To market, to market to buy a fat pig. A journalist friend of mine sent this to me (Australian miners attack 'obsession' with tax), following on the piece that we did yesterday on Kumba Iron Ore. It always amazes me that higher prices in a local industry created by external demand (important) attracts the leeches attention of the tax bleeders in government. Oooooohhhh, we could tax those guys more! The core of my argument is that the minerals in the ground were there long before people. And possibly will be there long after people. So it is the duty of the country (in my opinion) to make sure that we foster an investment environment that helps facilitate the mining of these minerals as quickly as possible. I can assure you that the Chavez administration will be scorned by future Venezuelan generations as the fellow that did not produce enough oil at the golden time for their country. Perhaps that can all change, attracting the Chinese, Indians and Russians to forge towards a Norwegian type model, that is what is being suggested. Hopefully.
Nutmeg was once so valuable because it was thought to have properties that could ward off the plague. The Dutch and the British had several skirmishes (in a long line of bigger global fights) to gain control of an island named Run which is in modern day Indonesia. Why? Because there was a whole lot of Nutmeg trees there. Phew. Whale oil used to be useful before humans discovered kerosene. What I am trying to say is that Venezuela has seen oil production decline under nationalisation, by nearly 50 percent. Who is Chavez doing a favour? According to Wiki, citing OPEC analysts, Venezuela has 230 odd years of oil left at current production levels. And that is at current production levels, which is lower than when private business was able to operate in that territory. There are already people predicting the end of the combustion engine, including the International Energy Agency chief back in 2010. And engine manufacturers are always pushing the boundaries in terms of fuel efficiency, even though this article points that the design of the engine has not transformed dramatically since the first one was invented: More bang, less buck: How car engine tech does more with less.
The only point I am trying to make is linked to that Citi report (curse it) that suggested that we have around 2.5 trillion Dollars worth of minerals under our feet, almost all of it in platinum. Of course those are only useful if people want them. We better hope that the combustion engine moves in the direction of fuel cell technology. Check out this useful page from those who know platinum well, Johnson Matthey: Applications. What use is a mineral if nobody wants it? Get it out the ground as quickly as you can, make the business conditions so favourable. Unfortunately miners locally find themselves in a trap of higher costs and with an unfavourable business climate. And that ultimately leads to lower employment and investment. So, the challenge is to get it all out the ground, beneficiate it if you must, but get it all out. Before nobody actually wants it. Can you imagine a motor vehicle in the future that uses clean energy and does not require any device to clean emissions, because there are none? Such vehicles exist already. I only need what is called an NEV, something that gets you to work and back. On second thoughts, a "golf cart" for me is nuts. But still you get my point. Resource rent taxes, resource nationalisation or nationalism is full of short sighted and internalised less global thinking. Dumb. Like I said yesterday, you didn't make that iron ore price.
Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E We slipped from about midday onwards, retailers taking a little knock. On that score I want to share a little insight that I got from reading a global retail (in emerging markets) report from arguably the most loved/respected and the same time hated investment bank on the planet. Yeah, you know who I am talking about. Anyhows, this report suggests that our retailers are cheaper compared to their global counterparts. Yes, you read that right. As lofty as the valuations might seem to the locals, these are cheaper than their global peers. And the point that I always make, so who cares whether or not we think something is expensive when foreign investors looking to invest in the next big theme, African consumers over a decade or so, like what they see. The way that we would invest in Nigerian stocks, taking a longer term and broader view is possibly how foreign investors view our retail companies. As big as we think Shoprite is, at roughly 11 and a quarter billion Dollars that is smaller than the Campbell Soup company.
Having said that though, Shoprite would slot into 3rd place on the list of retail, subsector department and discount companies (16 in total). Behind only WalMart and Macy's. If you had to stick it on retail/grocery stores, it would be in fourth place. Wait for it, just behind Companhia Brasileira de Distrib. Which has fewer stores than Shoprite, just a few. And operates a similar business. And guess what, Mr. Market is willing to give the company a 27 multiple. A paltry yield of 0.74 percent. So next time you say that these retailers are expensive, think global. CBD has worse margins, but of course operates in an exciting territory, Brazil. That is the main attraction for investors, and I genuinely think that there are investors in this company. The average volume in New York is lower than the rest of that hyperactive market.
New York, New York. 40o 43' 0" N, 74o 0' 0"W Stocks stretched their lead again, after a period of two weeks where we have been moving sideways. The Dow breached 14 thousand again and stuck, I noticed a little ticker on CNBC which suggested that we were only one very good session away from reaching the all time high for blue chips. 145 odd points. The broader market is still a fair way away from that all time record from October 2007. I think that the part that is most important to remember is that the last time we were at these index levels the overall market valuations were much more demanding than they are now. Collective earnings expectations for the S&P are somewhere around 113 Dollars for this year. With the S&P 500 level currently at 1519, at slightly less than 13 and a half times forward earnings hardly looks stretched now, does it? We often point out here that all that has happened is a re-rating of riskier assets because the worst case scenario has passed somewhat. In short, these dramatic events have been navigated, Euro Crisis, US elections, Chinese leadership change, Fiscal cliff, those have faded. But, of course the looming sequestration could cause some anxiety, some folks don't even think that is huge. As every day goes by and we hear less about Greece, Spain, Italy (elections are close) and so on, the more ordinary folks have confidence to invest for the future.
This does not happen too often, but I guess the fact that a fair price has been reached and more importantly an overhang of sorts has been removed. I am talking about Comcast's purchase of the balance of NBC Universal for a whopping 16.7 billion Dollars. This announcement coincided with very good fourth quarter results from Comcast -> Comcast Q4 Profit Rises, Boosts Dividend By 20%; To Repurchase $2.0 Bln Of Stock.
This article seems to suggest that Comcast got a great price from GE: Comcast's NBC Purchase Pushes Roberts Into Entertainment. Before the rise in the aftermarket, the deal represents around 15 percent of Comcast's market capitalisation. It is less of a big deal for GE, but it is not insignificant, around 7 percent of their market cap. A special dividend could be in the offing, if GE were in the business of doing that, they have done that from time to time. There was a statement from chief Jeff Immelt that suggested as much, so look out for further cash. I suspect the real reason that people buy GE is for their global industrial business. I suspect that in the coming years there might be a separation of the GE Money business. That business however is linked closely to the industrial business.
Why Tim Cook, Apple's CEO used this as a platform is perhaps beyond me, but I guess this one came with a little umpfff. The event was the Goldman Sachs technology conference, the place was San Francisco. Initially the stock was up, but it ended down around two and a half percent. In part due to the fact that Cook said that too many impatient investors spoil the broth the companies cash was not burning a hole in their pocket. And that the remarks and lawsuit from David Einhorn were a silly sideshow. And not a well thought out lawsuit following a detailed slideshow. I can understand the want and desire of David Einhorn to spruce up his returns, but I am guessing that if he is not patient enough, then find another investment with more juice. Or buy more shares and ruffle some feathers on the board. I guess his fund does not have the money to do that. BlackRock, the worlds biggest asset manager has been buying Apple shares like crazy, they own 5.31 percent, or 49.8 million shares. What do they think?
Back to the Tim Cook and Apple news, the main reason for actually talking there was possibly to get the number out there that Apple developers have generated around 8 billion Dollars worth of app sales. Apple keeps 30 percent of that. It was just showing you what we got, and what you have and how much money you can make on this platform. Howard Lindzon suggested that Goldman employees use Blackberries at work and iPhones and iPads at home, so this was barking up the wrong tree.
There is luckily for us a transcript of the speech: This is Tim Cook at the 2013 Goldman Sachs conference. Some of the important pieces for me were around innovation: "The innovation is so deeply embedded in Apple's culture: the boldness, the ambition, the belief that there aren't limits, the desire among our people to not just make good products but make the very best products in the world, it's as strong as ever, it's deeply embedded, it's in the values, it's in the DNA of the company." Like we often used to say, we are sure that the next Steve Jobs might want to associate him or herself with the business.
But the stuff that I really like is the following: "When I sort of zoom out and look at the smartphone market in particular, what I see is a market that last year was around 700 million [units], plus or minus. It's projected to double in the next four years to 1.4 billion—this is a huge market. I believe that more on a longer-term basis, all phones will be smartphones, and there's a lot more people in the world than 1.4 billion, and people love to upgrade their phones fairly regularly." This is true. People love their smartphones more than their families, in the case of Piers Morgan. So I have heard, or read through an article by his second wife. Perhaps soon to be ex if he keeps that up. Well. Not too sure what to make of all of this other than Tim Cook has been at this conference for a while. And he makes good points. Rather than the TV or watch rumours, I would prefer to see an augmented reality glasses rumour. Perhaps they will wait for Google to release them and then "Apple" them. We continue to hold and recommend the stock.
- Byron beats the streets. Yesterday we had full year results from one of our newly recommended stocks in New York which certainly pleased the market. L'Oreal managed to grow sales 10.4% for the year which came in at 22.46 billion Euros. On a like for like basis (excluding acquisitions etc) this grew 5.5% which beat the sectors growth of 4%. This obviously means that they managed to gain some market share. Net earnings per share grew 15% to 4.9 Euros while the dividend was increased by 15% and another share buyback worth 500 million Euros was announced.
The stock trades at 111 Euros which puts it on a historic valuation of 22.6. Forward earnings are expected to come in at around 5.31 Euro this year, 6 Euro in 2014 and 6.9 Euro in 2015. Trading at 16 times 2015 earnings the stock is certainly not cheap. But when you look at those growth rates and the fact that the company has zero debt you can see why.
The future looks bright. They have targeted 1 billion new clients over the next 10 years. Wow that is huge. They have also expanded production outside of France to target the developing market consumer. They opened factories in Indonesia and Mexico last year with one in Egypt planned for this year. That may be on hold at the moment. 2012 was the first year where markets outside of Western Europe and North America were responsible for more than 50% of sales.
I read an analyst note yesterday (it's paid for so I cannot say who) which suggested the following sales growth rates per region for 2013. Indonesia (34%), India (23%), Argentina (20%), China (12%), US (7%), UK (4%) and France (3%). That looks very positive and reiterates my view that the developing world is going to become more and more image conscious, both men and women.
I guess the only negative to consider is the ownership structure of the company. Nestle own 30% and the Battencourt family (founders) own 31% who both act in concert pursuant to a shareholders' agreement. Basically they vote together and dictate which path the company takes. I generally have nothing wrong with that, Google and Facebook have similar structures, as long as everyone's interests are aligned. Apparently though there is a bit of a rift amongst the Battencourt family in terms of inheritance. Here is the wiki entry about Liliane Bettencourt, the founders daughter who is now 90 years old and is worth over 20bn Euro. It is just a niggling issue that does need to be considered when buying these shares.
It is also a possibility that Nestle could try and buy the family out once she dies and with that the whole company. That of course would be good for shareholders who would demand a premium.
Regardless of this issue which needed to be pointed out I see this as a fantastic entry into the aspirational consumer growth group.
Crow's nest. Local retail sales were better than anticipated, sending the Rand slightly firmer. The G20 is hanging out in Moscow for the next couple of days dealing with matters currency and other. The president here will make his state of the nation address whilst there was mixed reaction to the Obama state of the nation. I thought it was excellent.
Sasha Naryshkine and Byron Lotter
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