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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