Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. The sellers stepped up the pace as a few worries about earnings season started to creep through and as such accelerated selling in the US. We of course were not immune in Jozi, resources were hardest hit, down a percent and a half. The platinum, gold, oil and copper prices all felt the brunt of those selling commodities, worries about companies pointing to a slowing global economy. Note that whilst I read the Caterpillar economic outlook as seeing things slowing, they do not see a recession in Europe, but growth is still going to be anaemic.
Locally we are waiting for the medium term budget speech tomorrow that is going to be very interesting. All that talk about cutting back on "vanity projects" from the minister will no doubt be revealed tomorrow. If not completely fleshed out, I suspect that the same old infrastructure projects and plans will be talked about. But I look forward to perhaps a much sterner Pravin Gordhan than in years gone by. This is going to be the ugly truth, we need to really spend less on wasteful spend. No more free lunches. BusinessDay has this story, which suggests "things" are getting harder: Ratings cut blow to SA's R1-trillion build plans.
At the same time, Eskom has asked the regulator for a big increase again. Often I wait for the initial outrage dust to settle and then to take a look at the practical side. I sense that almost all households are going to get themselves a solar powered geyser. It has to come at a far greater pace than in the past. Humans evolve relative to their surroundings and adapt accordingly, there will be more folks installing light savers too. I know that I have done whatever I can, I need to teach my family to switch off more lights though. Water is expensive too! We will adapt. Often the leftist elements in our government point out how wonderful Eskom is, but remember that there is no real competition. I suspect that is going to change at a retail level very soon, because as soon as the prices rise to a level that people notice, they do something about it. I wait for the energy regulator before making any commentary about the increases and what they mean to you and I. Not good.
British American Tobacco released their interim management statement for the 9 months to end September this morning. These are usually very detailed and most useful for investors. It is not that surprising that the company says "The environment continues to be challenging, with industry volumes under pressure. In this environment the expansion of illicit trade remains a threat, driven by excise increases and pressure on consumers' disposable income." That part about people adapting, unfortunately that takes on illegal spins too when the price gets "too high". You can download the release Interim Management Statement for the nine months ended 30 September 2012 from their website.
OK, as Byron said, I love to write about this one. The main reason is that I feel this is an industry in decline. You see that in the stick volumes, which are not growing even in emerging markets anymore. The commentary around higher excise duties in Brazil leading to lower company sales and ironically resulting in a rise in illicit sales. So, their line, and I agree with BAT here, is that government is losing out on revenue. So for governments there has to be some sort of balance here. In life there are many products that are bad for you, and extended usage can of course kill you too, there is no escaping that. But the reason why I think that they can only battle for so long with cost cutting is that developed economies, who on a per capita basis still consume more units than in developing countries, usage is slowing quicker than you think. And levelling off across their faster growing regions, which were more than offsetting the decline of the developed markets.
As an investment the company has done marvellously well, since the beginning of 2010, in Pound Sterling the stock is up 54 percent. Yowsers. The stock yields just over four percent, for a blue chip in Sterling, this has to be near the top of the pile. The group continues to buy back stock aggressively, having bought back 30 million shares at 978 million pounds year to date. That is around 0.3 percent of all shares in issue. When you look at the company financially, they are in great shape. They have relatively low gearing, at the half year stage they had net debt of just less than 9.4 billion pounds, their market cap is around 60 billion pounds. Operational cash flows are strong. The company returned over 3.1 billion pounds to investors in the 2011 financial year via dividends and buybacks. Their operating margins continues to improve. I do however think that for a company that is seeing more regulation, higher excise duties and push back to their products that a 16 times forward multiple is a little aggressive, but I know that the dividend underpin will limit the downside.
There is no mention of a regulatory hurdle pending in Russia. A recent Bloomberg article titled Russia Accuses Tobacco Makers of Hooking Women, Children, reveals that Russian lawmakers are closer to clamping down. Those Russians are crazy when they start something. The enforcement inside of what is a smoking culture, that will be extremely difficult. But raising the price, that is one way of muscling the consumer into a corner. As far as I understand it, public healthcare in Russia is very average, but it exists. In a fortnight we will no doubt see the reaction.
- Byron's beats
Yesterday, as I am sure you have already heard, Apple released the iPad mini. Before I establish an opinion on these product releases based on what everyone else has to say I go straight to the Apple website and watch the clip explaining the new product. Then you can go ahead and read what everyone else has to say. Here is the clip so you can watch it before you read what I have to say. iPad mini overview.
As you can see the product looks amazing. That is to be expected from Apple these days and always. The biggest difference is of course the size which makes it more portable. It also becomes a direct competitor to some of the smaller tablets like the Kindle fire, Google's Nexus 7 and Samsung Tab 7.7. The biggest question to be answered from this release was pricing. Because the tablet is smaller and supposedly cheaper it should be more accessible to poorer developing markets where Apple products are often too expensive.
The price starts at $329 for a 16GB which is still well above its competitors. Apple is still very confident it can ask a premium for its products and in fact the margin per unit of the mini will be higher than the third generation iPad it released 7 months ago. I agree. The brand quality, access to the best and most established app store, iTunes and all things that have made Apple products so successful just in a smaller package and slightly cheaper.
Was the release a disappointment? For some I guess the answer is yes. For most this was expected. There are always high expectations when Apple release products and in my humble opinion the only releases that will really excite the market are the ones where a brand new product is introduced. Like the iPhone or the iPad or way back when the iPod was first released. But don't forget, there were lots of different versions of the iPod with different sizes and features for different preferences.
That is what is happening here. Yes there will be cannibalization with the mini stealing sales from the iPad 2 which is still being sold at a lower price, the third generation iPad and now the 4th generation iPad which is the same as the third but with a faster chip (also announced yesterday). But like the iPod these are just appealing to different preferences so I wouldn't make such a big deal of it.
From an investors point of view I like the product. I like that the margins are strong and I feel people will still be willing to pay the Apple premium. Like all the Apple nerds out there I still wait in anticipation for a brand new Apple product release but please don't think that this has been a quiet year for Apple. 2 new operating systems, iPad mini, new iPod nano and iPod touch, iPhone 5, several new MacBooks (also announced yesterday) and the 3rd and 4th generation iPads. Results are released tomorrow night which we will cover on Friday.
US earnings yesterday, 3M was disappointing, Du Pont was really disappointing, Dow Chemicals had their results leaked early, those were disappointing too, but United Technologies was OK, that looked like a beat to me. The guidance is the part that most folks are worried about, expectations for next year needs to be lowered somewhat. Over in Europe I noticed that Philips Electronics beat, but warned on a weak consumer in their home markets and stodgy growth in the US. I guess this is telling us something that we all know already! Electrolux missed by a whisker and guess what, they also warned on the same things. SAP this morning reported a strong beat, which is in contrast to many of these businesses mentioned above. In this next piece someone has a decent enough go: Ain't Just Hamburgers: McDonald's Weakness a Warning for These Multinational Stocks and Others. Maybe, time will tell. What is another interesting phenomenon however is that UPS, Harley Davison and Whirlpool, all geared to the US consumers, those companies are doing really well! So, the US consumer is OK, but the rest of the globe, not so much.
Facebook. The stock that folks loved to bash after their IPO, and perhaps for all the right reasons, the pricing was just downright wrong. What the IPO did coincide with however was a massive jump in mobile user patterns and hence lower mobile revenue streams for everyone in the industry. Facebook is not alone here, Google is also having the same problems, but they will adapt, as they have been.
The September quarter however revealed something very interesting. Having been negligible in the quarters past, mobile advertising revenue grew to 14 percent of total advertising sales. BUT, more importantly, mobile revenue has grown by a factor of six since the beginning of the last quarter. And they, Facebook, put a number to it, 3 million Dollars a day. The actually quote from the CFO, David Ebersman, who said that 4 million Dollars a day is coming from News Feed, three quarters from mobile. Which then translates to 270 million Dollars for the present quarter, that is if the growth rate tails off immediately. Which I suspect that it won't. So, having been basically nothing, expect mobile revenue to be nearly one third of total revenue by the end of the first quarter next year, those are my quick back of the matchbox calculations. The Zuck also weighed in and said that six months ago they were not trying to make money off of mobile revenue, now they are trying. So he wanted to dispel this myth, that is what he said!
And the good news for their customers is that Facebook suggest that in your mobile stream, the advert power to users are 10 times more than on a desktop. Because of course it (the advert) appears in your stream, you have to scroll through it. What is also interesting was what Sheryl Sandberg, the COO, said on the conference call when comparing Facebook to the Super Bowl. She said that Facebook has three times as many users as the Super Bowl, and that is daily. But Sheryl, for your daily Facebook browse you don't bust out the popcorn, crisps and beers. And when you check your Facebook page, you don't talk about it with your friends for days, buy memorabilia and the like. But I get your point Sheryl, you have many users who many advertisers can reach for a lower cost each and every day.
The stock soared in afterhours trade, up nearly 13 percent in afterhours trade to over 22 Dollars. BUT, check back and see that 38 was the IPO price. Check out the full numbers via their investor relations page: Facebook Reports Third Quarter 2012 Results. What struck me was that the market cap last evening, before the stock ran away in the aftermarket, was 41.78 billion Dollars. Cash and marketable securities were a whopping 10.5 billion Dollars, meaning that one quarter of the share price is cash alone. This is a phenomenon not uncommon for many tech stocks, but in Facebook's case you can't say that the rest is still cheap. That is the problem you see, the price of the stock is less predictable. Less predictable than friendships for instance, which are supposed to be enduring and everlasting. I said supposed to be! You would still say that with 60 cents of earnings pencilled in by the analyst community for next years earnings that a 36 times forward earnings multiple is VERY expensive. This stock is definitely not for everyone. But as I say often enough, I believe that they will change the world.
Crow's nest. We are off again today, US markets sold off heavily overnight. PMI data across Europe has disappointed, as has a CPI release here this morning. This means Ms. Marcus, as Reserve Bank Governor has less wriggle room you would think. There is a small matter of the FOMC statement later this evening and New Home sales in the US too. With the poor German PMI data sloshing around, an interrogation of ECB president, Mario Draghi in front of German lawmakers couldn't come at a better time.
Sasha Naryshkine and Byron Lotter
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