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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