Money with a dash of Funny: April 2013

Friday, 26 April 2013

Starbucks, the fix and the growers

"I would have off the bat assumed that the Americans drink as much coffee as the French or the Italians. And I would have assumed that those two proud nations of coffee drinkers would easily drink more than everyone. But it quite simply comes down to simple geography. The Scandinavians slurp enormous amounts of coffee. Huge. More on that in a second, I wanted to understand coffee production, because that would give useful insight into the demand side. In the year 1990/91 all the countries that grow the stuff managed to collectively grow their output 93.253 million bags. Last year, and this information is courtesy of the International coffee organisation statistics page, the producers managed 144.646 million bags. That is a pretty massive increase in coffee production over a twenty odd year period."

To market, to market to buy a fat pig. Up, up and away we went, flying into positive territory for the year again. That is right sports lovers, 116 days into the year and we are struggling to break even year to date. No thanks to the resource stocks, and in particular the precious metal stocks. The gold stocks are experiencing their worst year since I don't know when. Perhaps 1984 or 1985, my data does not go back that far. Platinum stocks have had a crazy ride, since the highs of early 2008 it has been bumpy at best. Retail stocks have also been struggling this year, perhaps the lofty valuations are finally telling. Earnings growth rates for the retail stocks sit in the low to mid teens and the yield underpin is still very decent, so I guess we are in a wait and see type pattern for now. Woolies, Massmart, Shoprite and then lower down the market cap ladder, Holdsport and Cashbuild are all companies that we continue to recommend and hold. That is for out and out retailers, of course there is also Tiger Brands and Richemont, two totally different companies, the one sells rice the other sells thing that are nice.

US markets slipped away towards the end of the session, but still, the Dow is up around 12 percent YTD. The S&P 500 is up 11.15 percent year to date. We are not even flat for the year. That shows you where the flows have been. A fall off in weekly jobless claims, a much better read than anticipated was greeted with both hands. Microsoft has been on a tear lately, whilst everyone has been hating on them. The stock is trading near a 52 week high, and year to date are up nearly 20 percent. Phew, that is pretty amazing. After hours it was revealed that George Soros had taken a stake in JC Penney. The plot thickens. Why? First a few days ago Reuters runs an obituary, when Soros was still alive and well. And the way that the holding was filed suggests that he is happy to hold it for a while. Bill Ackman must be happy about that. With Ron Johnson amazingly (not really) unable to produce the same results at JC Penney as he was at Apple, Ackman must have been second guessing himself. Or not. It seems there is no shortage of ego there.

What does a siren with a crown, two fish tails, long hair and your favourite morning brew have in common? Starbucks. A company founded in 1971 in Seattle. Their first shop was in Pike Place Market, next year the company plans to have 20 thousand shops across all six continents that you could have customers. Ironically, the continent that their brew might be most appreciated, Antarctica, does not have any stores. Just to show you how quickly their home market continues to grow, Starbucks plan to open 3000 new stores in the Americas alone. The source of the Sleeplessness in Seattle of both Tom Hanks and Meg Ryan might well have been too many lattes or espressos from Starbucks. Maybe. I can't remember how the movie plot runs, but I remember that the end is all too familiar with movies of this nature. Boy gets girl, girl gets boy. The end. No story of him leaving the toilet seat up and her forgetting that the big match is on this weekend. None of that.

But back to Starbucks, because we are interested in the business of business, and the business of selling what is quite possibly the only daytime drug that nobody frowns upon. I mean, a glass of wine at lunch or a cigarette on the street do not attract the same positive feedback that a warm steamy cup of coffee does. The smell for starters is better. The company is not only all about coffee, they also own bakeries and tea brands/outlets. Teavana, if that is your thing. Personally I drink both, tea and coffee. Starbucks have their own home coffee systems, so that at home you can feel as if you are there. At home I have the Nespresso machine, at work we have one too. The coffee is awesome. Bad coffee unfortunately is really bad, and that is both a problem and a good thing. A good thing because premium coffee is awesome, a bad thing because you become a coffee snob.

For the quarter ended 31 March 2013, total net revenues grew 11.3 percent to 3.555 billion Dollars, operating income was 26.4 percent higher at 544.1 million Dollars, net earnings grew to 390 million Dollars, an increase of 26 percent. This translated through to 51 cents a share for the quarter, an increase of 27.5 percent. There are fewer shares in issue as the company continues to buy back stock, 12 million shares less than this time last year. Which is around 1.5 percent fewer shares in issue. The plan is to buy back another 26 odd million shares, thus removing about three percent of the free float.

The quarterly dividend was hiked not so long ago to 21 cents a share. The stock sank afterhours, so perhaps we should use the indicated opening price today, 58.95 Dollars for the purposes of valuation. The yield is 1.43 percent, hardly a positive yield underpin. The forward multiple (using the number that I have seen for the full year by the company, 2.18 cents) is around 27 times earnings. But what are the growth rates? The expectations are for earnings to increase by 22 percent per annum for the next three years. So the PEG ratio (a like for like measurement for any company) comes out at 1.2 times. PEG measurement is simple, price to earnings multiple divided by earnings growth. Slightly more expensive than you would hope, but earnings are growing at a fair lick. Earnings could surprise on the upside. Astonishing margins, which are expected to continue to grow by as much as 30 odd percent to nearly 20 percent EBIT over the coming four to five years. Amazing. Just coffee.

And I say, just coffee, but this is even more amazing than I thought, the coffee consumption per capita statistics. I would have off the bat assumed that the Americans drink as much coffee as the French or the Italians. And I would have assumed that those two proud nations of coffee drinkers would easily drink more than everyone. But it quite simply comes down to simple geography. The Scandinavians slurp enormous amounts of coffee. Huge. More on that in a second, I wanted to understand coffee production, because that would give useful insight into the demand side. In the year 1990/91 all the countries that grow the stuff managed to collectively grow their output 93.253 million bags. Last year, and this information is courtesy of the International coffee organisation statistics page, the producers managed 144.646 million bags. That is a pretty massive increase in coffee production over a twenty odd year period.

And this is more impressive, Brazil (50 million bags) and Vietnam (22 million bags) account for half of all production. Do you ever hear of anyone refer to a Vietnamese coffee blend> Nope. I learnt something new too, there are three different growing seasons for coffee, April, July and October. Different climates means that beans are harvested at different times of the year. Ironically, Starbucks opened their first store at the end of January in Ho Chi Minh City. Of the producers of coffee, Brazil is one of the few countries that enjoys high consumption. Back to that map of global consumption, because I think that this is important. From the document, Coffee Consumption, I have ripped the table out by way of an image:

Normally you would think that the Americans would be higher up on the list there. But their consumption on a per capita basis is 50 percent lower than their northern neighbours, Canada. That leads me to believe that there could be good growth opportunities for the company in the US, and there is evidence of that in the fact that the company are opening a huge number of stores in the coming years in their home territory.

And I have not even mentioned India or China, the homes of the tea drinkers once. Increasingly though, these two huge nations are becoming coffee drinkers. The US is 75 percent of their revenues, and there is still major growth here. Their Asia Pacific business, which includes China, is growing revenues and profits at 35 odd percent. Coffee is a soft luxury, Starbucks is a brand that people aspire to consume. The company is in good hands, Howard Schultz is 59, so I guess there would be some continuity questions. But he seems in good health and aggressive. The board is power, there are some really good members, including two ex Pepsi board members. And Robert Gates, the ex secretary of Defense. We continue to favour Starbucks as the correct entry point into what is a strong growing emerging market story, as well as well entrenched consumer culture in their home markets.

Byron beats the streets

After covering Amazon for a few years now I am sure you get the point that these guys are not focused on present earnings. Somehow Jeff Bezos has managed to convince shareholders that the earnings will come and that they must just be patient. Not much has changed as the company who trades at $265 reported earnings of 18c for the quarter. This comfortably beat expectations of 10c but it is revenues which show the real picture here.

These were a little light verse expectations, $16.07bn vs $16.14bn. This showed a net sales increase of 22% compared to the first quarter last year. I'm not even going to get into valuations because there is not point. But let's assume that once they are finished their big capital expenditure spree they manage net profit margins of 10%. With expected revenues of $75bn this year that means profits of 7.5bn. The company has a market cap of $125bn meaning that even at these assumed profit margins they would be trading on 16.7 times earnings.

But investors are expecting sales to grow at an alarming rate. Not only are Amazon sacrificing profits by investing in massive distribution centres, they are also selling hardware at nearly cost so as to sell people their content. This short term margin killer has good long term prospects. From their presentation Business Insider have come up with some exciting highlights where Amazon are gaining exposure.

TV and movies seem like a big theme for the company. This is of course very exciting. Nobody likes to wait a whole week to watch a series and let's be honest, series are very popular. So are movies and being able to stream them on your Kindle is convenient and cheap. Of course books is how the business started and as a client myself I love the convenience of being able to buy a book on my Kindle app. This is expanding to short pieces and any other readable material. Reading will never go out of fashion.

There is also talk about an Amazon set top box. They have so much content to sell, the more exposure they have to their clients and the easier they make it for clients to buy things, the more they will sell. It sounds similar to Apple TV where you plug the set top box into your TV and basically you can stream Amazon content.

The options are endless. eCommerce is the future and Amazon is the biggest player in this space. In this case the bigger the better because you become the most reliable and the all the big retailers have to come to you if they want to be in the eCommerce world. Therefore you have best selection too. It is certainly not for your conservative investor seeking yield but we still like it for clients who have a strong stomach.

Crow's nest. Today is actually the birth date of Marcus Aurelius, born in 121 AD. I hear you say, but I have heard that name somewhere. Of course you have, in the Gladiator movie, a classic if you are a sucker for historical movies like me. But the story in Gladiator about Lucius Verus was warped a little, he might have died of smallpox. Before Marcus Aurelius died, who outlived him by a country mile. And despite my best efforts to find the gladiator, I could not find him. Russell Crowe, I know he exists. It all seems familiar, Italian politics. But they have a new prime minister. And more importantly, yields on the 10 year fell below 4 percent three days ago. In July last year it was 6.6 percent. Before the Europeans decided that it was good to be European, all together. Not finished. Keep calm and carry on.

Sasha Naryshkine and Byron Lotter

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Thursday, 25 April 2013

MTN zoning in on 200 million

"Only 18 percent of all MTN subscribers in South Africa have a contract and quite possibly a much better handset, because of the subsidies. And most of those users are data consumers. Amazingly, across the group, data revenue is up 42.2 percent. MTN says that across their networks active data subscribers have increased to 13.3 million. That means that there are many more people consuming data, who are not pre paid subscribers."

To market, to market to buy a fat pig. Markets ploughed ahead, in the face of news that isn't quite pleasing. Durable goods orders from the US looked ropey, the month prior was revised downwards. Taking out some key components, transportation and military spend, the number was only modestly higher. The German IFO business climate index was lower than anticipated, leading people to believe that the German economy is slowing. Meaning that the ECB might well cut rates, although many have pointed out that they are not too sure how that would help too much. And Italy has a new leader, another technocrat. Not the colourful mayor of Florence, whom many were thinking might emerge, but rather a young(ish) fellow by the name of Enrico Lette, aged 46.

Letta has asked for the austerity measures to ease a little. Most Italians are against the very idea of austerity, and I don't blame them at all really. Do you? If you had what you thought was the status quo receiving certain social handouts, how would you react? Naturally there would be push back. Berlusconi is suggesting that the property tax be abolished. Yeah, that sounds fun, except people need to be compliant. Fewer bureaucrats is what is probably needed and more focus on small and medium businesses in Italy. The Italians still make very fine products. And democracy has been entrenched there for years. Centuries, bar for the sacking of Rome by the "barbarians". Rome was actually sacked three times. Visigoths. Germanic people. Sound familiar? Hardly barbarians, but also makers of fine things, brilliant engineers. Europeans, after centuries of wars, are finally united. And yet there are still many detractors as to why the Europeans should do this or do that, and go it alone. They have tried that people. For centuries. Time to be together and enjoy solidarity.

This is unusual from MTN, releasing subscriber numbers at the beginning of the day, I am used to releases in the middle of the session. Check it out: MTN Group records 195,4 million subscribers. These are subscriber numbers for the first quarter to end March 2013. Across the group, for the 1st quarter versus the prior quarter, MTN grew their base to 195.388 million folks. A 25 million addition from the same quarter this time last year, hardly sounds like ex-growth to me. But of course there are questions about saturated markets, that is almost always true. You can't add reams of subscribers when you reach a level where the number of subscribers exceeds the population. That does not mean that users cannot use multiple sim cards. Locally, their pre-paid environment saw a soft patch, perhaps the price wars are starting to pay off a little for Cell C, although the war on their bank account will be more. Should they worry? Well, yes and no. There is certainly a mountain of money at HQ, 216 14th Avenue in Fairlands, whilst I am not so sure the same exists at Cell C, 10 Rivonia Road in Sandton.

Nigeria grew their subscriber base strongly, up 8.1 percent to 51.295 million. There are now more subscribers in Nigeria than there are people in South Africa. Iran grew their base strongly too, to 41.5 million folks. Outside of South Africa, Ghana is the only other country where subscribers are above 10 million, now at 12 million and some change. That was an increase of 2,5 percent on the quarter. In Syria, where there is still a civil war, the connections shrank 6 percent. In Cyprus the number of connections was unchanged really, it is their smallest territory at 312 thousand customers. Spending on average of only 24.18 Dollars per month. Which is almost double of what it is in South Africa.

The concerns around lower ARPU's (average revenue per user) are warranted, they are falling. And in particular I guess that South Africa is a sign of things to come. Blended ARPU's here fell 8.1 percent quarter on quarter to 110.62 ZAR per month. Post paid fell 6.3 percent to 222.34 ZAR whilst pre-paid fell hard, down 9.6 percent to 86.05 ZAR per month. In terms of separating the pre and post paid, out of the 24.950 million subscribers in South Africa, only 4.636 million are post paid subscribers. That is all. Only 18 percent of all MTN subscribers in South Africa have a contract and quite possibly a much better handset, because of the subsidies. And most of those users are data consumers. Amazingly, across the group, data revenue is up 42.2 percent. MTN says that across their networks active data subscribers have increased to 13.3 million. That means that there are many more people consuming data, who are not pre paid subscribers.

It is laughable when you throw back to the results from a decade ago. There were only 6.661 million people on the entire network as at the end of December 2002. Of those, 3.944 million were in South Africa, of which 928 thousand were post paid customers. ARPU's in Nigeria were 7 times higher. So, mobile phones are cheaper to use, a whole lot cheaper to use. And they certainly make your life a whole lot easier. Whatsapp, that has changed the way that people communicate. SMS was not viewed as a proper way to communicate back then. In an age where twitter has a limited number of characters, SMS's are short and sharp.

The companies operating in Sub Saharan Africa are all benefitting from an uplift in economic activity at a much faster pace than at any other time, since most countries obtained independence post world war two. The cycle of mass conflicts are fewer, the number of completely impoverished regions are slowly diminishing. You want to be operating in this economic environment, where the telecommunication options are almost entirely restricted to mobile telephony. The fixed line infrastructure has been "missed". Mobile is truly mobile. We continue to add to MTN on weakness, the next numbers are due in the first two weeks of August. The market has lifted the stock a lot this week, thanks to competitor Vodacom's positive trading statement and these subscriber numbers.

Byron beats the streets Stryker is a US company that has been on the radar for a while now as an addition to our New York portfolios. Before we delve into the details let's look at what they do first. Here is an explanation straight from their website.

"Stryker is one of the world's leading medical technology companies and is dedicated to helping healthcare professionals perform their jobs more efficiently while enhancing patient care. The Company offers a diverse array of innovative medical technologies, including reconstructive, medical and surgical, and neurotechnology and spine products to help people lead more active and more satisfying lives."

It has a market cap of $24bn (to put things into perspective that is 2.5 times the size of Aspen), boasts an annual earnings growth rate of 7.5% over the last 5 years (this includes the financial crisis) whilst increasing the dividend 22% on average per year over that period.

Quarter 1 results were released last night which showed sales growth of 1.3% to $2.2bn and adjusted earnings growth of 4% to $1.03. Earnings for the full year are expected to come in at around $4.33 which is up 6.4% from 2012. The share price currently trades at $64.73 putting it on a forward valuation of 14.95. That seems reasonable when you look at their growth rates.

It is always important to look at a company's sales mix, I hacked this from their financial statements.

As you can see geographically most of the sales (66%) comes from the US. I am sure the scope for geographic expansion is huge as developing markets become richer and in many developed countries, older. Reconstructive is their biggest division with 44% of sales. That involves reconstructive surgery for sports injuries and accidents etc. Hip replacements, knees, ankles. The cutting edge equipment used for these procedures is developed by Stryker. 38% of sales are pulled in by MedSurg which actually stands for Medical/Surgical Beds. As the names suggests this includes surgical beds and all sorts of hospital equipment like side tables, maternity beds and accessories. 18% of sales as you can see comes from Neurotechnology and Spine. If you browse their website the technology in this area looks very impressive.

So why will Stryker outperform? I read a detailed analyst report which suggests that the company is gaining strong market share in all its divisions because of their superior technology. This is of course subsidized by big research and development spend. However this is being managed well enough to not impact the bottom line. Net profit margins of 15% were recorded last year and that is very impressive. The company has a strong balance sheet and has reached a decent size where they can look for acquisitive growth. The fundamentals look good and so does the macro picture. People are getting richer and older and governments are being pushed to increase medical spend. This is a nice alternative to Johnson and Johnson if you want direct exposure to medical devices.

Wow. A Sony Playstation today has more processing power than a military supercomputer from 1996. But that is not something that we even question, or care to admit about innovation. TED talk by Erik Brynjolfsson: The key to growth? Race with the machines. Byron actually tweeted something interesting, something that we have been discussing in the office for a while. The jobs that require little thinking, i.e. repetitive jobs, well, they might not be a thing of the past just yet, but we are quite quickly replacing ourselves. Check, Mineweb article, via a Lotter tweet: Rio Tinto's driverless trucks move 100 million tonnes. That story contained a link, which led to here: Miners to replace workers with machines. 100 to 120 thousand Aussies a year to drive those trucks in the middle of nowhere. Sure, the companies won't save all that money, someone will have to operate that truck remotely, but many trucks can be managed by the same person sitting far away in an air conditioned room. Drones, trucks, the machines are not quite self aware though.

Back to Brynjolfsson who points to all these free things that add an enormous value to many people, each and every single day. Important tools for all of us, I use these all the time. Obviously this software is free, but the internet connection is not, I thought to myself. Neither is the laptop, or the chair I sit on, or the roof over my head, I pay for rent. Neither is the software that I am typing this note. But the biggest library in the world, that is mostly free. The conclusion of the lecture (I urge you to watch it) is that humans and computers working together far better than at any other time in history. We are more productive, we just take the machinery around us for granted.

This next graph is going to blow your mind. There is productivity and there is employment. Some unemployment is structural. That is, as per the Investopedia (free) definition: "Unemployment resulting from changes in the basic composition of the economy." Such as machines, performing human functions. Check this out:

As the computer age hits us, fewer humans are employed, but more importantly for all of us, productivity climbs. That forces people out of comfort zones and forces them to be better at what they do.

The whole post I found initially via this piece from James Pethokoukis: Should workers fear IBM's Watson? The short answer is that people with jobs that can be replicated with computers, yes, they should be afraid. Of course human behaviour is a key part of determining many things, so, until the computers really do become self aware, we are safe. Unfortunately the losers in all of this is labour.

Crow's nest. Stocks are higher mid morning, that is good. We are closer and closer to being break even for the year. Tough out there. UK GDP data saw the country miss a triple dip recession, the weekly jobless claims are always a big highlight for the swing for the fences crowd, that is a little later today.

Sasha Naryshkine and Byron Lotter

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Tuesday, 23 April 2013

Richemont rocking

"That is almost double of what they did in 2011, so they certainly had a cracking year. Around 3.57 Euros worth of earnings per share (remember that the GDR here is one tenth of the Swiss listed entity) which translates to (at 12.08 ZAR to the Euro) 43.14 ZAR a share. Or at one tenth of that, 4.31 ZAR. The stock is understandably flying this morning, up nearly 6 percent in Jozi, at around 71.35 ZAR. 16.5 times historic multiple. For a company growing profits at around 30 percent, that is hardly demanding."

To market, to market to buy a fat pig. We were doing just fine around midday, and then drifted lower later on to the close. Perhaps that Massmart trading statement, which weighed on all retail stocks, was to blame. General retailers sank 2.2 percent, but listen in here a little. The first retailer appears in place number 15 on the market capitalisation ranking table, with only around one and one quarter of a percent of total market weighting. Many might be crowing that the retailers are overvalued, but that is relative to what? Are the historic measurements warranted? Well, perhaps not when you read the opening paragraph of this report: The Rise and Rise of the African Middle Class.

"The rise of the middle class, as a percentage of the population, has been steady - in 1980, 111 million or 26% of the continent's population fell in this category rising to 151.4 million or 27% of the population in 1990 with a further surge to 196 million in 2000 and a dramatic increase to 313 million in 2010 equating to 34.3% of the population (African Development Bank, 2011). In contrast, the rise in absolute numbers, compared to the percentage rise, has been more dramatic and this is best explained by the increase in population with Africa having hit the 1 billion population mark in 2010."

So, according to this report, the middle class across the continent has doubled in 20 years. So why shouldn't the retailers that operate here command a higher multiple? Why compare different eras that are completely different. If there are many more consumers inside of your operating territory, the chances of higher profitability in the future exist. And that was why WalMart were willing to pay up for Massmart, their expansion plans across not only here locally, but across the continent were too exciting to ignore. So whilst fund manager one would not pay more than 12 times earnings in 2002, 2012 is different. Don't compare different times to current times. And that introduces Byron's piece nicely:

Byron beats the streets Yesterday we saw a Massmart sales update which not only disappointed Massmart shareholders but the whole sector which fell over 2%. The sector is down 1.7% again today and has lost 13% this year. Let's look at the numbers and then the repercussions.

"For the 14 weeks to 31 March 2013, total sales increased by 10.3% and comparable sales increased by 6.0%, continuing the slower sales trends experienced towards the close of the financial year.

The South African consumer environment remains difficult and sales growth may be under some pressure for the remainder of the financial year. If the current sales trends continue, it will be difficult to meet our objective which is to achieve trading profit growth (excluding foreign exchange movements and Walmart transaction costs) equal to sales growth."

I guess what really spooked investors was the deceleration of sales. Massmarts year end is June so this is their third quarter sales figure. For the first 6 months sales had increased 14.7%. That is a fairly sizeable drop in growth. I can't say I am surprised, I have spoken about this extensively. How lower income groups have struggled from a stronger rand and a pull back in unsecured lending. Massmart have huge exposure to the lower LSM groups, especially with their Masscash brands.

If you have been following our posts over the years I am sure you know what I am going to say here. We are in this one for the long term and a speed bump such as the strikes of 2012 (I'm not playing this down, it has had terrible repercussions) is no reason to sell. And that brings me to another point. Clients may ask why we didn't reduce retail exposure when the strikes started happening and the rand started weakening?

The simple answer is that getting in and out of a stock creates extra costs and most of the time you get it wrong. The best way is to ride the wave and in fact add into weakness like we are currently seeing. Only 8% of Massmart sales come from the rest of Africa, the South African exposure is still huge. And when they start diversifying this geographic spread, which they are planning to do, then we should see earnings growth start accelerating again. Getting worried about a deceleration in sales is a short term "investors" worry. We think the long term story is intact, especially when you look at the report Sasha eluded to above, and are happy to carry on adding.

As for the rest of the sector, expect similar updates. Especially from the companies with more exposure to lower income groups. I don't think this trend will continue for one very important reason and it is political. This is the ANC's biggest voting bracket and the ruling government know that all too well. Unfortunately investing in this sector does have political risk so it will be volatile but the lower income bracket is in fact who everyone is fighting to uplift.

Whoa! Stand back here folks. Richemont have produced a sparkling trading update this morning, that indicate a likely increase in net profit of approximately 30 % compared to the prior year. Sales increased by 14 percent for the year, whilst in constant currencies only increased 9 percent. That was the benefit of a weaker Euro. As that crazy Jim Cramer says in the intro to his show, there is always a bull market somewhere. So, net profits are expected to increase by around 30 percent, so somewhere around 2 billion Euros for the full year.

That is almost double of what they did in 2011, so they certainly had a cracking year. Around 3.57 Euros worth of earnings per share (remember that the GDR here is one tenth of the Swiss listed entity) which translates to (at 12.08 ZAR to the Euro) 43.14 ZAR a share. Or at one tenth of that, 4.31 ZAR. The stock is understandably flying this morning, up nearly 6 percent in Jozi, at around 71.35 ZAR. 16.5 times historic multiple. For a company growing profits at around 30 percent, that is hardly demanding. A simple PEG ratio (Price to earnings ratio divided by annual EPS growth) puts that metric at 0.55. That is cheap, but their forward earnings growth at that rate is not clear. Either way, this is pleasing for shareholders.

Caterpillar reported results pre the market yesterday. The company has a rich 100 year plus history. You have watched War Horse, right? Those horses that pulled the giant guns through the mud, remember those poor things? Actually Caterpillar's predecessor, Holt, supplied tractors to the Allied armies in Europe. To do the "donkey work" in the mud on the Western Front. Lately for shareholders however, it has felt like the rest of the portfolio has been dragging the stock along with it. Over the last 12 months, the S&P 500 is up 11 percent, Caterpillar is down 22.3 percent. Why? Well, in part worries about the slowing Chinese economy, which has impacted both the building sectors and mining companies. Lower demand equals lower production, which means fewer equipment purchases. In part a softer Europe is also to blame for underperformance, but then again, anyone who has visited Europe looks at buildings that last got a proper lick of paint around 1797. Not fair, but you know what I mean.

The results were lighter than what the market was looking for, 1.31 of earnings was a miss of 7 cents versus consensus. Sales and profits were markedly lower, but there were some reasons around that. The company had guided earlier: "In our year-end 2012 financial release, we said the first quarter of 2013 would be challenging, and it certainly was. As expected, inventory changes were a major factor. Caterpillar and our dealers usually add inventory in the first quarter to prepare for higher end-user demand in the spring and summer. In the first quarter of 2012, we added about $2 billion to inventory, but this year, we cut inventory by about a half billion dollars. In the first quarter of 2012, Cat dealers added machine inventory of about $875 million, and this year, they reduced machine inventory by about $700 million. Those are significant year-to-year swings, and coupled with moderating end-user demand, resulted in sales and revenues being down 17 percent"

And the forecasts were toned down, the range is now 57 to 61 billion Dollars worth of sales, with profits of 7 odd Dollars a share in the middle of the range. What has happened already is that the stock re-rated to these levels. And in fact after these results rose 82.71 Dollars a share, up 2.8 percent. And around one quarter of a percent after hours, so the company stock price had a great day yesterday. The company is still going to repurchase stock to the tune of 1 billion Dollars, not insignificant against a market capitalisation of 54 billion Dollars. They are using the lower share price to "reward" shareholders. Dividends I guess are always more welcome, but this represents that the company is of course aligning their interests with yours. In the eyes of the board the stock represents the best possible allocation of shareholder capital, this is not always the case. Reducing the number of shares in issue spruces up earnings. And reduces cash on the balance sheet, increasing return on equity (fewer shares in issue) and a higher return on assets (fewer assets as a results of using cash to buy shares). So some key financial metrics are met as a result of share buybacks. That cash however belongs to the shareholders, and requires their approval ultimately.

At 7 odd Dollars of earnings, and a quarterly dividend 52 cents (208 cents for the year), the stock trades on fundamentals of 12 times forward earnings and a dividend yield of 2.5 percent. At face value that is not too bad, but bearing in mind that revenues are actually set to be lower than the prior year, I think that the stock is well priced at these levels. However, if you are bullish on continued global infrastructure plans in emerging and developed markets, and believe that this will continue to see resource demand increase in the coming years, then Caterpillar is a great vehicle to be invested in. The problem is that there are swings and roundabouts in demand, not too dissimilar to those of retail consumers and automobiles, this is possibly even more than that. We will continue to recommend the stock and stay long if you have them. The global economy is not in free fall, and is currently just chugging along at a fairly anaemic pace. But that will change. And when that does, you want to be holding the stock, because whilst the economic recovery takes place, the price would have moved long before it becomes clear that this is the case.

Shorts. Digest these.

Why have we underperformed the rest, along with other emerging markets? We tried to explain it yesterday, and indeed I stumbled across another piece that had a go: Emerging problems.

This is amazing. Read this piece first: Why the US economy doesn't weigh as much as we thought it did. Two things here, one is that the change by the BEA in the measurement of GDP will give it a boost, but to me the one line in there was most interesting: "America just gained an Argentina". 100 odd years ago there was a debate on which one of those countries will be bigger economies in the coming decades. Well, we know who won that and who has the wonky economic policies. All this is relevant because of the pending GDP release Friday. As these fellows point out: Guess What? Growth is Back!

Crow's nest. There is nothing more important today than the Apple results. Really. If those go better than expected, I suspect that there could really be another leg to this rally. If the company disappoints, phew, I suspect that it might look poor for the stock for a while. What I don't want the company to do is to react to the falling share price by implementing measures that will make short term shareholders happy. Focus on the core business and the client, the rest will fall into place. I want to hear about cool new products and strong demand for existing ones. After market today. We wait.

Sasha Naryshkine and Byron Lotter

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Monday, 22 April 2013

McSideways

"Not the most glamorous company to work for, but Jeff Bezos, Jay Leno, Sharon Stone, even Pink and Carl Lewis have worked there at some stage. Why not, as a youngster, it might give you a good grounding to understand "how it all works". The company has not lowered their dividend payment for a single year since the inception of their dividend paying history, and that stretches back to 1976."

To market, to market to buy a fat pig. Markets rocked on Friday, the overall index added a percent and a half. Resource stocks were the main drivers. It has certainly been a return to a period of volatility. A five day volatility graph confirmed that, and the US market experienced their first weekly fall of the year. The weakening Yen I suspect has caught everyone off guard, that market is at a five year high in Tokyo. Try and find someone who can explain that one to me, if you wish to. I guess we do not talk about that country, Japan, enough. Just this morning I was saying to Byron that I have to visit Tokyo, all their gadgets and high levels of human advancement. I guess that they have to, because space is at a premium. Capsule hotels. 30 Dollars a night. I might have to sleep in a box, sing karaoke, read manga kissa, visit the fish market, eat noodles from a street vendor, watch sumo wrestling, visit the national gardens (I am a useless but passionate bonsai grower) and perhaps hang out at Shibuya Crossing for a bit. Shibuya Crossing as far as I understand it is the most checked in place on Foursquare in the world. Young and hip Japanese folks make it so!

US markets were mixed, the Dow Jones Industrial Average demonstrated the skew nature of a price weighted index, with some key stocks sinking, IBM down after the first earnings miss in nearly eight years. Down a whopping 8 percent. I suspect that Buffett would have stood up and noticed and now be buying some more. Some late quarter skittishness seemingly. McDonald's also weighed on the index, down nearly two percent. Google screamed ahead after their results, up nearly four and a half percent on the session.

One of our most widely held US company holdings is McDonald's. Possibly one of the most recognisable brands across the world, seventh on last years Forbes list, behind Apple, Microsoft, Coca-Cola, IBM, Google and Intel. All powerful names in their own right. McDonald's operates 34 thousand outlets around the world, managing one in five of those, creating employment for hundreds of thousands of people that serve nearly 70 million people daily. That is amazing, because that means that McDonald's will basically serve the population of the planet every 101 days or so. 25.2 billion people served a year.

Not the most glamorous company to work for, but Jeff Bezos, Jay Leno, Sharon Stone, even Pink and Carl Lewis have worked there at some stage. Why not, as a youngster, it might give you a good grounding to understand "how it all works". The company has not lowered their dividend payment for a single year since the inception of their dividend paying history, and that stretches back to 1976. That is always a good sign, the most recent news on that front was an increase of the quarterly dividend to 77 cents, announced by the board back in January.

That is all very nice. But McDonald's stock fell nearly two percent on Friday, so I suspect that the market was less than impressed with the results, which you can find here: McDonald's Reports First Quarter 2013 Results.

And it is glaringly clear there why the stock sank, revenues and profits flat to slightly lower. Earnings marginally higher, buybacks strong, but expected. At 1.26 USD for the quarter, that annualizes to somewhere around 5 Dollars worth of earnings for the year. 77 cent dividend, that means 3.08 Dollars worth of dividends. And that I think is the key in all of this, the dividend. Because, the stock price was above 100 Dollars a few days ago, but post this report dropped below it. You don't need to be a mathematical genius to work that yield out. The company has always rewarded their shareholders for being exactly that, holders of the company. The yield is more than three percent at around 100 Dollars a share.

But the outlook is wishy washy: "As we move forward, top-line comparisons will begin to ease while the challenging global environment and bottom-line pressures are expected to persist. For the month of April, global comparable sales are expected to be slightly negative. We are confident that we have the right plans in place to differentiate the McDonald's experience and strengthen our business momentum for the long term." What does that mean? I guess it means business as usual.

I suspect what might happen is that the growth expectations for this year are probably waning, the global consumer is feeling stretched. Easing commodity prices will be helpful for the business and their consumers, that is what I would think is a hidden positive. But for now the mood around the company and their stock is like flat coke, it is drinkable but leaves you feeling not quite satisfied. McDonald's still wants to be in every neighbourhood on the planet. They still innovate their menu items to stay abreast with consumer needs, tweaking the menu in different places for needs of their customers. The menu in Jaipur is not the same as the menu in Jakarta. Or Joburg, our menu is pretty boring. This is a keeper, and like their product, it is always going to be a consistent performer. We continue to hold and will accumulate if any negative sentiment pushes the stock much lower than current levels.

Byron beats the streets On Friday we saw first quarter results from one of the most fascinating companies around, General Electric. Why are they so fascinating? We will go into the details later but first let us refresh our memories of where this massive conglomerate makes its money. This table below from their presentation shows where earnings came from in the first quarter.

It is an interesting mix. Power and water have taken a large hit because of weakness in the European market. But this number is volatile and has been factored into the price. Analysts look at future orders and in this segment we saw nice growth. But as you can see the rest seems to be doing alright. Oil and Gas, Energy management, aviation, healthcare and Home & Business solutions are all sectors we like and have good growth prospects as global GDP grows. The bank still has a huge influence on earnings but a bit of banking exposure in a growing US economy with a strong housing market is not necessarily a bad thing. The company is working on reducing the overall size of the bank.

Although overall sales were down operating earnings increased 14% compared to the first quarter last year to $0.39. This was thanks to cost cutting and the sale of their NBC stake. The company is expected to make $1.67 this year which trading at $21.59 puts the company on a forward PE of 12.9. I would say that is fairly reasonable, especially for a solid defensive operation. If the company were to sell of its separate divisions there is definitely value to be unlocked.

More importantly the order book grew nicely, this from CEO Jeff Immelt. "Our equipment orders were strong in the quarter, growing 10%, with Oil & Gas orders up 24%, and Aviation up 47%. In growth markets, equipment and service orders grew 17%. We ended the quarter with our biggest backlog in history."

I guess this is a company that really benefits from confidence. If countries and businesses are confident they are going to spend on the industrial equipment that GE sell. And why do I say the company is so fascinating? Take a look at this link, it lists the products that GE sell. It goes on forever. And with a motto of "Imagination at Work" I am told that the kind of innovation at this company is mind blowing. And if you are a Greeny check out the link http://www.ecomagination.com/" target="_blank">Ecomoagination which looks at all the GE initiatives which aim at helping the environment.

We continue to add to this stock, it looks cheap and is well geared to providing the world essential products efficiently and economically. If it were to break up into separate divisions the shareholder will certainly unlock good value, as we have seen on a smaller scale with the NBC sale. A must have in our portfolio.

Shorts. Digest these.

Ha, ha! Buffett was right. Remember when he bought Burlington Northern, with their freight railway business being their major edge over their peers. Or perhaps just their edge, if not over their peers. Everyone questioned what he, Buffett, was doing. But he knows business, and knows it well. Then I guess that you would not be surprised to read: Oil shipments by rail have doubled in two years and have helped the revival of a new 'railroad age'. Incredible. A January piece suggests either he was lucky or clever, possibly both: Oil Industry Beats Buffett in Railroad Investments Surge: Energy. Meanwhile however, as Cullen Roche points out: Rail Traffic Continues to Trend Lower. No worries, amazing timing already.

The copper price has gone into a bear market, meaning that it has fallen more than 20 percent from its recent high. I was a little bemused to read this piece in the New York Times: If It's Underground, Maybe Its Price Is, Too. I am not too sure about the conclusion, more people in urban areas must mean durables continue to tick higher, meaning resource intensity should continue. I am not too sure there is going to be a glut. A glut emerges when prices are high and everyone continues to bring new production online. But what happens, classically, is that as soon as these projects come online, the prices are lower. So, I suspect that going with quality is the key here. And we are happy to be long BHP Billiton.

Who would have thought? We said many times over the last few years that the fiscal position of the US would improve, as the economy did. Because businesses would be making more, governments would be spending a little less than they wanted and jobs would be fewer in the public sector. So, I wasn't surprised when I read: Update: Federal and State improving Fiscal Situation. See that? Turns out that recency bias led us to believe that it would always be worse, from this point on.

Remember last week when we pointed to emerging markets having taken a pounding, relative to the US markets. This Jason Zweig piece over the weekend was good: Here Comes the Next Hot Emerging Market: the U.S. Interesting, because the investment professional, van Agtmael, still suggests that Americans have 25 percent of their portfolios in emerging markets. Surely that should have changed? Because as we often point out, around half of S&P 500 revenues are from around the world, including big gains in emerging market over the last decade. So, I suspect whether you like it or not, your investments are diversifying themselves. The FT had this piece over the weekend: Data shift to lift US economy 3%. It is amazing that when a subtle change is made in the measurement that the outlook improves. Perhaps those French were onto something, when Sarkozy suggested that happiness be included in GDP. Problem is, how do you measure that? You know the old one: The Fisherman and The Investment Banker. Funny, aint it?

Xi Jinping gets it. He knows that in order for the communist party to continue to rule the country, there needs to be some stability. And as we have documented, since he came to power he has toned down the lavishness that exists inside the party. The luxury goods makers have felt it already. Xi Jinping urges party to 'toe mass line' to win over public. I suspect that the "biggest" political event of the next couple of decades will undoubtedly be a real democratic event in China. It has to be. As people get wealthier they want more choices, including democracy. And that will be good for all of us. But how this actually happens is important too. There is always pushback from those folks who have vested interests and the most to lose.

This is true, but you knew it already: How Twitter is becoming your first source of investment news. Barry Ritholtz obviously is talking his own book, but it is true. In these recent Boston events from Friday, in which the second fellow was captured, who was the best person to follow on Twitter? Joe Weisenthal. Yes. Plugged in everywhere. Twitter is not to tell people what you had for breakfast, although that is kind of fun. It is a customizable news feed, for real informal news. Facebook is for your mates. Instagram is for your photos. The first time that I watched CNN in about half a decade was Friday. Get on twitter, even if you are not active and just use it as a news feed.

Crow's nest. Markets have started better here. Some commodity stocks have recovered, which is good news for us down here in Joburg.

Sasha Naryshkine and Byron Lotter

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Thursday, 18 April 2013

Aspen gets the right formula

"It looks a little complicated after having read it a few times, but the thing to remember is that they used to actually manufacture this product here under licence from Wyeth. Anyone with a small child will be familiar with the S26 and SMA formula products. The amount of "stuff" that you have to carry around with your baby far exceeds the physical size of the child. Formula, bottles, bibs, and the list really goes on and on."

To market, to market to buy a fat pig. Wow, it looked ugly out there yesterday, resource stocks still under severe pressure, with some 52 week low prints coming from the resources sector. I guess the good news you could say is that I saw an analyst recommendation for Amplats changed, the bad news is that it changed to neutral from a sell. Meaning that the share price has fallen enough for the investment community to start to take note of the price levels as a potential buying opportunity, but not enough yet with conviction. Neutral means what? That you are idling? I guess idling is better than sliding down the hill. The shock from the extreme gold price sell off continues to brew unintended consequences, the unknown knowns, if I could paraphrase Donald Rumsfeld. Reason being is simple, same as Tanzania Concerned Gold Slump May Prompt Mines to Shut.

In the "good times" governments, who somehow thought they had something to do with the resource price levels, set the bar for resource taxes higher. Because somehow, the Australian government made the iron ore price go higher, and therefore felt that they needed to benefit. Somehow Tanzania, Zambia, they also felt the same way. Well, this is a raw reminder that no, it wasn't you that made the price go higher, it was the market, supply and demand. And the people that had the most open markets, they benefitted by supplying the producers with the fairest ground rules to mine the stuff out the ground.

You can have all the reserves in the world, if you can't get it out the ground to benefit the folks that risk their capital, it is not going to happen. And by getting it out the ground, you get tax revenue. In exactly the same way that an agricultural business would pay tax, using the land, so would a miner. But someone seems to think that the minerals in the ground belong to the people. In the same way that the air we breathe belongs to the people? OK, I am getting completely off topic. But if you needed reminding: Zuma Seeks Review of Mining Taxes to Boost Revenue. That is a Bloomberg story from mid February. On the 14th of February the GLD ticker, which is basically a reflection of Rand price of gold was trading at 14150, roughly 14,150 Rands per ounce of gold. Now, yesterday, the same GLD ticker traded at 12400, or 12,400 Rands per fine ounce. That is a marked fall, 13 odd percent. Bear in mind that the price is falling, but production is tumbling. I hope someone has not worked into their model to rely on future mining royalty revenues. Sigh.

This is interesting. Just this morning there is an announcement from Aspen who are paying 215 million US Dollars for infant nutritional products both in Southern Africa and Down Under in Australia. It looks a little complicated after having read it a few times, but the thing to remember is that they used to actually manufacture this product here under licence from Wyeth. Anyone with a small child will be familiar with the S26 and SMA formula products. The amount of "stuff" that you have to carry around with your baby far exceeds the physical size of the child. Formula, bottles, bibs, and the list really goes on and on.

Back to Wyeth, which was then bought by Pfizer in 2009. Pfizer then sold the infant nutrition business this time last year to Nestle for 11.85 billion Dollars. See this WSJ reminder: Nestle Wins Pfizer Auction. They (Nestle) paid a whopping 19.8 times EBIT. And it was only this year, not so long ago in fact, in February, that the competitions authorities gave the thumbs up here locally for that transaction. Perhaps that is part of the puzzle as to why Nestle would look to Aspen to produce and distribute the product for them, they know the regulatory environment better.

Here is the official announcement from the Aspen website: Aspen to invest more than R1,9 billion in infant nutritional deal with Pfizer. 215 Dollars is a big check to write. That is roughly 75 million Rands higher than the 1.9 billion ZAR in the headline. At current levels of the Rand to the US Dollar, the rate no doubt has been set.

The annual turnover of the Australian part of the business is roughly 785 million Rands, at 9.48 Aussie to the ZAR. And add in the local turnover of 180 million, you can roughly get to 965 million ZAR. So, they, Aspen are paying two times annual revenue for the business of selling baby formula. I checked the annual report, several of them to see whether or not I could find the margins for their baby formula business, but sadly only the segmented business report was able to give me was for the whole business, the South African consumer division has been flat for a while now. It is so hard to find the margins of this business, because the Sub Saharan Africa business is probably a better fit, at 15 percent EBITA. The South African business, which included the Pharma, last year had EBITA margins of 28.7 percent. The consumer division sales however were "only" 998 million Rands. So, this acquisition is roughly the same size. And working backwards from that EBITA margins for the Rest of Africa business, I can presume that they paid a cheaper price than Nestle paid Pfizer.

Wow. Apple got juiced last evening. The stock fell below 400 Dollars for the first time in a year and a half, ending the session down 5.5 percent to 402.8 Dollars. 52 week closing low. The dividend yield is now 2.63 percent. That is right. It now has cash as a percentage of market cap of 36 percent, that is about as high as it got in the financial crisis of 2008, cash as a percentage. And I am just guessing that they probably have more cash, not less. You would swear, as Cramer said on his show, that they were going to register a loss next week. Of course we are talking our own book.

Debating Apple's Stock as It Hovers Near $400. That was interesting. Blodget from the BusinessInsider points out that Apple trades at a monster discount to the broader market, and trades at the same levels as "broken" tech stocks like Dell, HP themselves and even attracts a discount to Intel. Really? That is dumb. But most of the fall yesterday was a result of a warning that did not actually mention Apple by name.

Cirrus Logic is the provider of various components to Apple. Here was their results release a couple of days ago: Cirrus Logic Announces Preliminary Q4 Revenue Increases 87 Percent Year Over Year to Approximately $206.9M Wow. It hardly looks like a gigantic miss to me. Guidance is poor. But as this holder of the stock points out, Cirrus is so cheap: Cirrus Logic: Really, 5 Times Earnings? 90 percent of their business comes from Apple. So warning that a key customer had told them to back up a little equals proof that the current quarter won't be a positive surprise for Apple. Amazing. Of course we will see.

Shorts. We don't do enough of this. We of course read a lot around here, because we have to. Some is excellent, some is average, some is terrible, but read it all and come to a conclusion. So perhaps we should share some of the best reads of the morning, with very little explanation. You're smart enough, make up your own mind. So let us reinitiate with the shorts part of this message. We used to call it Bart's shorts, because Homer Simpson's son favourite saying was: "Eat my shorts". So, digest these shorts.

This is fairly interesting, even though we don't really pay too much attention to a seasonal slowdown: Wednesday: Beige Book, Mortgage Applications.

This is stating the obvious, a WSJ article: Miners Miss Out on the Golden Age. But comparing gold miners to tech stocks? Not so sure about that. Of course the worst part for the producers is that costs have risen at the same pace as the yellow metal.

The Reinhart & Rogoff spreadsheet "flaw" has been attracting a lot of attention. Barry Ritholtz puts the boot in: Did Reinhart-Rogoff Screw Up Their Debt Research? Phew, this has fallen into the laps of the democrats at a time of huge jostling in terms of budgets and austerity. I can feel for Paul Ryan though.

Cullen Roche puts the boot in even further: Still Missing the Point on Reinhart & Rogoff. Phew. The point made is simple enough, US debt is not the same as Spanish or Greek debt. "The R & R paper isn't flawed because it has Excel errors in it or data biases. It's flawed because it makes no distinction regarding a crucial understanding of modern monetary systems." Ouch.

Escaping PCs. What is amazing about this short piece is that you can simply scroll down to the bottom and see that graph, where Apple basically has nearly half of the margins in PC sales. Whilst Apple sells around one quarter of what HP sells in the PC space in absolute numbers, Apple has 45 percent of the PC profits whilst HP has only 7 percent. Margins are shot at HP. Poor PC makers, people are already suggesting that they are "finished". A WSJ article pointed out that PC sales are likely to be 350 million this year. Hardly sounds finished, but when you compare that to 200 million odd tablets and 920 million smartphones, phew it sounds like treading rising water inside of a sinking ship. Or maybe people are just waiting for Windows 9 that looks like Windows 7.

Crow's nest. Markets are higher, just a little. The gold stocks are taking another pasting. Oh dear. Pepsico reported better than anticipated numbers, as did Morgan Stanley. Top lines are starting to beat estimates, which is pleasing.

Sasha Naryshkine and Byron Lotter

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Wednesday, 17 April 2013

BHP Billiton full of gas

"Petroleum is their next most important business division. This line was interesting: "Onshore US produced more than five million barrels of liquids during the March 2013 quarter and the Eagle Ford is now our single largest liquids producing field." These gas assets that they overpaid for (at the time) are going to be absolutely huge inside of the next decade."

To market, to market to buy a fat pig. Earnings, earnings and more earnings. Commodity prices have been caned lately and the currency, the local one anyhow, has reversed its recent gains to be trading at what looks like pathetic levels historically. All the while our market bumbles along and lower, US equity markets are trading near their all time highs. Without what even looks close to full employment. Japanese central bank policies still baffle most, but hey, they are trying really hard. Remember that Japanese and US collective wealth, if I remember right is around half of global wealth. That is right. So it matters that Japanese money is looking for higher yields. In the mean time locally we could well be closer to a rate cut, the inflation data today was in a sense pleasing that it did not breach the upper end of the range, 6 percent. Intel and Yahoo looked soft, and missed earnings expectations, Intel was downgraded to a sell I saw.

Surely falling commodity prices must be good for the US, lower inflation and because their gasoline price moves all the time, lower prices at the pump equals more breathing room for the consumer. But perhaps the biggest bit of "news" around, at least in the broader circles is that the parameters of the spreadsheet that Reinhart and Rogoff could possibly have been wrong. Now, they are economists (famous and well regarded) I hear you say. BUT, some MIT academics have blown holes in their analysis, which was used by none other than Paul Ryan in his budget presentation. Ouch. Well, it could have been worse, you might have been a Malthus fan, or a Marx fan. Perhaps Marx was the reincarnation of Malthus. Not likely, Marx was 16 when Malthus died. Ah well, predictions are difficult at the best of times.

This morning we have received the third quarter production report from BHP Billiton, the quarter that just ended. I guess at face value the report looks a little light in some departments, but the severe weather in Australia specifically impacted on iron ore production. Yesterday Byron and I saw one of those mega Komatsu trucks that were driverless, carrying off a whack of iron ore. Not in person of course, but rather on the screens in front of us, which admittedly are looking a little old. But they still work, and in keeping low cost over here at Vestact, I suspect they are not going to be changed unless we HAVE to change them.

So, what is the short analysis of BHP Billiton? Well importantly the full year production guidance has remained unchanged. Guidance for 183 million tons of iron ore has been reiterated, even if the quarter only produced 40.205 tons of the red metal. It was a 5 percent fall from the prior quarter, but a slight increase on the production from the comparable quarter this time last year. The company expects a yearly rate approaching 200 million tons in just three odd months time, so in other words at the end of the financial year. Wow, that is simply astonishing. 50 odd million tons per quarter run rate.

Petroleum is their next most important business division. This line was interesting: "Onshore US produced more than five million barrels of liquids during the March 2013 quarter and the Eagle Ford is now our single largest liquids producing field." These gas assets that they overpaid for (at the time) are going to be absolutely huge inside of the next decade. The landscape of North Dakota has been transformed, thanks to the extraction of shale gas from the Bakken formation. One of the most sparsely populated US states is now attracting loads of attention, as shale gas extraction moves the US away from expensive imports. Most of the oil comes from over the state border in Montana, which at least has 1 million people in the whole state, only marginally better than North Dakota. In terms of population density however, Montana has fewer people per square mile than North Dakota, and only Wyoming and Alaska are more sparsely populated. From this recent piece from Prof Mark J Perry, Market forces and fracking have created wealth and jobs, comes the graph of how market forces have created thousands of new jobs:

The same author has a rather comprehensive piece on how the change has been massive for these far flung regions: America's oil and gas revolution. There has been a 40 percent increase in US oil production in half a decade. The US will probably produce more oil than Saudi. That last paragraph is amazing: "A study by Merrill Lynch pegged that contribution at 2.2 percent of America's GDP -- equivalent to an economic stimulus of $1 billion every day." Please. Let us frack here. We will, as I have been told. Hopefully business will lead but I guess that is not going to happen. Government thinks that they are the leaders here. Another story for another day.

Let us get back to those BHP Billiton petroleum numbers inside of the third quarter company release. 55.42 million barrels of oil equivalent were produced, that was below this time last year and below the quarter prior to this. The natural gas year to date run rate is ten percent ahead of where it was this time last year. Eagle Ford formation of course is in Southern Texas, where the weather is a whole lot more agreeable than Montana or North Dakota. Check out this piece The Bright Lights of Big Oil, where the graph is published, from Bloomberg:

Amazing hey? If you wondered how the US shale gas revolution was going, then these two graphs should quite perfectly explain that. BHP Billiton's onshore oil and gas businesses in the US are in Texas, Arkansas and Louisiana. I used the North Dakota/Montana example just to show you how the landscape has changed. BHP Billiton has approximately 50 years worth of current production in these fields, with approximately 8 billion barrels of oil equivalent. Across their petroleum division, their unit operating cash costs per barrel are 6.9 Dollars a barrel, at the bottom end of their peer group. So this is going to become a more and more important part of their business, and perhaps even their biggest business in two to three years. The "protection" that this energy segment gives you over their diversified peers, makes them a unique commodities proposition.

Next up, and perhaps most pleasing was the base metals division, and in particular copper, where the year to date increase is 12 percent better than this time last year. The reason being that the continued ramp up at Escondida should see that this years production is on track to increase by around 20 percent over next year. At the same said plant there is a massive new project to build a newer and better concentrator plant, which is around one third finished. At a whopping cost of 2.2 billion Dollars. Completion is only set during the first half of the 2015 calendar year, so somewhere around the middle of 2015. Which I guess is not that far away, a little more than 24 months. That is great to see, because whilst they might not have had the same issues that some of their peers have had in Chile (most noticeably Anglo American), the asset has been a little patchy. BHP Billiton are of course 57.5 percent owners of the worlds biggest copper mine, Escondida.

Their production report is always useful, because of course it gives you insight into what to expect. Many commodity companies trade in tandem with commodity prices, which are always volatile. For traders these are of course wonderful, because the volatility is immense. We are however at the other end of the spectrum. We are investors, and longer term than most. Whilst massive infrastructure development might have taken place in the developing world already, resource consumption in some of their key commodity businesses continues to rise with rising GDP per capita. More copper for greater electricity generation, more gasoline and diesel for greater transport, more fertilizer (Jansen potash project) with richer mouths to feed is going to be needed in the coming years. BHP Billiton is still the premier mining company on the planet. And we will continue to recommend them. The next big announcement is of course the production report for the year, and then the results, those are in four odd months time. Till then.

Byron beats the streets Yesterday we saw results from our favoured healthcare stock in our US portfolios, Johnson & Johnson. What a history this company has. It was founded in 1886 and has been listed since 1944. It has boasted 29 consecutive years of adjusted earnings increases and 50 years of consecutive dividend increases. It now has a market cap of $227bn and boasts annual sales of $67bn.

As you will know from the previous coverage I've done on the stock, there are three divisions to this business. Consumer (21% of sales), Pharmaceutical (39% of sales) and Medical Devices & Diagnostics (40% of sales). For the quarter these sales equated to $17.5bn which was up 8.5% from the first quarter last year. This was helped by higher drug sales and the acquisition of Synthes (medical devices) which will be fully integrated into earnings after this quarter.

Regionally these sales come from all over the world. 46% from the US, 25% from Europe, 11% from the Western Hemisphere excluding the US (I'm assuming this is mostly Central and South America) and 18% from Asia-Pacific and Africa. And where is the growth coming from? The US grew sales 11.2%, Europe 6.8%, Western Hemisphere excluding the US 4% and Asia-Pacific and Africa 6.3%. The Synthes acquisition probably skewed sales slightly in the US. This is a good mix and well balanced growth across the regions.

Profits of $3.5bn for the quarter translated to $1.22 a share. There were some once off charges for litigation and transaction costs. Without these the company made $1.44. Estimates for the full year come in at around $5.40. The stock trades at $83.45 or 15 times this year's earnings. Interestingly the stock has done very well lately, up over 19% this year so far. This is because, as we can see, sales are growing fast enough to justify a higher rating. There is another reason though. The whole sector has done well because defensive healthcare stocks are seen as more attractive in these uncertain times. Times are always uncertain but investors see these times as more uncertain than others. I disagree but I am not complaining. Stocks with more certain growth rates should always afford a better rating.

Overall I am very pleased with the numbers. It's great to see a strong comeback from their pharma division following a run of call backs due to bad quality. This division grew sales 14.7%. I have said this before but I really like the mix of sales. Many analysts feel that the pharma division on its own would afford a much higher rating but the diversification for me is a bonus. I like both consumer goods and medical devices as a theme.

We continue to add to the stock as the market leader in a sector which is benefiting from a well deserved rerating. And it is certainly not too late, the long term future looks strong as developing nations become richer and become more significant in their sales mix.

Crow's nest. Stocks are trading lower here again, it has been a torrid quarter, if you want to look at it that way. Mining companies have weighed heavily on the overall exchange, gold miners are as a collective down a whopping 35 percent this year. Wow. Platinum stocks are down a whopping 25 percent this year. Yip, the market is down "only" three percent so far this year, thanks for nothing resource stocks.

Sasha Naryshkine and Byron Lotter

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Monday, 15 April 2013

Gold. PSY. I mean sigh.

"For the local producers however, this is not good news at all. At the same time labour unrest, above inflation labour wage increases, Eskom increasing costs, the companies are under immense pressure. I don't know what the number is, but I would like to see analysis of that, almost on a shaft by shaft basis."

To market, to market to buy a fat pig. Whoa, what a day for the precious metals and the associated stocks. Their shareholders could have easily believed that Freddie Kruger and Jason had come early. Because of course Friday was the 12th of April. Gold miners sank as much as four and a half percent, platinum miners shed over three percent to reach levels not seen in some time. The overall resources sector fell 2.4 percent. But the gold companies as a collective are down over 30 percent this year alone. Platinum stocks have fallen 23 percent plus this year so far. Resources as a whole are down nearly 13 percent year to date. The broader market, after enjoying gains, is down over two and a quarter percent.

And if that is not enough for you, then today is going to show the miners up again sadly. Worse than anticipated Chinese GDP numbers were released this morning, although it really depends who you are and how you read it. AngloGold Ashanti for instance, this is the worst price levels for the stock since the period September through to November of 2008, when everyone was getting red ears and sore kidneys from all the beating. I suddenly thought last week, this is terrible when I use the body blows analogy, it seems like I am a serial beater or was beaten. Not the case, violence is extremely low on my agenda, if not completely nonexistent. You have to however for AngloGold Ashanti go back to the middle of 2004 to find when last the price was at these levels. Spare a thought for the Harmony shareholders, the stock has not been this low since late August of 2005. 50 Rands. Phew. The GoldFields share price, adjusted for the unbundling of Sibanye, experienced a similar financial crisis swoon to that of AngloGold Ashanti, and similarly was at current share price levels in late winter of 2005.

Basically all the gold stocks are trading at levels not seen for 8 odd years. GLD, the Rand price of gold is up 400 odd percent since debuting in November of 2004. Over the last year however, the Rand gold price is flat. Listen in a little closer here, in 1970 South Africa produced 1266 metric tons of gold, 79 percent of global production at that time. Amazing hey? In 1999 however, we produced 2130.4 metric tons of gold, but that was only 21.1 percent of global production at the time. It really was Australian and US gold production that ramped us up to what looks like a peak, for now, in 2001. That was the best year for gold production. Like I said, so far. Check out this graph:

I found it via an article Gold: Two markets, one price... for now, a pretty recent one at that, I was just looking for historical context really. What it does represent however is that you must not feel too bad about falling gold production here, it is a global phenomenon, all the gold producers above us on that graph have also been struggling. My only worry is the hot money which flocked to gold as an investment, sure there will always be someone to buy it, but at what level. A stronger Dollar and a better feel for the US economy in the coming months will reflect badly for the yellow metal.

For the local producers however, this is not good news at all. At the same time labour unrest, above inflation labour wage increases, Eskom increasing costs, the companies are under immense pressure. I don't know what the number is, but I would like to see analysis of that, almost on a shaft by shaft basis. What companies are experiencing right now, which shafts are profitable and which ones are not. I did a search and came up with an ancient article from Mineweb, written by two old friends, Gareth Tredway and Stewart Bailey. Stewart Bailey is coincidently quoted in a Bloomberg story from last Thursday: AngloGold's Asset-Split Plan Said to Be Rebuffed by South Africa. See that? AngloGold Ashanti's shareholders are pushing the group for a separation of the assets, but the government of South Africa thinks that it is a bad idea. Hmmmmm.... there are many government economy meddling that business thinks is a bad idea, but that influence is exerted by expanding businesses to other economic destinations.

As an example, South African company Aspen in 2003 had annual sales of 1.9 billion ZAR, of which nearly 1.5 billion was in South Africa. Fast forward to the last half year, the half year to end December, and South African sales were 37 percent of total sales at 3.565 billion out of nearly 9 billion ZAR in total. Firstly what is eye popping is the sales growth in ten years, and secondly how the International business has surged. Clearly there are international opportunities that have presented itself, it is who has taken them. It is time to think global, not inward thinking that was self imposed. The world owes us nothing. You choose your own economic paths.

And China chose a different one in 1978. And chose economic reforms, which are still ongoing today. Remember in the Mao era that during the Chinese famine in the terrible years from 1958 to 1961, there are different estimates on mass starvation. Because of state controls. There are stories of people who starved to death outside of grain silos. Disaster. 20 to 43 million people starved, the figure goes as high as 70 odd million people starving to death. The Russian purge accounted for 1.2 million souls. Sis. And what do both of these have in common? Communism. Cast your mind back to this piece: Capitalism has lifted humanity out of the dirt and is greatest value creator in history of the world. It is Jim O'Neill that said that African countries should try to emulate South Korea as how to emerge from poverty. Check out the Economist from last week: Gems from Jim. That leads into Byron's beats well, he looks at those Chinese numbers.

Byron beats the streets China GDP Growth slows to 7.7% was the Wall Street Journal headline. How I wish our GDP was "slowing" to that type of growth. None the less everything is relative and expectations were for 8%. One of the main reasons for the miss seems to be a slow down on consumption which was spurred by the authorities who have put a crackdown on luxury spend. Fair enough, they are focused on ensuring Chinese growth remains sustainable. You know what human nature can do, people over extend themselves when times are good and this can create bubbles.

Talking about bubbles the Chinese property market has also been a big concern of late. Sasha has covered it extensively but the world has taken notice of what seems to be a huge speculative bubble in the Chinese property market. And so have the authorities who have started to talk about policies which will clamp down on the speculation.

Business Insider have put a table in this piece headed A Complete Look at China's Latest Disappointing Data in One Chart which has a look at all the data released as well as consensus. Quite a few misses there but again I will reiterate the long term picture. The days of double digit growth for China are over but every year their overall impact on the global economy gets bigger. I'd rather have China growing at 7.7% than say India growing at 10% because the base there is so much higher being the second biggest economy in the world.

And yes we will see misses and beats but the Chinese government are focused on long term sustainable growth which can only be a good thing. If they grow at 12% for the next two years but then crash because credit extension was too aggressive billions will be lost. And that is why the government are being more conservative which is actually a breath of fresh air. Sasha again eluded to which countries around the world are dependent on China last week. He concluded that it was not only Australia and that we are all very much linked to the nation's economy.

We are confident that China still has legs for strong long term growth. Their GDP per capita is still well below any developed market. The Chinese government have targeted 7.5% growth for 2013 so 7.7% for the quarter is just fine with me.

This is really worth thinking about for a long time. What Are The Top Five Facts Everyone Should Know About Oil Exploration? Of course there is a big desire across the spectrum to move towards a non oil based economy, a greener economy. But perhaps we are being way too hasty as human beings, there is this resource that is available to us right now, don't ignore its importance.

Half of the worlds energy needs come from oil and gas. But it goes further than that, as the article points out: "Oil/gas powers 100% of all transportation, within a few significant figures of rounding error. Transportation, in turn, directly accounted for 1/6th of world GDP in 1997 and is heavily involved in every other type of economic activity." True again. Renewable technology accounted for 0.07 percent of power generation over thirty years. Sad but true. What is more amazing when you scroll down the story to point three, oil is wealth, is that 200 years ago almost ALL energy consumption was bio fuels. Initially coal changed everything and then oil and natural gas added to that massive change. The more we burn fossil fuels the richer ironically we have got. Out with whale oil and in with natural gas. Where to next, your guess is as good as mine. Natural gas of course is the obvious answer, whilst we have already seen that coal will become less important globally, but still VERY important for us here. As I was told Friday, by someone in the know, the Karoo fracking is just a matter of when and not whether it is going to happen.

Crow's nest. A massive week of earnings is ahead of us. 10 Dow components report and around 100 S&P 500 stocks report this week. I don't care who you are, there is no way that you could cover all of those stocks. There are of course overlaps, but still, 20 stocks a day? Can't do it. Google, IBM, JnJ, McDonald's, Intel, Pepsi, Coca-Cola, amongst some heavyweight financials are all due with numbers this week. But of course there are some strange happenings that will capture peoples imaginations, including the 101 year anniversary of the first supreme ruler/emperor/lovely ruler/have-to-stand-and-clap-when-his-name-is-mentioned, Kim Il Sung today. Ironically Kim Il Sung was thrown out of the Korean Communist party for being too "nationalist". And of course he holds the rule through terror award for having under his rule around 1 million folks having died in camps. Yeah, that is awful, completely awful. The first grandchild of the man above expresses guilt apparently for his grandfathers sins. Meanwhile over the border, PSY released a single that broke YouTube records. 51 million views in around 40 hours. 20 million in the first 24 hours. That is the kind of history that I prefer.

Markets are selling off globally, the commodity stocks are getting caned. Collectively off three and a half percent this morning, being led lower by the gold stocks, which are off a whopping nearly nine percent today only. Wow. That is certainly very sad.

Sasha Naryshkine and Byron Lotter

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Thursday, 11 April 2013

PC's. Ain't nobody got time for that.

"This is very interesting because unfortunately for the likes of HP and Dell the standard of the operating system is out of their hands. This is why Steve Jobs was so adamant on creating both the hardware and the software. As an absolute control freak he did not want the Apple user experience in the hands of another company. Now this makes me think, what if Google fall behind with their Android software? Surely Samsung and the rest are at risk? The experience of their clients are in Google's hands. Google are fully incentivised to maintain their high standards but so were Microsoft. We are shareholders of both Google and Apple, I am not concerned about the innovation levels at Google, it is just an observation. However I definitely think it advantageous for Apple to control both."

To market, to market to buy a fat pig. A massive global rally from Tokyo/Sydney to the NYSE saw us participating in a rather large way. Everything except gold stocks, Goldman Sachs outlook for the yellow metal is lower than where the current price is, they see it settling at around 1250 Dollars per fine ounce over the next half a decade or so. Predicting commodity prices is tough. Hard, nigh impossible. Check out Cullen Roche's piece on it: Goldman: Time to Short Gold. The gold stocks sank 1.8 percent whilst everything else, almost across the board rallied strongly. Industrials were up by nearly that amount, the resource stocks as a whole lagged the market, which ended the day just shy of 1.4 percent in the green. The gold price also took a bit of a knock when the Cypriot reserves (they seem to be keeping around 3.6 tonnes) are set to be sold to pay for some of their bailout. Check the story out: Cyprus could sell gold reserves

The broader market S&P 500, the biggest index by market capitalisation, rose to a record high of 1587.73. Up 1.22 percent. And of course, with blue chips having traded at a record high in the session prior, the Dow Jones Industrial average hit another closing record, over 14800 points and now within touching distance of 15 thousand. Wow. 1589 is your new all time high level, pencil that in. Pencil, HB? Remember that. Stick in in your tablet on a notes segment that is backed up into the cloud, I should have said that rather.

Yech. The Pick 'n Pay trading statement yesterday was very disappointing. This is for the 52 week period to end 3 March. Results are expected in 12 days time, I am very sure that they are going to be scrutinized and again some are going to be left with lots of head scratching. The first ugly line is all you need: "EBITDA from continuing operations will decrease by between 5% and 15%." There is however some good news, turnover growth in the second half outpaced the first half, perhaps some inflation creeping in there. We continue to give this company a wide berth, our belief is even if there is a shakeup, shareholders are probably not going to see it for the better part of two to three years. More when the results are released in full.

Sometimes we all need a little perspective. Australia released employment numbers this morning, and they were not good, the unemployment rate is at a three year high of 5.6 percent. The number of folks employed dropped sharply by 36100 folks. Sounds like a lot, it is a lot. But here is the part that I want to highlight. The month before was the best month since July 2000, with 74000 jobs being added to the Australian economy. Again, for the purposes of this comparison that I am getting to, let us add the two together and we get to roughly 38000 jobs gained in two months. The labour force is 65.3 percent according to a WSJ article from around a month ago, there are 22,987,165 folks in Australia (according to the Population clock - Australian Bureau of Statistics) so roughly 15,010,618 people. That of course will change as you click on the link above, the country continues to add citizens.

And hear me out, I am heading in this direction slowly. Nonfarm payrolls were published in the US on Friday, with a gain in employment of 88 thousand for the month of March, and the prior month, including the revisions saw the number jump to 268 thousand. So, 356 thousand. The labour force in the US is 154.3 million, 10.3 times bigger than the Australian labour force. So divide 356 thousand by 10.3, and you get to 34.5 thousand. Amazing hey, the numbers almost stack up exactly the same. Australia's main trading partners are China, nearly 20 percent, Japan at 11.9 percent, the United States at 8.9 percent with South Korea at 5.4 percent and lastly Singapore at 4.5 percent. Top exports by value are iron ore and concentrates by a country mile, 64.1 billion Aussie Dollars in 2011, Coal at 46.8 billion Aussie Dollars and then quickly drops off to 16 billion Aussie Dollars for gold exports.

And this is where the difference lies, the US economy is massive, and it has multiple trading partners. Their imports from China alone are almost like importing our entire economy. That is right sports lovers, that is how big that trade is now, and that is just the imports. Add in exports at 104 billion Dollars, all trade between the two is equal to roughly the economy of Poland. If you thought that the Australians were reliant on the Chinese, yes, that is true, but so are all of us. That is just the way that it happens. In fact there are countries right on our doorstep that have a larger reliance on the Chinese, nearly half of all the trade in the DRC is between them and the Chinese (send the Chinese army there then), Angola is nearly at 40 percent, Zambia at nearly 35 percent, whilst Australia, it accounts for around 28 percent of all trade. South Korea, nearly 25 percent. Japan, nearly 20 percent. Us over here, well, we are at 12.7 percent and growing. Size and scale are one thing, percentages are a little more telling.

Wait one second here. BHP Billiton's CFO said China's growth was likely to moderate to 6 percent in the coming years. I guess that makes sense. As the base gets bigger and bigger, the growth rates will have to slow. The economy needs to rebalance, and will, as workers wages start to rise sharply in the coming years. So, whilst Australia has big exposure to the Chinese growth story, so do many other companies and countries. But I guess that is a much better boat to be floating on than the Cypriot boat.

Oops. The headline says it all: PC Shipments Post the Steepest Decline Ever in a Single Quarter, According to IDC. I am not too sure where Framingham in Massachusetts is, but I checked on the interwebs using my laptop. A population of 63 thousand people. That is, according to the new Gautrain statistics, roughly the number of people who use the service daily. Seems like a nice enough place, Framingham. That introduces the next piece nicely:

Byron beats the streets. Sales of PC's have been an interesting trend to watch over the last few years. Especially since tablets and sophisticated smartphones have thrown a huge spanner into the works. As Sasha alluded to, last night we received data from research firm IDC that worldwide shipments of laptops and desktops dropped 14% in the first quarter of 2013. Wow that is a big drop. The most obvious reason is the introduction of tablets as a direct competitor. Not everyone sits behind a desk, in fact a huge portion of the workforce are on the go on a day to day basis. Before tablets those people used to lug a laptop around, now the obvious choice is a tablet.

But there is another trend which is covered in detail in this WSJ article titled Computer Sales in Free Fall and that is the adoption of Windows 8. According to interviews from both analysts and consumers in the article, Windows 8 has just not impressed. Sasha and I are due new laptops and we too are holding out because we are unsure of the new operating system, I can see this trend happening first hand.

This is very interesting because unfortunately for the likes of HP and Dell the standard of the operating system is out of their hands. This is why Steve Jobs was so adamant on creating both the hardware and the software. As an absolute control freak he did not want the Apple user experience in the hands of another company. Now this makes me think, what if Google fall behind with their Android software? Surely Samsung and the rest are at risk? The experience of their clients are in Google's hands. Google are fully incentivised to maintain their high standards but so were Microsoft. We are shareholders of both Google and Apple, I am not concerned about the innovation levels at Google, it is just an observation. However I definitely think it advantageous for Apple to control both.

Back to the computer sales, this is the sharpest drop since the IDC started tracking sales in 1994 and is the fourth decline in a row. This is a trend that I don't see changing. Sasha and I even considered running solely off iPads. That will not work for us just yet but I am very sure that people with less complicated computer requirements will welcome the convenience of a tablet. This also highlights why you need to be on the ball when investing, especially with technology stocks. And this is exactly why Warren Buffett does not like them as investments. The HP share price is down 52% over the last 5 years but in April 2008 it would have seemed like a sound long term investment. If you want to invest in technology stocks, just like the companies themselves, you need to be on the ball.

Crow's nest. Check it out: Bitcoin Is Crashing. Amazing chart. Bitcoins, as far as I understand it, are generated by software that you install on your machine. Bicoin miners. Hey, the "idea" is only four years old. Bitcoins are denominated in Dollars. Enough about a new currency OK, Bitcoins would be denominated in their own currency. Just another payment methodology that might, or might not work. It turns out that something "mined" and invented using software is supposedly much better than central bankers of the world. Check this piece out: Bitcoin Exchange Mt. Gox Reveals The Insane Volume And Surge In New Users That's Causing Its Severs To Melt. I can hear you muttering under your breath, not a bubble, not a bubble.

Today we have started slightly lower here after the absolute heroic rally yesterday. An amazing rally really. So today, folks are choosing to take some off the table.

Sasha Naryshkine and Byron Lotter

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