Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. Although retail and industrial stocks improved, supported by the beaten up platinum stocks that enjoyed a rare good day, the JSE All share still closed in the negative, down 0.3% to 37 352.25 points. The gold stocks were beaten up, the Rand continues to be battered, perhaps the storm is more external, the Euro Dollar rate continues to favour the Greenback, the Dollar has strengthened as much as three percent over the last four weeks. Equity markets have gone in the same direction, lower. So perhaps one should just watch the Dollar. And now, the Japanese are heading for another election as Prime Minister Noda has indicated that he will dissolve parliament (the Diet) in two days time. Elections will take place almost immediately and the expectations are that Abe will get another shoe in. Which might not be that good. Watch that space.
And if you missed it, everyone is reporting that there should be a major shortfall in platinum production, for the first time in nearly a decade. Johnson Matthey, the experts in this field said so yesterday. But their price targets for platinum is not that far off from where it is trading now, suggesting of course that those transacting in the precious metal know this news already. What might boost the platinum price a little is if Anglo American Platinum (or is it Amplats?) in their review decide to stick a few more shafts on care and maintenance. I can't see the situation looking anything but ugly for the short term. But, as they say in the classics, there is gold in them hills! Or platinum in this case. I curse the Citi report about the 2.5 trillion Dollars worth of value in the ground.
Telkom. Ouch. They have provided us with another trading update today, which follows the one from September the 21st, which we wrote up about in September: Telkom report another fall in earnings. At that stage Telkom reported that earnings were going to be lower, but did not give the absolute range. Now they have presented the range, which is worse than the estimates bottom point. "Telkom hereby advises shareholders that headline earnings per share from continuing operations for the six months ended 30 September 2012 are expected to be between 78% and 83% lower than the comparative period." Yech. And as we pointed out, HEPS (from continuing ops) clocked 191.7 cents this time last year. So expect HEPS to be 37.3 cents in the middle of the range, for the half year. Ooops.
And then "Basic earnings per share from continuing operations for the six months ended 30 September 2012 are expected to be between 62% and 67% lower than that of the prior period." Reminder, basic earnings per share was 32.5 cents this time last year. Expect that to be around 11 and a half cents this time around. Results are due next week, on Monday in fact. Perhaps this is the absolute bottom. I just can't find a compelling reason to own the stock. Sorry. We still avoid the stock, the company still has a dominant place in the South African telecommunications space, if only someone, somewhere would treat it as a proper business rather than a government experiment in a socialistic project. Sure I would like everyone to get internet access, but it turns out that the mobile companies are already doing that.
- Byron's beats
This morning we received full year results from Spar group. Under the Spar umbrella falls the Spar brand, Build It, Tops and Pharmacy at SPAR. But this business model is different to the likes of Woolworths. Spar is a franchise so its main function is to operate its 7 distribution centres and supply and service independently owned Spar franchises.
This has its pros and cons. Because owners are incentivised to make their business a success you get some fantastic Spars, like the one at Broad Acres which is better than most Woolworths stores. But this goes both ways as bad operators can tarnish the brand. The Spar in Parkview comes to mind. And this is exactly why Woolworths have been buying back their franchises, so they can control their quality. Spar does own some of their bigger stores (11) to maintain some sort of quality standards.
The success of this distribution business is still fully geared to the retail sector and how well their stores do. And according to the numbers we are still seeing double digit growth. Turnover increased by 12.2% to R43.2bn. 6.4% of that was attributable to price increases and the rest due to volume growth. Within the revenue mix, Spar wholesale grew 11% to R35.5bn, TOPS grew 18.3% to over R3bn and Build it grew 18.5% to R4.6bn. So people are drinking more beer while improving their homes. They are eating a bit more too.
Headline earnings rose 11% to R1.06bn which equated to headline earnings per share of 616c. The stock trades at R122.88 which is actually down 3.2%. These numbers must have missed expectations. The dividend declared equated to 430c. You see they can afford to pay out shareholders the lion's share of earnings because expansion is out sourced to entrepreneurs. Earnings of around 700c are expected for next year. This means the stock trades on a current yield of 3.5% and a forward PE of 17.5. Expensive but we have discussed retailer valuations extensively, these levels are inflated by foreign ownership and judging by their recent performances, rightfully so.
Unfortunately for us, Spar is a case of you just can't own them all. We prefer Massmart because of their model and Wal-Mart backing. We have also favoured Woolworths in the upper end supermarket sector and Cashbuild as a separate building retailer. I like the stock and the sector but we prefer the others just mentioned.
It was that time again, the Cisco disco. The company released results for the first quarter of their financial year, and judging by what the stock is doing afterhours, let us just say that the market enjoyed them. A lot of people struggle to understand this company, I figured that I was always going to do a worse job than Google finance in trying to describe the company, so here is a copy paste, right up the alley of a former police chief here locally. You know, the fellow that had a remarkable resemblance to Morgan Freeman.
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"Cisco Systems, Inc. designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry and provide services associated with these products and their use. The Company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate, and collaborate. Its products are installed at enterprise businesses, public institutions, telecommunications companies, commercial businesses, and personal residences."
If you want to think about the internet as a river, or better, a set of canals providing the information, then Cisco are the people who build sluice gates, the people who make sure that the water flows fast and in the right direction. Routers, switches, wireless systems, storage facilities, the cloud, call centres, even fancy IP phones. Those Cisco phones rock. So, everything to do with the internet. So, if you think that the internet is a growth business, just in general, then Cisco would be well positioned to benefit from the continued expansion and digitalisation of the world. Heck, your fridge is even going to have an IP address. IPv6 people. The whole idea is that you would be able to control your house from a smart device, turn on lights, get your fridge to relay to you that you are running short of stuff (milk, veggies) that ordinarily you would only discover later. The future is here already, perhaps some people find that a little invasive, a talking fridge. Perhaps it comes with a scale and can tell you to "step away from the fridge people" when it is just you alone. No more midnight snacking.
Cisco released the numbers post market, the top line number came in slightly higher than anticipated 11.876 billion Dollars for the quarter, led by a strong bounce in their core business in the America's. Still, this only represents a 6 percent increase from the corresponding quarter. But hey, I will take that especially when they say in the documents that went alongside the Q1 Fiscal Year 2013 Conference Call, that it is "a very challenging market, where many of our peers are reporting declines." Good one. Gross margins ticked up, which was another sign that the hard work the management team has done with streamlining the business, simplifying the business has started to pay off.
When you dig a little deeper into the revenue numbers you find that the new businesses have rocketed. I was very pleased to see a 30 percent growth in their Service Provider Video Business. Their wireless business grew by 38 percent and their data centre business exploded, up 61 percent. Collectively however, if you add those three businesses together they are still less than 20 percent of their overall sales, almost equal to their routing business, which saw sales contract a little. Even their core switching business showed negative sales growth of 2 percent. Pleasingly their services business grew 12 percent, this is the second biggest segment representing 22 percent of total revenue. So this is a case of the older businesses contributing less and the newer business starting to grow strongly.
The company bought back 15 million shares at an average price of 16.44 USD per share, but more exciting for shareholders was the big bump up in the dividend to 14 cents a quarter. That translates to 56 cents per year, which at an afterhours much higher share price of 18.12 that represents a yield of 3 percent before tax. This is a company that only paid their first dividend in March of 2011, that is better than "not bad". Net income grew 11 percent to 2.569 billion Dollars, that translated to 48 US cents per share earnings for the quarter. I would say that you should expect at this click around 200 to 205 cents worth of earnings for the full year. Again, at the aftermarket price (18.12 USD) the stock trades on a forward earnings multiple of less than 9 times. Phew, old tech went cheap in a hurry. But when it was expensive it used to be known as new tech, we will explore that a little later.
Cash, cash equivalents and investments was 45 billion Dollars as at the end of the quarter. That sounds like a lot. In fact, relative to their market cap of just shy of 90 billion Dollars, that is crazy. Nuts. In fact, given that the stock has jumped after market to what roughly translates to a market cap of 96 billion Dollars, their cash, cash equivalents and investments as a percentage of market cap is 47 percent. On an ex cash, cash equivalents and investment basis, the stock trades on an earnings multiple of less than 5 times. What? I can see why the average price target for the analyst community is 21.53 Dollars, as per Yahoo finance.
These are record results against a backdrop of a challenging macro environment. But that does not answer the question, why is the stock so cheap? Perhaps it is John Chambers. Don't ever let life challenges set you back, Chambers overcame dyslexia. However he pays himself (the company pays him, sorry) an awful lot of money. Some people suggest the guy is worth as much as 1 billion Dollars. Holy smokes! Last year the fellow was paid nearly 38 million Dollars. Wow. He has been CEO for 17 years, it will be 18 years in January.
Or perhaps it is that old tech has been discounted out of sight. But the truth is that the company has operating cash flows of around 10 billion Dollars per year. We are going to be patient on this one. The stock looks cheaper and I suspect that it will get a rerating soonest. Stay the course, we are still buyers.
Digest this.
Sometimes you come across a piece of analysis that crystallizes what you have tried to say all along. Corporate and households in the US deleveraging aggressively, saving more, and making sure that they get their financial house in order after the worst financial crisis in living memory, or that is at least what everyone tells us. Naturally the US government filled or plugged the gap, and as such saw their debt levels balloon much to the horror of all and sundry. This post absolutely nails it, with Cullen Roche explaining how Goldman Sachs economist Jan Hatzius Connects All the Dots. More cash on companies balance sheets, more savings by individuals, and US government committed to winding their neck in over the coming years. Or at least that is what the fiscal slope event is telling us. That can't pass soon enough!
Crow's nest. We are flat. US futures are higher, perhaps the positive Cisco news about corporate America. That is good to see after a barrage of negative news lately.
Sasha Naryshkine and Byron Lotter
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