Money with a dash of Funny: October 2016

Monday 31 October 2016

Hips, Shoulders, Knees and Toes

"Stryker reported results for their third quarter last Thursday, after the market closed. This is the kind of business that has changed significantly, keeping relevant and up to date as medical science has evolved. Knee and hip operations are more prevalent than any other time in history."

To market to market to buy a fat pig Friday was another day that the equity markets slid from underneath us. It seems that politics is to blame at the fringes (stronger Rand, which is a good thing), perhaps a semblance of relief that the fellow with the keys to the treasury is doing such a good job. CNBC had an interview with the minister of finance, live at the JSE on Friday, it was really good. Good in the way that he still held it together, stressed teamwork is the key, he was funny. He seemed to carry the aura of a person in charge of their respective domain. Of course, you and I know that a cabinet shuffle could happen at any time. So, we have to live with the situation and know that politics, as much as it makes you crazy, also takes care of itself. We do not have any control over it. Politics, like many other things when investing, is one of the big "things" that you can't even closely control.

This short piece is a must read - Book Review: Is Forecasting A General Skillset? It is about making forecasts and looking at professionals and amateurs alike. And there are some key points, like " ... simplicity is essential to forecasting" and "Consistently, the best forecasters don't use sophisticated statistical approaches, and anything beyond basic data crunching is usually a misapprehension of reality." Another set of lines from the piece, for more background: "Investing is a polyvalent, polymathic enterprise - you need to touch upon statistics, economics, history, psychology, political science, to name a few. Yet, what we train today are specialists in narrow fields who generally can't see the bigger picture."

Which leads us to the very last piece that nails the conclusion, at the end of the article: "It doesn't matter whether the market is up 12% or 16% in any given year; what matters is that it's up, and in sufficient magnitude to make certain portfolio themes function the way they ought to. To spend time trying to figure out the difference between a few percentage points of return is to miss the forest for the trees and expend tremendous resources on effectively nothing." Basically, spending hours and days trying to build complicated models that may miss by a little, and then wondering why they miss is a waste of time. Rather get the big picture right and then know that at the fringes there is very little that you can do about it, to get a perfect forecast. Like the weather, which is extremely unpredictable, so are markets in the short term.

Enough of that, a quick market scoreboard - the Jozi all share sank two-thirds of a percent, lead lower by financials. In what was a pretty broad based sell off, AB InBev, after a very average trading update, was down over four percent on the day. At the other end of the table, on a sparsely populated winners side, was Tiger Brands. Their trading update which looked very decent, saw to it that the share price climbed nearly two and a half percent on the day. The other bigger news on the day was that Dischem was looking to sell 27.5 percent of the business to qualifying investors. Management, one investor (deep value Cape Town fellow, you guess!) and the founding family would be the other shareholders. Nice, it is good to have choices. At the top end of the range the company may well be worth 20 billion Rand, valuing the company at more than the market currently values Barloworld, Tongaat or Famous Brands. That is the type of company that they would be keeping. And twice the size of Cashbuild. How many other private businesses out there can you think of which are at that size and scale?

Over the seas and far away in New York, New York, stocks were rattled by a mid session FBI probe into Clinton emails, uncertainty = sell first and then ask questions later. By the time all was said and done, the nerds of NASDAQ had lost half a percent, the broader market S&P 500 closed down just under one-third of a percent, whilst the Dow Industrials fell a smidgen, down 0.05 percent. The big news from over the weekend was that General Electric and Baker Hughes have neared a 30 billion Dollar deal. Both stocks were up Friday, and whilst GE initially suggested that there was not too much going on ("We are in discussion with Baker Hughes on potential partnerships. While nothing is concluded, none of these options include an outright purchase."), Mr. Market seems to be ok with a deal. GE and Baker Hughes will have a combined investor webcast this afternoon. Deals = confidence.

Company corner

Stryker reported results for their third quarter last Thursday, after the market closed. This is the kind of business that has changed significantly, keeping relevant and up to date as medical science has evolved. Knee and hip operations are more prevalent than any other time in history. More and more each and every day! Complicated stuff for us mere mortals. When you think of the business, think of a company that has three divisions, Medical and Surgical (MedSurg), which includes all the power tools, the hospital beds, the ambulance cot (beds) to more hardcore software for complicated procedures. There is also a wide array of surgical equipment, cement mixers, waste management (blood and the like), as well as even cleaners and detergents.

Then there is the more complicated hips, knees, soft tissue and computer assisted repair (amongst others) business, the orthopedics business. This division includes newer technologies like the Mako Robotic-Arm assisted surgery device. The whole aim is to make sure that the quality is maintained, each and every operation looks like the last one. See? Knee replacements are like big Macs. Only kidding, obviously you want and need the consistency time and time again, maintain quality. The last knee implant must look like the next. Eliminating human error. The question is, with the technology available to us, with regards to the precision afforded to us by fine tuned machines, are they (the machines) as good as the surgeon? Time will tell.

Lastly, there is the Neurotechnology and Spine division. This is the division that I find incredible, cutting edge and incredibly futuristic. This stuff blows my mind - > Interbody/Vertebral Body Replacement. I am speechless that parts in humans can be 3D printed (Cranial replacement) to last.

So that is the split. As per the last quarter (below) 38.01 percent orthopedics, 44.23 percent Medsurg, and the balance (17.76 percent) Neurotechnology. And then, North America is still the main part of this business. Which is why I really like it, there are huge growth prospects for this business around the globe.

The company guided forward for the full year in a tighter range, at the top end. So not too much of a spectacular change, the stock still trades on around 19.3 times forward (to the end of the year), the dividend is not why you own it, a paltry 1.33 percent yield currently. Mind you, the dividend has doubled in the last five years, that tells you a lot. This is a very exciting space to be invested, if you think about it at the simplest level, people are living longer and require solutions from science in order to be able to replace parts that have been subjected to wear and tear. As science evolves, there will be more parts and more solutions, more equipment to do the surgeries. The company also has the ability to do small deals and add to their portfolio where they see fit. We continue to recommend the stock as a solid long term investment and are currently buying.

Linkfest, lap it up

As time goes by, technology keeps getting better and our ability to communicate improves. The next major step in communication will be the shift from 4G to 5G - This video shows the difference between 4G and 5G

This new computer from Microsoft looks great - The Surface Dial is a crazy puck that controls Microsoft's new PC.The test will come with its functionality and user friendliness though. As we discussed last week, IBM saved money by using Macs instead of PC's running windows due to the huge IT support cost that comes with Windows based machines.

I have seen much debate recently about passive vs active investing The Pitfalls of the Passive Investing Marketing Pitch. The main point of the article is that if you think an ETF is for you, make sure you know what you own. You might be owning a unit trust in a different name and it still has multiple layers of fees that you don't see.

Today is halloween so here are some commercial numbers from the US - Halloween Is Frightfully Lucrative. Making the tradition go mainstream is a huge win for marketers, the amount of money spent on sweets and costumes is mind blowing.

Home again, home again, jiggety-jog. Halloween today. No scares Monday. Sadly politics will weigh on markets, with two of the not so best candidates in the US pit against one another in a fight to the close. There are of course non-farm payrolls this week Friday and earnings continue. Facebook, Alibaba, Starbucks report numbers, as do many, many others. From an interest point of view we have Coach, Whole Foods and Solar City, Activision Blizzard and GoPro too. Those are all "interesting". Never a dull day!

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Friday 28 October 2016

Alphabets on a Great Future

"We continue to buy shares of what is a unique company. They are working on revenue lines that we have no idea about. And it feels good to know that these are for solving problems of the world, that is the core of the business. Stay young Alphabet. Stay young."

To market to market to buy a fat pig Short intro and market piece again I am afraid for those of you who love this segment. It is too busy on a company front. So, quick sticks, here is the look in. US stocks closed lower, off the best levels by quite some stretch. The nerds of NASDAQ lost two-thirds of a percent, the broader market S&P sank three-tenths of a percent, whilst the Dow Industrial was off half of that (0.16 percent). There is US GDP today, that should be exciting! Rate hikes looming, please get that done already. I am tired of hearing every day will they or won't they. Just get the one done and then wait and see.

Locally, stocks were mixed to lower. Same-same today, AB InBev results have been poorly received. I guess there will be many moving parts in there for 18 months or so, you will just have to roll with the punches if you are part of the new machine that sells around 3 out of every 10 beers across the globe. Just three days ago a driverless truck delivered Bud, the first commercial delivery sans the driver. Wow. The driverless truck is "Otto". 120 miles of driving, Otto is an Uber initiative. Awesome news for all! Except truck drivers.

Company corner

Alphabet reported numbers last evening, this was for their third quarter just passed. This is of course the business originally known as Google. This business is not even 20 years old, yet is synonymous with one of the biggest jumps that we have made as humanity, the internet. The internet is your online everything. You can buy almost anything you want, you can research almost anything you want. Provided of course your internet is not restricted, some poor souls still have their internet screened, or worse, no internet at all. That is another story entirely.

Quarterly revenues jumped 23 percent on a constant currency basis, 20 percent in Dollars to 22.451 billion Dollars. Take a moment to let that sink in, annual revenue approaching 100 billion Dollars and a business that has just become an "adult". GAAP operating income grew 26 percent to 5.767 billion Dollars, margins expanded and GAAP net income clocked just over 5 billion Dollars. On a per share basis, GAAP earnings per share clocked 7.25 Dollars. Non-GAAP, that number was 9.06 Dollars.

Whilst the business is called Alphabet, Google is still everything to the business, revenues from that "division" is 22.254 billion, the other segment, aptly named "other bets" generated quarterly revenues of 197 million Dollars and incurred losses of 865 million Dollars. What? Well, ruth Porat, the CFO credited with professionalizing the business at some level has done an extraordinary amount of work making the business more lean, more standard.

Her (Porat) Wall Street background has more than helped, she may have originated from the West coast (she was born in the UK actually), she spent nearly three decades across the country. The story goes about a time she was going to the gym (she likes spinning), she slipped on the icy curb and shattered her shoulder blade. Ouch. The surgeon said, we got to operate, she said, no can do, as CFO of Morgan Stanley, full year results were two days away. Sorry. No painkillers, that would make things fuzzy. So, off she went, delivered the results for the giant financial institution and only then went for the surgery. I am not too sure if that is dumb or valiant. Possibly both. Her father's entire family was killed in the holocaust, he hails from the Ukraine, ended up being a nuclear physicist. Being born in England, you could technically call her an immigrant, right? Sergey and Larry have an amazing person making the company leaner and more efficient.

Other bets, the moonshots, the dreams, the other businesses that potentially could change the world (and that suck a lot of cash right now) is a mixed bag. Calico is a healthcare business that focusses on longevity, on their website I find the "press" segment amusing: "As we make early progress on our research and goals, our capacity for handling press inquiries is limited. We'll do our best to be in touch". In other words, we are busy, leave us the hell alone. And then an explanation of what they are trying to achieve: "Calico's areas of interest are organized around understanding the basic biology of aging as well as interventions for serious age-related diseases. Calico is exploring the genetics of aging in human populations as well as in a variety of model organisms from yeast to worms to naked mole rats." Nice. So potentially this could be a very important business to Alphabet in the long run.

Another business is "The moonshot factory", which comes with an operating model. Simply called X, the business is designed to turn ideas into real technology. Technology that will change lives and make the world a better place. You may well argue that is the core of Google, the starting point.

And whilst the cash burn is huge for investors, the great ideas turned to prototypes, turned to awesome businesses, turned to bottom line expansion is something that takes a decade. Or more. Foghorn, which is carbon neutral fuel made from seawater sounds like something from a comic book, invented by Professor XYZ. Smart contact lenses, helping people with diabetes. The UK born Astro Teller (real name Eric Teller) runs the business, nicknamed Astro not for his love of small candy balls or science geekiness, rather a hairstyle that looked like fake grass. He looks amazing. Title for Astro? Captain of Moonshots. Ha ha!!

Google Ventures, now known as GV is part of other bets. Other bets that include startups with capital and expertise. This is where investments in Uber (you may recognize this business) and of course Nest, which is wholly owned. Google Ventures invested (Michael tells me) 258 million Dollars in Uber, giving them a 6.8 percent stake in 2013. Dilution along the way? Who knows, time will tell, recent reports suggest they still own the same percentage, it is possible they may have been diluted to half that. Uber is "worth" in the last fundraising, around 66 billion Dollars (June this year), if GV owns three and a half percent, then this is worth 2.31 billion Dollars. Or 0.42 percent of the entire parent company market cap. Ha-Ha! GV may become a more important business in time, as the company looks for other avenues to invest their resources.

Resources that last were 83.056 billion Dollars (Cash, cash equivalents, and marketable securities) at the end of the last quarter. And over 10 billion Dollars more than a year ago. Cash represents 15 percent of the current Alphabet market cap (nearly 550 billion Dollars). So whilst cash conservation and cost controls have been introduced by Ruth Porat, these other bets burn around 3.5 billion Dollars a year. As a shareholder you have to say, yes, this is actually worth every cent. In identifying the next big thing, thinking has always been encouraged at Alphabet slash Google.

We continue to buy shares of what is a unique company. They are working on revenue lines that we have no idea about. And it feels good to know that these are for solving problems of the world, that is the core of the business. Stay young Alphabet. Stay young.

Amazon reported numbers for the third quarter last evening. It is still very important to remember that Amazon is building a business. They are a long way from being mature, I am not too sure where that is, as long as the vision exists and Jeff Bezos has the energy to want to change the world. Like the aforementioned Alphabet, the vision of creating something amazing and huge keeps this business at the forefront of technological innovations. Getting stuff to your front door that you ordered an hour ago is pretty mind blowing. In the old days it took an hour to turn your computer on and to connect to the internet. Not quite, you know what I mean though, that sound where your telephone line connected at the exchange and the "handshake" sound it made, tinny and all. How times change.

And in large part, improving technologies has meant that Amazon have been able to expand other businesses. Amazon Web Services (AWS) increased sales by 55 percent year-on-year, to 3.231 billion Dollars for the last quarter. Operating income for that division increased to 861 million Dollars, up 101 percent year-on-year when measured against the corresponding quarter. For those of you who don't know what it is, AWS is cloud computing. i.e. You can host your website from anywhere and upload all your documents to the cloud.

All the "stuff" that used to be done physically at your desktop can now be done from anywhere, provided you have an internet connection. No more need to store vast documents locally. This business is only 10 years old, and is fast becoming an integral part of their business, representing 8.7 percent of total sales. If you are looking for all their products, visit the link above and then follow the products links. They are selling stuff (products) there that you have never heard of.

The business is still pretty much a US based business, 58.6 percent of the sales still come from that region, 32.7 percent is "international". Rolling twelve month sales clocked 128 billion (nearly) Dollars, up 27 percent year on year. Make no mistake, this business is growing off a bigger and bigger base all of the time. The disappointment however was that profits for the quarter fell and missed expectations, net income for the quarter was 252 million Dollars, this followed a blow out quarter prior to this period.

They continue to make a big loss in the international part of their business, so whilst sales increased 28 percent to 10.6 billion Dollars (for the quarter), the operating loss widened to 541 million Dollars. Twelve month sales for that segment was 41.9 billion Dollars, a huge number. For comparisons sake, Amazon North America registered sales of 75 billion Dollars for the rolling twelve months (i.e. the last four quarters). Home Depot has annual revenues of 88.5 billion Dollars. By this time next year, Amazon North America should have sales in excess of Home Depot. Only Costco and Walmart in North America will have bigger sales than Amazon. Amazon North America is now bigger than Target. Stick that in your tech pipe and smoke it.

Amazon is a business that has many irons in the fire, not too dissimilar to Alphabet. Just read through the Press Release - Amazon.com Announces Third Quarter Sales up 29% to $32.7 Billion. Content, Prime members getting movies, music, the Alexa software (Echo ecosystem) integrates with everything.

You get what you get with Amazon. This is a business that will invest heavily in their infrastructure leading to scant profitability. It won't always work, there will be lines that will be shut down. The user experience is what matters. Fourth quarter guidance may have disappointed some folks and been at the bottom end of the guidance. They had a laughable operating income guidance - "expected to be between $0 and $1.25 billion." Ha ha, that means that they could make nothing or they could make more than ten percent more than a record quarter.

This unsettles people into believing the long term story, they want steady profits now and an amazing future. As a result of unlimited resources, you cannot have it all. And hence you have to roll with the volatility in the share price, which is down five percent pre-market. Buy this business and own it, own it for a decade plus. By that stage it may well be challenging Walmart for the biggest retailer in North America. Or before. And you can bet that they will have many other interesting businesses along the way. Stay long, stay strong.

Linkfest, lap it up

Every week there is that one article that is a must read. Here is this weeks. It was so good that it was shared on our office WhatsApp group twice in 12 hours - Start Now. Time is your friend when it comes to investing, especially when the market has been flat like the last 18 months.

Beer and self driving trucks, sounds like a great combo! (Otto and Budweiser: First Shipment by Self-Driving Truck). Next step is beer being delivered by drones.

As the price of something drops, people use more of it. On shore wind generation costs have dropped by 30% over the last 5 years and solar costs have dropped by 66% - Renewables overtake coal as world's largest source of power capacity. Given how long it takes to build coal and nuclear power stations, I wonder if a Nuclear power plant starting tomorrow makes sense. If by the time it was completed the cost per megawatt would still be less than solar then maybe? Or would solar costs have dropped so much over the years of build time that solar power is cheaper than nuclear.

Home again, home again, jiggety-jog. There were multiple results overnight and over the last few days that we will get to. Amgen had results, we will get to those for sure! Apple have released new MacBooks, that is incredibly exciting. If you think about it, people drive expensive German Sedans for an hour or two a day and then sit in front of their scooter type performance at their desk. For ten odd hours a day. get your company to buy you a MacBook, tell them that IBM research has shown that you will be more productive and cost less over the life of the computer. Stocks are mixed across Asia.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Thursday 27 October 2016

You Musk Listen

"Let us just say that Musk wants to change our consumption habits. This company idea at conception was so mad that you wanted to be a part of it. Elon Musk doesn't care much for normal people metrics. He is simply not normal. Which is why he draws the wrath of the analyst community, they cannot understand his vision."

To market to market to buy a fat pig Stocks in New York, New York closed mixed, some of the heavy tech stocks (by human definitions) slid post or ahead of their results, other stocks caught a serious bid post their numbers. Boeing boosted the Dow Jones Industrial Average, the index closed 0.17 percent higher on the day. Still, the jury is still out on the largest aerospace business on the planet, given lower fuel prices, commercial airlines are likely to sweat the current fleet a little longer.

I like the commercial and satellite part of the business, and we can all agree that military technology advances commercial technologies quicker, I am not too sure how you feel as an investor? Perhaps I shouldn't be so precious. Another business in the "space", Northrop Grumman, reported numbers that the market also liked, the stock was up smartly and the prospects look better in the medium term, relative to Boeing. Mondalez and Biogen (different industries entirely) both caught a good bid after delivering numbers that Mr. Market liked. So far, earnings season looks like it is heading in the direction of an overall beat, high quality or not, the jury will deliver that in a couple of weeks.

The broader market S&P 500 sank 0.17 percent, whilst the nerds of NASDAQ sold off nearly two-thirds of a percent, weighed down by Apple (down 2.25 percent at the end), Amazon down over a percent and a half ahead of their results today and Alphabet (Google) down around three-quarters of a percent. Both the titans of today and the future report today, and these results are as eagerly anticipated as Apple's results. Well, at least for us around these parts. Amazon and Google, exciting times indeed!

I was reading an interesting post that suggested that you should always stick to your knitting, stocks guys and gals shouldn't comment on fixed income and fixed income gals and guys shouldn't comment on stocks. To be a master of both is very difficult, briefly in the office we could think that distressed bond buyers are folks who are experts in both. The discussion was formed against the backdrop of the disaster that is Mozambique's "Tuna Bonds". What a freakin' mess. See -> Mozambique 'tuna bond' yield hits record high after debt warning.

On the local front we had the medium term budget speech. In sticking to the above piece on expertise, my analysis both on the political nature of the delivery and the actual numbers matters little, there is plenty of very good analysis around. I am not too sure that there was a noticeable reaction from Mr. Market, it seemed not. The Rand is marginally weaker again this morning, the realities of a weaker than anticipated growth outlook against the very real backdrop that spending cuts and tax hikes are likely to cramp consumers styles did perhaps weigh. On the currency, on retailers. In the end we will be fine, to borrow that great line from the The Best Exotic Marigold Hotel: "Everything will be all right in the end... if it's not all right then it's not yet the end."

Perhaps that was the spin that the Finance Minister was putting on the hard choices of the coming few years. Amongst the local stocks, listed here, Richemont caught a bid, Mediclinic sank as the Pound was once again pounded. The banks and financials enjoyed a good day. We are going to have a couple of dull weeks, and then earnings will start from those businesses with the March/September cycle. In amongst our stocks, Richemont, Mediclinic, Brait, Tiger Brands and Naspers will all report numbers inside of the next month. It will be the earnings deluge that we try and keep pace with! The broader market, for the scoreboard watchers, showed that we ended down 0.38 percent by the time all was said and done.

Company corner

Tesla Motors reported numbers last evening, this was for their third quarter of the current financial year. The company is one that splits the street down the middle, those that think the man is a visionary and that it is going to take more than a quarter (or a year, or a decade) to be materially profitable and those who think that the business is eventually going to come apart at the seams, Musk dreams too much and under delivers. If you are an Elon Musk fan and can put up with your fair share of expletives, then make sure you read the Ashley Vance book on him. It is really good and gives some very valuable insight into how the guy works. He is beyond quirky and has incredibly high standards, as well as incredibly high goals. Musk can be credited for bringing forward the fleet of electric vehicles and equally promoting driverless fleets. Someone always needs to be the doer and the others will follow.

In the results themselves, there were some big milestones, including record deliveries of just shy of 25 thousand vehicles. 16047 Model S and 8774 Model X vehicles were delivered during the quarter and another 5065 Teslas were in transit to their eager customers at the end of the quarter, these sales will be booked in the next quarter. Revenues clocked 2.3 billion Dollars. That is a 145 percent increase from the prior year corresponding quarter, gross margins were a whole lot higher in Q3 (27.7 percent) versus Q2 (21.6 percent). GAAP net income was a miserly 22 million Dollars, or 14 US cents a share. The business was (how do you say this politely) more diligent with cash utilisation. Still, the nine month numbers look iffy. At best.

The company needs to expand and deliver, and make it pronto. And snappy. The Gigafactory, Model 3 development, production and delivery as well as the SolarCity purchase are all large main courses that the team need to eat and digest. Model 3 "volume" deliveries are expected to be in the second half of 2017. Hey, 31 December 2017 is the second half, right? Every Model 3 will have the standard 360 degree visibility of 250 metres of the hardware for the full self driving capabilities. The other thing that Musk wants to continue to ramp is the 100 kWh battery version of the Model S, that is a very profitable model. On the earnings conference call, he said to an analyst who asked a question about that model that straight after this (call), he would be heading right there. See this blog, note the quirky Latin spelling of the month - New Tesla Model S Now the Quickest Production Car in the World

As Tesla points out in the Q3 earnings release: "Fleet learning means that all Tesla vehicles with Autopilot will naturally get better over time." And then of course the clincher for me: "Tesla vehicles have already been driven over 3 billion miles, including more than 1.3 billion miles logged by vehicles with Autopilot hardware." So, I repeat a question I have seen asked on the inter-webs, would you rather be driving on a road with someone who just passed their licence with 100 hours of driving experience, or a fleet of driverless cars with over one billion miles of learned driving behaviour? I know my answer. On the earnings call, Musk said that he knows that there are sceptics out there on autonomous driving, he urges them not to bet against it. A million and a half miles a day are driven in Teslas, relayed back to a central database.

Tesla get zero emission vehicle (ZEV) credits from government, in fact without the 138 odd million Dollars credits (sold to other auto makers), they would have been unprofitable. Again. It all seems rather weird, I listened to Elon Musk try and explain the ZEV credit thing to analysts on the conference call, sadly, I could not quite understand it. In short, the higher the volumes, the less they are prone to volatility. It is tough to try and get a handle on government involvement in these businesses.

Let us just say that Musk wants to change our consumption habits. This company idea at conception was so mad that you wanted to be a part of it. Elon Musk doesn't care much for normal people metrics. He is simply not normal. Which is why he draws the wrath of the analyst community, they cannot understand his vision. They have time lines and horizons of quarters and maximum a few years ahead. I am sure that sometimes (and I get that sense from his question answering manner) that he cares less for these folks. It almost seems like that Maximus moment when he slays a whole lot of hapless gladiators and then screams to the crowd, "are you not entertained". Musk asks on the call, "How many products can you buy that you truly love? So rare". If Tesla continues to make products, premium ones, that people really want and are beautiful, and folks will pay up for, then the company will be successful. And by extension, the company will be profitable.

So short term there are going to be many dis-Beliebers and the haters are gonna hate-hate-hate. And perhaps even in the medium term, whilst Musk tries to balance profitability, shareholders and product execution. The plan seems so huge. So big. Again, how do you eat an elephant? One bite at a time The team is working for the betterment of humanity, and whilst that sounds wishy-washy in an investor context, the business will ultimately appeal to the consumers desire of their products. That does not mean that this is a wonderful investment for shareholders. As a shareholder in what is a "humanity event" (reduction in fossil fuel consumption), expect major volatility. This share price could halve in less than a year. Equally on a few good quarters, it could double. It really is that wild and by extension should only form a small part of your portfolio, if you have the stomach for it. I believe that Musk will be the leader in changing the world. I genuinely do.

Linkfest, lap it up

Naspers has mostly just been seen as a proxy for Tencent. As of late thanks to two deals, people are starting to see the value in their other investments - Indian internet market will take time and money to mature, too early to think about exits: Naspers CEO. After reading this article, I am sure that you will agree that Naspers' assets in India seem very exciting and have loads of potential.

New technologies are exciting and finding funding for R&D is important - Hyperloop One Raises $50 Million, Hires Former Uber CFO. Fast and cheap is the goal, Hyperloop is projected to be both.

Economists rarely agree on anything, Japan needing immigration of young, relatively unskilled people is something where there seems to be some consensus - Japan Opens Up to Foreign Workers (Just Don't Call it Immigration). As humans we tend to fear change, immigrants mean change, both from a labour market perspective and a cultural perspective.

Home again, home again, jiggety-jog. Stocks across the globe are lower, at least the ones that are open. Folks are asleep across the oceans, as I wrote this. Sensible ones I guess, we all need that sleep and you cannot catch it up, or so it seems. Are you excited for the earnings today? I certainly am!

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Wednesday 26 October 2016

A slowing Apple needs perspective

"Apple Pay for the month of September registered more transactions than it did in the entire of the 2015 financial year. Apple Pay actually launches in Japan today. The Music business, thanks to the monthly subscriptions grew 22 percent. The iPhones business still represents 60 percent of total sales. All product unit sales were lower year on year as a result of the release of the newer devices, expect that to change sharply. Tim Cook often points out, on sales alone, that the Apple Services business as a standalone would be a Fortune 100 business. That is the size and scale."

To market to market to buy a fat pig As it is earnings season, we are going to keep this top segment very limited. And we are going to "stay constructive" on company earnings. Sorry, this is not the market report, it is the excitement of earnings season. Loads coming this week, Amazon and Alphabet are set to report tomorrow evening. Earnings were a mixed bag on Wall Street yesterday, at least the reaction to the numbers. General Motors slid after decent enough numbers, Caterpillar delivered, the guidance was worse than anticipated, the stock fell, whilst Whirlpool stock was stuck on deep spin cycle and shareholders came through the session down 11 percent and looking worse for wear. See, it says don't tumble dry on the label. Procter & Gamble bucked the "trend", the stock was up smartly after an "unexpected" (by the market of course) higher profits. At the end of the session the Dow had slipped 0.3 percent, the nerds of NASDAQ were down exactly half a percent, whilst the broader market S&P 500 was somewhere in-between.

Locally we are watching the mini-budget today, whether we like it or not. It becomes an important event as everyone says it is so. Implementation of a budget is a daily occurrence and far more important than the actual numbers themselves. Stock locally closed marginally in the green, again a firmer Rand towards the back end of the session saw to it that some currency sensitive stocks were sold. The all share index still managed to eke out a gain, up 0.13 percent by the close.

Financials were down half a percent, resources were the winners, up another percent. MTN added over five percent on the day, someone likes what they see in the subscriber and ARPU numbers from a couple of days ago. All things "Breeteesh" and related to the Pound were once again sold off, INTU at the top of the losers board. Discovery have been given the go ahead to start a bank here, they are likely to invest over 2 billion Rand in setting it up. Watch this space for more, they are likely to go for the rewards program on the bank front and "good behaviour" integrated with the rest of the product suite will make you trim and proper on all fronts. A free smoothie goes a long way, right?

Company corner

Apple reported numbers after hours last evening, these are for their fourth quarter and ahead of the highly anticipated festive/holiday season. It does include a week of the iPhone 7 and iPhone 7 plus. These results also included guidance for the current quarter. These have possibly been the most anticipated results for some time now, whilst it is fair to say that this is the weakest comparable year in an absolute age (I think Bloomberg pegs it at 15 years), back then the iPod had only just been released (October 2001). In the Apple 2001 financial year the company had sales of 5.363 billion Dollars and registered a modest loss, they had 4.336 billion Dollars worth of cash (seems like that always is the case), there were 345 thousand shares in issue and share price ended the quarter at around 15.4 Dollars, adjusted for stock splits, that is 1.10 Dollars back then.

Last evening, the company reported annual sales for the financial year just passed of 215.63 billion Dollars. They have ended the quarter with around 237 billion Dollars worth of cash (securities and cash equivalents). So, without wanting to beat up on a headline, I am not too sure how the same company is comparable. That is just me. Oh, and the share price is nearly 9000 percent higher, a number that is too big to comprehend for most investors. Forget that. It is the past, it means nothing about the future and rather tells you where the company has come from. Just like a bunch of lines drawn on a historic graph, that is the road travelled. So what does the Apple of tomorrow and beyond look like?

It is difficult to believe that the iPhone was released on the 29th of June, 2007, after a show and reveal from Steve Jobs in January of 2007. Jobs was the master revealer. The first one I ever had was the iPhone 3G and I thought it was amazing. Looking at the photos of the newest iPhone, the 7, it is incredible to see how far we have come. The consumer globally has bought over one billion of the 15 models available to them since the release date. The 4G phone (on contract at the time) cost 499 Dollars, for double the memory, you paid 599 Dollars and were locked into a 2 year contract.

Strangely, and perhaps this is human nature, the "cheaper" 5C phones never really sold en masse. People want the real deal. With much improved specs and amazing electronic "art" form, the newer 7's sell from 649 Dollars for the "smallest" 32G phone, the bigger ones cost more. The 128G phone costs 749 Dollars, the 256G one costs 849 Dollars. The iPhone 7 plus (with the amazing camera) costs 969 Dollars for the 256G one. Obviously 9 years on the product is more amazing than before, consumers expect more and more every year. For reference purposes, the average selling price (ASP) of the current cycle is expected to be markedly higher than the current (last quarter) 600 Dollars. And it is easy to see why, right?

Let us focus on the annual numbers and the forecast. The company reported net income of 45.6 billion Dollars for the 12 months ending 24 September 2016 on revenues of 215.63 billion Dollars (said that already, sorry for the repeat). That translates to 8.35 Dollars a share, which at the closing price of 118.25 Dollars means that the stock trades on 14.16 times earnings. And the 57 cent per quarter dividend translates to a 1.93 percent yield. More than treasuries of course. Cash as a percentage of market capitalisation is 36.8 percent, the earnings multiple less cash is just under 9 times. That sounds dirt cheap. I guess the market is wary of the size and scale of the business, where companies "Nokia" and "Blackberry" come to mind. I expect the company to continue to sell their main product, the iPhone, strongly.

During the quarter past the company returned a whopping 9.3 billion Dollars to shareholders (dividends and buybacks) and since the capital return started, the company has returned 186 billion Dollars out of the 250 billion program. Operating cash flows for the quarter was an Apple record. Nice. International sales account for 62 percent of the total business. The highlight of the quarter was undoubtedly the services business, Apps, Music, Movies and all things you get from being inside the ecosystem. Revenues year on year for that business grew 24 percent year-on-year and now represents 13.5 percent of all sales.

Apple Pay for the month of September registered more transactions than it did in the entire of the 2015 financial year. Apple Pay actually launches in Japan today. The Music business, thanks to the monthly subscriptions (as a user I love it, my colleagues less so) grew 22 percent. The iPhones business still represents 60 percent of total sales. All product unit sales were lower year on year as a result of the release of the newer devices, expect that to change sharply. Tim Cook often points out, on sales alone, that the Apple Services business as a standalone would be a Fortune 100 business. That is the size and scale.

Guidance was as follows for the current quarter, 76-78 billion Dollars of sales, margins about the same as current, operating expenses a little higher than most people would have expected. The biggest issue is actually pent up demand, on the earnings call (read the transcript on SeekingAlpha -> Q4 2016 Results - Earnings Call Transcript): "Demand continues to outstrip supply, but we're working very hard to get them into customers' hands as quickly as possible." In particular the iPhone 7 plus, which has the awesome camera. Whilst the company doesn't deliver unit sales for the Watch, they have pointed out the new version is gaining huge traction, healthcare business Aetna have supplied 50 thousand to their employees, encouraging them to lead healthier lives. This version should comfortably outsell and outstrip the previous version.

The CFO, (Roman born) Luca Maestri said something interesting on the call, a "thing" we have seen circulating over the last few days, it has to do with the company IBM having adopted Apple. IBM have 90 thousand Macs across their organisation, 48 thousand iPads and 81 thousand iPhones. Which are expensive, right? Wrong! Maestri says: "IBM reports that PCs have three times the cost to manage, drive twice the number of support calls and are 5 times more likely to require a follow-up appointment to resolve an issue than Macs. Thanks to much lower support cost and significantly higher residual value, the company is saving as much as $535 per computer when comparing the total cost of Mac ownership to a PC over a full-year lifecycle."

You own Apple for a number of reasons. One, it is cheap (the stock) relative to many other great businesses. Two, this is an amazing business with beautiful products and great user experiences, that is VERY important, users return time and time again. Three, the improvement to existing products (the next iPhone form is going to be off the charts) and new products are going to be top notch. Growth prospects still exist in many parts of the world, China, India and many emerging market consumers want the same experience, reason four. We continue to accumulate what is a great company. The stock price is trading down after hours, nearly three percent, obviously the supply side looking strained is an issue for current quarter sales. This company still represents one of the biggest consumer opportunities over the next five years. Conviction buy from our side.

Visa reported numbers after market two nights back. These are for their fourth quarter and the year end. First, as always, a little perspective on what they (Visa) do. Last year, 2015, they processed 71 billion transactions on 2.4 billion cards. That means that roughly every third person on the planet has one Visa embossed card. 7.4 trillion Dollars worth of merchandise was bought on Visa cards last year. Whoa! Forget the fact that cash will become increasingly irrelevant, so will the physical cards themselves. You will increasingly use nifty technological options to pay for goodies. And there will be and are many growth opportunities globally, for instance in the prior year annual report, this line caught my eye:

"Cash and checks in Europe represent 37% of personal consumption expenditure, a 3.3 trillion dollar growth opportunity."

I am guessing that governments want people to use less cash too. The more people use electronic payments and are encouraged to do so, the more receipts governments are likely to accumulate. Europe still strangely relies heavily on cash, and in the US there are these quirky things called checks. We actually have, in urban areas in South Africa, very sophisticated payments systems. No Apple Pay yet but geo payments and tap & go cards are ahead of most countries.

On to the numbers, GAAP Full year net income clocked 6 billion Dollars, or 2.48 Dollars per share (2.84 Dollars ex special items) on revenues of 15.1 billion Dollars for the full year. As you can see, Visa is a very profitable business, each little (of the billions) of swipes add up to a big, big number. And of course, as you know, the company hiked the dividend the other day to 16.5 cents a quarter, from the current 14 cents. It may not sound like a lot, a double digit increase in the dividend is a pretty special thing.

Added of course to the huge buyback program, in fact, as per the last annual report (which does not include the year just passed) the company has bought back 735 million shares. As per (courtesy SeekingAlpha) the earnings transcript, Visa bought back 92 million share last year. There are around 1.87 billion shares in issue currently, roughly 30 percent of the shares in issue have been bought back in eight and a half years since listing. Stick around for another decade and a half and you may be the last shareholder left (wink). Not likely!

The company guided as follows for the next full year, revenue growth of 16-18 percent (lower than expectations of 19 percent), non-Gaap EPS is set to increase in the mid teens next year. Is that acceptable for a business that now trades on an earnings multiple, historical of 33 times? According to the analyst community, their expectations are for EPS growth of the same as revenue growth prospects, which means that at 82.03 Dollars closing price the stock trades on a 25 times forward multiple. I do think that is acceptable for a company that has lengthy runway ahead, this company continues to benefit in the move away from cash and checks, away from the physical to the electronic.

Visa represents one of the very best investment opportunities currently. I suspect that whilst there may not be the hugest amount of heavy lifting in the next financial year, a return of above ten percent is more than acceptable in this environment. The company continues to stay at the forefront of technology, with regards to the future of payments, utilising one of the biggest payment networks known to mankind. We continue to accumulate the stock at current levels and this company is a huge keeper. Tuck it away, stay overweight.

Linkfest, lap it up

It is exciting to think of where technology will be in 40 years time. We could have people on Mars, use nano bots to repair broken bones and have mostly moved away from fossil fuels - The Alternative Energy Sources of the Future.

Singles day (11/11) in China is almost upon us. It is arguably the most important day of the year for Alibaba, where they sold $14 billion worth of stock in one day - Catwalks and Katy Perry: Alibaba starts countdown to Singles' Day

This is a question that companies and society at large are busy asking themselves. How do companies retain woman employees. The answer is to be more family conscious for both male and female employees - This is what work-life balance looks like at a company with 100% retention of moms

If you are like me and your "to-read" list gets longer instead of shorter, here is an app designed to increase your reading speed - Spritz - The Science behind reading

Home again, home again, jiggety-jog. Under Armour had results too, last evening, we "missed" those at some level, ownership is not completely universal and is restricted to a smaller number of accounts. We will definitely get around to reviewing those numbers in a hurry to stay relevant as well as producing the quality of the content that you are used to. Remember that all the reports that we produce are archived on our front page for historical look back purposes. To paraphrase that crazy Steve Balmer incident, earnings, earnings, earnings. Jump around and say that in a nerdy and geeky way.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Tuesday 25 October 2016

Swapping Dividends for Burgers

"The big news is that the company is suspending the dividend for the time being, with all likelihood that they will resume in the next financial year. Whilst this may be a bummer for those who like the yield, they have traditionally been very generous with 1.3 to 1.35 times dividend cover, this is still a growth business. And added to that, they don't like to leverage up too much, perhaps some hard lessons were learnt in the past"

To market to market to buy a fat pig Earnings. In the end that is all that we care for. I know that there is a local medium term budget speech tomorrow, I know that there is a US GDP read on Friday, for us here however, we breathe and eat and sleep earnings and the business of business. Give me twenty company releases over one economic release from a government organisation. You get my drift? A company can of course always put their best foot forward and may not always show you the ugly side, that is the analysts job.

To be subjective is incredibly hard. Sometimes one part of me thinks that of you have skin in the game you are likely to do a better job, i.e. ownership of the stock for self and clients, then you are more likely to drill harder. Some tend to think that it is the other way around. Sometimes when asked to comment on specific stocks that none of our clients own, I am less likely to hold the same interest.

OK, straight into the meat, I mean the vegetable stew from meat free Monday. Stocks as a collective here in Jozi yesterday fell away in the last hour to close the session flat. We were up for most of the day, losing all of the gains in the last hour of trade. Sigh. Commodity stocks slipped at the end of the day, AngloGold Ashanti and Anglo American at the top of the losers boards, NEPI and MTN at the top of the winners boards. Losers outnumbered winners marginally, stick that down in your markets lingo book, along with all sorts of other not so important information.

Across the seas and far away in New York, New York, stocks on Wall Street "responded" to earnings and mergers, excitement building that the earnings recession has bottomed. And this quarter is about to reveal that businesses are growing earnings again, after a 12-18 month period of iffiness. Excitement around mergers, AT&T gobbling up Time Warner for the distribution and the content is set to be a good thing. Entertainment folks, what a time to be alive when you can with an internet connection watch the old and the new.

That internet connection doesn't even need to be yours! i.e. you can watch content no matter where you go in the world. Earnings, Microsoft continued to enjoy a lift from Mr. Market, the stock was up another two and one-quarter of a percent, Alphabet, Amazon and Apple all rising ahead of their earnings reports this week. The Dow lifted 0.43 percent, the broader market added nearly half a percent, whilst the nerds of NASDAQ tacked on one percent by the time the bell rang for the close. Without further ado, let us talk about some earnings related news from yesterday.

Company corner

MTN reported numbers for their nine months to end September. Rob Shuter is going to join earlier than previously thought. 13 March next year, which is still a long way away. I guess it cannot actually come sooner for current chief Phuthuma Nhleko. As he is quoted in the SENS, he continues to shift more and more responsibilities to both Stephen Van Coller (who is the Vice President of Mergers and Acquisitions, as well as Strategy) and Gunter Engling, the acting CFO. Nhleko has stuck in some "hard targets" for the 12, 18 and 24 months, with the first half of the next financial year set to reveal the results of these targets.

Group subscribers increased 0.9 percent quarter on quarter, that is a good thing, the base now stands at 234,7 million, across 22 different countries and territories. That is a whole lot of people. 29,7 million here in South Africa (a decline of half a percent), 60,5 million in Nigeria (an increase of 2.5 percent) and 47,8 million in Iran (up 1.1 percent). Those three countries, out of the 22, account for 138 of the 234.7 million, or nearly 59 percent of all subscribers. Other West and Central Africa (which includes Ivory Coast and Ghana, as well as Cameroon), has 47.6 million customers, or another 20 percent of the subscriber base. I must have missed the fact that large OPCO and old reporting methods have been replaced by regional reporting.

In terms of subscriber numbers and expectations, the group have revised to include nearly a million net subscribers for the year. ARPUs are very important, those are average revenue per user. For MTN Nigeria in Dollar terms, they have understandably plunged as a result of the currency being rubbished. Down 32 percent quarter on quarter. Whoa!

Check this out: "Voice and data traffic increased 1,8% and 142% respectively YoY" Data? WhatsApp, Facebook, YouTube, you get the drift. And notwithstanding the fact that global call rates are on the down, across their network it is plateaued for the time being. What I also find interesting is the following, this is here in South Africa: "Revenue improved by more than 3,6% QoQ while the EBITDA margin expanded by more than 200 bp QoQ." Margins expanding and revenue on the up? That goes against recent "wisdom" here in South Africa, that is not what the chattering classes would have been putting forward.

Iran seems to be "getting better", the group are able to repatriate monies out, which is more than just a positive development. They expect to have got all the money they need to out over the next six months. Nigeria is still nothing short of a lurch from problem to problem, politicians have suggested that the company improperly repatriated funds out over a decade, nearly 14 billion Dollars worth. As the release says: "Consequently MTN Nigeria will strongly defend any action that would be prejudicial to its interest."

Data is the next big leap. What is quite interesting is that not all countries are the same, some countries like Ghana (41.7 percent of total revenues) and Iran (41.5 percent) are using more data per customer than South Africa (34.4 percent of total revenue) and even Cameroon (19 percent), who lag, as do Nigeria (20.4 percent). So different countries and their respective populations have different consumption patterns at a data level. Whether or not data will become commoditised remains to be seen, we all consume a whole lot more than we used to, streaming music and videos has become a way of life. More smartphones joining the networks will do more and more in time, consume more data. Whether or not the networks can balance the fine line between huge capex (MTN have invested 21.230 billion Rand over the last 9 months, an increase of 10.5 percent year on year) and charging the right rate, remains to be seen, I suspect that they will definitely pull this off. As more and more entertainment takes place on mobile devices, MTN will be a benefactor of this trend.

The stock has responded as you would expect, relief at some level that "things" are not as bad as the headlines. Nor are they great, Nigeria needs to somehow be stabilised (at least the bad news), the business in that country is currently in a state of "severe storm" that is being weathered. To this point. I suspect that a local listing and local ownership (in Nigeria) would go a long way to improving local sentiment to the company. The oil price and a stabilisation of all things Nigerian budget, well, stick that down in the category of cannot do anything about. Owning this business on the basis that data continues to supply internet, and will continue to do so, for millions of people across our continent.

Famous Brands delivered and served up six month results yesterday. At face value they are decent results, notwithstanding what is always a tough operating environment. The group have successfully transformed themselves into a food production business, along with the old core distribution and franchising front end. Production means that you can control the quality inside of the brands that you have acquired, something that becomes increasingly hard to do across multiple brands and many more stores. The group now has over 2600 stores of your good old favourites, and your new favourites too. The tried and tested Mugg & Bean to Debonairs, alongside the likes of Tashas. I mean, who do you know who doesn't like Tashas?

Numbers quickly, revenues increased 23 percent to 2.45 billion Rand for the first half, operating profit (before exceptional items) increased 17 percent to 404 million Rand. Operating margins contracted as a result of higher internal investment to improve operations, as well as incorporating the lower margin production businesses. Making and selling cheese and meats to yourself is a lower margin business, it is more steady and about the controls. It has been a busy first half, with the acquisition of Salsa Mexican (damn delicious stuff), Lupa Osteria (anyone eaten there?) and of course the french fries spot, Lamberts Bay Foods.

The group also invested in a tomato paste facility, Cape Concentrate in Coega. For what it was built for, and never used, and for what Famous Brands got it for, genius. Since the half year has ended the group has also acquired just under half of By Word of Mouth Catering as well as landing the "big one", Gourmet Burger Kitchen (see below). I used to fish with an old Norwegian ship captain (on a smallish boat relative to what he was used to) who was a little like Captain Ahab, always searching for a monster fish that managed to escape us. In his deep Norwegian accent he always used to refer to the "big one".

The big news is that the company is suspending the dividend for the time being, with all likelihood that they will resume in the next financial year. Whilst this may be a bummer for those who like the yield, they have traditionally been very generous with 1.3 to 1.35 times dividend cover, this is still a growth business. And added to that, they don't like to leverage up too much, perhaps some hard lessons were learnt in the past. It is difficult to believe that this business has been listed for around 25 years and that the history is nearly 50 years long.

Perhaps the family types who got 405 cents per share (less tax) have squirrelled more than enough for the next few years. It is pretty easy to work out, there are nearly 100 million shares in issue, if the company doesn't pay 4 Rand a share, they "save" themselves 400 million Rand. That is less money they have to pay externally and more money to service the debt associated with the big transaction done in the UK. That is of course the Gourmet Burger Kitchen (GBK), which was acquired for the princely sum of 120 million Pound Sterling. 80 stores. You do the math, that is a "big number".

GBK EBITDA for the last year was 9.6 million Pounds, they (Famous Brands) are paying 12.5 times EBITDA. For comparisons sake, Shake Shack (Yeah baby!!) had annual revenues of 224 million Dollars (183 million Pounds) with a similar store footprint, with 25.2 million Dollars EBITDA, the market cap is 1.21 billion Dollars. So .... the market in the US pays 4 times more for Shake Shack than Famous Brands paid for Gourmet Burger Kitchen. Obviously the one is Shake Shack and Mr. Market are expecting HUGE (You-J) things, the brand may be small, yet it gets high profile mentions. Shake Shack are set to get to 107 stores by the end of this current financial year.

The expansion plan for GBK will be local (in the UK) and then into Ireland (half of which is Europe), before heading off to the mainland. And I am pretty sure that the brand will land up here at some stage. I was talking to a fellow who is heavily invested through a private company in the food and beverage entertainment space (read restaurant and bar) here in South Africa, he suggested that the gourmet burger space here locally was saturated, he did say that RocoMamas had done a great job. Stop yourself, count the calories! Remembering that Spur own half of RocoMamas, you could say that it was the one that "got away" from Famous Brands. Steers could shake things up a little, have two separate brands I guess with gourmet shakes and burgers if they wanted.

And then lastly, Paul's are set to open here (literally here in Melrose Arch) in late February. That is an exciting development, the bakery's are incredibly delicious. I have seen and been to several in France, they have an amazing feel and look, so fresh and clean and freakin' delicious. Again, don't count the calories or you will get depressed. What to do with the stock? Hold it, even through the "no pay" zone, it is for good reason that the dividend is likely to be suspended all the way through next year and into the year after. Another big growth phase and consolidation is afoot!

Linkfest, lap it up

Another example of how things get distorted when Governments intervene in the natural workings of the market - Sugar shortage in Egypt leaves a bitter taste. The author makes a good point, it is the consumer who gets hurt at the end of the day.

Sometimes South Africans take for granted our liquid stock market and forex markets. This is not the case in many African countries - Even one of the world's richest airlines may not be able to operate in Nigeria for much longer. Due to a highly restrictive currency market, countries are struggling to get money out of Nigeria.

There is a reason that Apple has a cult like following. Their products are just much more enjoyable to use - Macs are 3 times cheaper to own than Windows PCs, says IBM's IT guy.

"Only 5% of IBM's Mac employees needed help desk support versus 40% of PC users."

Home again, home again, jiggety-jog. Visa results last night, the stock is off a touch after market with a "small beat" relative to the expectations. We will cover that tomorrow in full force. As well as one of the most highly anticipated results! Apple reports this evening after hours. Whoa, that is always thrilling and hugely exciting. Stocks across Asia are a mixed bag, some up and some down, stocks may open marginally firmer here.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Monday 24 October 2016

McEarnings

"Will it come immediately? I doubt it, there are many more middle income neighbourhoods around the world. Global comparable sales up three and a half percent, across the 36 thousand restaurants in over 100 countries is a decent enough reflection of the global economy. Depending on where you are in the world, the offering is a quick fix of calories or a soft luxury."

To market to market to buy a fat pig A mixed close for Wall Street Friday, earnings still continue to stream in thick and fast. See below in the company segment, my colleagues have told me to be strict about separating the various segments, otherwise we end up with a fruit salad. And we are looking for more than one flavour. Chocolate or vanilla? Personally I prefer both over many other exotic flavours. Talking of exotic flavours, AT&T are buying Time Warner for 85 billion Dollars. There was some news that Apple would go after Time Warner, obviously the content is what everyone is after here. AT&T will pay half cash, half stock. I tried to understand the content side, who has what, who is likely to be the winner in all of this. Consolidation is obviously the key in all of this, Apple may build up their own content in time, they certainly have the resources to take on Netflix and Amazon. I suspect that unlike many people think, there is loads of space for multiple entrants.

By the end of the session stocks had finished mixed, the nerds of NASDAQ was boosted by the likes of Facebook (traded at an all time high) and Microsoft (also trading at an all time high), one pre their results and the other one post their results. The Microsoft all time high comes nearly 17 years after the dot-com high (adjusted for splits) just before Christmas 1999. Talking of which, I saw Christmas decorations this weekend. With a little over two months to go, I am not surprised I guess. Microsoft have done good work in directing all their customers to pay a subscription based monthly (or annual) for the office suite, as well as having a strong cloud product. Not a coincidence.

The nerds of NASDAQ closed up 0.3 percent, the Dow Jones Industrial closed 0.09 percent off for the session, whilst the broader market S&P 500 lost a smidgen, less than one-fifth of a point lower for the session. We are about 50 odd points away from the all time highs. Provided that we see decent earnings this week from the likes of Apple, Amazon and Alphabet (the company formally known as Google), stocks may get a decent leg up this week. Oh, and there is the small matter of the first look at US GDP this Friday. A big week! And at last, mostly earnings related.

On the local front we had stocks up two-fifths of a percent by the close, resources were rocking, up one and three-quarters of a percent by the end. At the top of the leaderboard was Anglo American, at the bottom was BATS after announcing the deal with Reynolds on Friday, that is really big money relative to their market capitalisation, 47 billion Dollars, dilution and more gearing is a little insipid in the short term.

Company corner

McDonald's results Friday beat the street and the stock jumped over three percent. It hasn't been the easiest in their operating space, the stock, notwithstanding their move Friday, is down three and a half percent year-to-date. Owning stocks shouldn't be a quarter to quarter thing, nor year to year, and the giant golden arch in the sky stock is a testament to that. The company has delivered 40 consecutive years of dividend increases. Through the savings and loans crisis, through the dot-com crisis, the financial crisis, you name it, McDonald's stock has delivered dividend growth. The company basically pioneered the restaurant franchise model and is synonymous with fast food. Perhaps in a changing world where habits are trending healthier, the company may come under pressure from fresh food again. Or they may just tweak their menu, or perhaps the reality is that ultra healthy food is a rich people thing.

Will it come immediately? I doubt it, there are many more middle income neighbourhoods around the world. Global comparable sales up three and a half percent, across the 36 thousand restaurants in over 100 countries is a decent enough reflection of the global economy. Depending on where you are in the world, the offering is a quick fix of calories or a soft luxury. The company also offers employment for hundreds of thousands of employees across the globe, not the most glamorous job, it is a look into the organised workplace for most first time entrants.

The stock has done well, it is a steady Eddy, 1000 Dollars invested in 1991 (25 years ago) has delivered returns of just over 800 percent, including the reinvestment of the dividends. The yield now stands at 3.3 percent (pre the tax). On a 21 multiple I would have to say that the stock is well priced, in this space we prefer the coffee business and the higher margin food of Starbucks. You can't own everything and that is also something you have to come to terms with as an investor. Starbucks has underperformed McDonald's both YTD and over the last 1 year, the five year chart tells an astonishing story however, Starbucks up 154 percent versus McDonald's up 23 percent. Of course that tells you exactly nothing about the future of the business, a historical chart!

At the opposite end of the markets liking was GE, the stock was down sharply in early trade, managing to recover by the end of the session to be just under one-third off. It wasn't so much the current results, rather than forward guidance on revenue had been lowered. Their power and renewable energy businesses had performed "well", their oil and gas business (which is more recent business) is struggling, along with the rest of the folks in that sector. The only stock to have stayed the course in the Dow Jones Industrial Average is hardly the most exciting company you can own. And as a result of the sectors they operate in, is bound to be more cyclical than a food business of any sort.

I suspect that the company is likely to struggle over the next 12-18 months, with no growth and a 20 multiple, do not expect anything other than a market performer. Which of course sometimes catches you off guard! The company however tells you what every investor wants to hear, that they have paid a dividend each and every quarter for over 100 years. Think about that. Multiple World Wars, multiple recessions, inflation, stagflation and the list goes on and on. And GE? No worries, we will pay you a dividend year in and year out. The financial crisis and the exposure to too much finance and not enough industry was a bad patch, hence the move back to the "old business". Whilst this is possibly a stock that you can own forever, there are certainly businesses (in our opinion) with better prospects in the medium term.

Linkfest, lap it up

As technology changes and technology moves on, there are winners and losers. Change is always difficult, two companies bearing the brunt of anti-change sentiments are AirBnB and Uber - The next 10 days will decide whether Airbnb lives or dies in New York City. Over the weekend the law was passed that people are not allowed to advertise rentals for less than 30 days at a time. The fact remains that Uber & AirBnb allow for societies to more efficiently use resources, making society better off as a whole.

There are some amazing facts about Google - 55 Facts You May Not Know About Google.

The goal of any corporation is to get the most out of their employees, working longer hours doesn't always lead to getting more work out of employees. Finding the average work hours worked and then comparing it to the amount of work produced/ productivity levels will help researchers get a better understanding of that work/ life sweet spot - Americans Work 25% More Than Europeans, Study Finds.

Home again, home again, jiggety-jog. If you like wearing Yellow and Orange, then your sporting teams had a fabulous weekend. Sundowns can proudly sport a star for the African champions above their badge, the only other South African team to do this are the Bucs. The Cheetahs were deserved winners of the oldest rugby completion in the world. Western Province have won this trophy 33 times. Wow. Famous Brands results this morning, and MTN have a quarterly update, we will have more on that tomorrow.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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