To market to market to buy a fat pig. Yesterday was a bad day for markets due to a combination of White House political rumblings and the horrible terrorist attacks in Spain. The Dow dropped 1.24%, the S&P 500 dropped 1.54% and the Nasdaq was down the most, 1.94%. The All Share flipped between green and red all day, until the US markets opened, keeping us firmly in the red. The All Share finished down 0.21%, the only significant sector showing a dark shade of green were the gold miners, who finished up 2%.
As CEOs have been quitting Trump's committees due to the poor handling of the hate fuelled protested last weekend in the US, Wall Street is worried that some of his top advisors will also quit. There was a false rumour that his top economic advisor, Gary Cohn had quit. Wall Street considers Cohn a voice of reason in team Trump and someone instrumental in getting pro-business legislation through congress (False rumours that Gary Cohn is leaving the White House just spooked Wall Street - for good reason). If CEOs have quit, I'm sure that the thought of quitting has at least crossed the minds of team Trump members. Meaning that the next controversial thing Trump does could result in more people quitting.
Company corner
Bright's Banter
We love the education sector here at Vestact and here's why. The South African Private School sector is a very fragmented market with only three prominent companies operating in the sector namely: AdvTech, Curro, and Reddam.
There are roughly 26 000 schools in Mzansi with just under 13 000 000 learners of which around 600 000 go to private schools. This equates to 4.5% of the entire school market, a small piece of the pie. Contrast that to developed markets where private schools make up 20%-30% of the total number of schools.
What these private school operators do is take the burden of having to provide good quality education (which is in very high demand) from the government by investing aggressively in the curriculum and infrastructure. With only 4.5% of the schooling marking, the likes of Curro and AdvTech are barely scratching the surface considering the current demand from parents and global trends in private schooling. I think with more schools being built across the country we should see that 4.5% number slowly creep up to global norms. This is a growing tide no doubt!
Curro has had an interesting journey as they started out with 2 059 learners in the year 2009 when PSG bought 50% of Dr. Chris van der Merwe's business. Fast forward eight years, they now have 54 campuses, 127 schools, 47 002 learners and 2 844 teachers.
Curro's growth has been paramount in the past few years and this half-year was no different with revenue growth of 24% to R1.08 billion and earnings growth of 36% to R110m. The question you might be asking yourself is why did the shares of Curro close 5% down on the day? Well, the devil is in the detail.
The company trades at a price to earnings ratio of 99 meaning the market has set very high expectations for the company. The Meridian brand (their cheaper offering) came under pressure especially in mining dependent provinces like the North West and Limpopo. This resulted in the number of learners decreasing by 6% for the brand. With a high PE comes high expectations and with high expectations, comes high responsibility.
The other issue was Stadio, their answer to AdvTech's tertiary offering. Stadio was a drag on earnings, maybe a bit more than expected because of the high set up and license costs. The good news here is that Stadio will be spun out of the business in September 2017.
The other issue is that Curro has only one brand i.e. "Curro". If anything negatively affects the brand such as notorious learners in one school or a derogatory educator in another school, this damages the whole Curro brand. Country wide brand damage was seen due to the racial incident at Curro Roodepoort for example. This contrasted with AdvTech who operates over multiple brands, the damage is then limited to those few schools that operate under that particular banner.
Finally, Curro is highly exposed to the middle class and the earnings potential of the middle class tends to be highly correlated to the economy. When the economy is doing well, parents will be able to pay for the school fees with ease but when it doesn't, the company will find it hard to pass on increases without driving the parent out of the gate to go find a cheaper alternative. As we have seen at Meridian.
In the words of the legendary Howard Marks (Investor). There is no such thing as a good idea or a bad idea in the investment world without reference to price. It's not what you buy, it's what you pay. Finally, investing is not a matter of buying good things, it's a matter of buying things well and people who do not know the difference shouldn't be in the business.
Here at Vestact, we prefer AdvTech which trades at a historic PE of 24 with growth expectations of high single digit to double digits for the next couple of years. It is more exposed to people who are in LSM 6 and above (not that sensitive to price) and recently the price of the shares started to look very attractive on different logical valuations.
Linkfest, lap it up
One thing, from Paul
I got into a discussion yesterday with our partner in New York, Ted Weisberg of Seaport Securities. He emailed me to commiserate about the market slump on Thursday evening on Wall Street.
His opening comment: "Weakness across the board. Market internals have been deteriorating for weeks. Not sure what the "spark" was for today. Perhaps Spain. Perhaps dysfunction in the White House. Perhaps just a market that is overbought. Whatever the reason it was an ugly day and I suspect more to come."
My response: "Lets see what happens. As you know, we keep a steady hand on the wheel. No change to portfolios, that is the default."
Ted: "Understand. But we both know that trees simply do not grow to the sky."
Paul: "You are right, even great companies don't last for ever, as a look back at the constituents of the Dow in history will show. However, great multi-generational family equity portfolios do grow to the sky? Our job is to try to position those portfolios to be invested in the best stocks in any given era. Clearly the term "best" is subjective, and there will be some failures. Some turnover in portfolios is obviously appropriate, but it seems to me that less activity is better than too much activity, as a rule."
Byron's Beats
As you know, healthcare is a core investment theme here at Vestact. But healthcare can be a broad term and the companies tapping the market can come from all sorts of sectors. For example Apple have pipeline products that can read your blood sugar via the Apple Watch. This article from Moneyweb suggests that Google is the most important healthcare company in the world. The most important healthcare company on the planet. I tend to agree, you have to be cautious on what info you accept from the internet though. By having patients more informed on what could be wrong with them, collaborating with doctors will be a lot more efficient.
Michael's Musings
If you have $20 million burning a hole in your pocket here are some beauties that you could buy - The 10 Most Expensive Cars at the Pebble Beach Auctions.
Walmart reported their 2Q numbers yesterday, I am amazed by the absolute size of the company. They had revenues just for the second quarter of $123 billion! Their most recent FY numbers had revenues posted at $485 billion. What do you think South Africa's GDP is? All the cars in that traffic jam this morning, all the people in the shopping malls this weekend, all the cocktails bought at the Saxonwold shebeen and any other economic activity taking place within our boarders over a 12 month period comes to around $300 billion. Basically Walmart is 61% bigger than South Africa - Walmart beats on earnings as online sales surge.
The market is telling you that it thinks Amazon is less likely to default on its debt than China - Amazon can borrow money more cheaply than Russia, Mexico and China. How can that be true?
Home again, home again, jiggety-jog. The economic news flow today doesn't have any significant market moving numbers in it. Next week the South African earnings season kicks into high gear, Woolworths will be of particular interest to us.
Sent to you by Team Vestact.
Follow Michael, Byron, Bright and Paul on Twitter
078 533 1063
No comments:
Post a Comment