Money with a dash of Funny: July 2013

Wednesday 31 July 2013

Fertilizer market gone to pot!

"Potash Corp. share price fell 16.54 percent, Intrepid Potash sank 28.55 percent, Mosaic Co. fell 17.28 percent, Israel Chemicals dropped 16.32 percent, it was absolute carnage out there for the producers! They must have been seething at another Russian coup of sorts, it reminded me somewhat of the palladium dumping, that crushed the price."

To market, to market to buy a fat pig. A mixed bag yesterday, the resources stocks lagged the broader market here, largely the precious metal miners. Both the gold and platinum stocks sank, they have been on a tear lately. And I guess the short termers might see this as an opportunity. If ABSA didn't stink up the joint, they fell 7 percent on what the market saw as very disappointing results. Clearly. Parent company Barclays felt the wrath of the sellers too, the stock fell in New York (the ADR) by nearly the same amount, seven percent. The results looked decent enough to me, I guess some folks worried that a premium is being put on the stock price and the growth is slowing. And they have lost customers, I am not sure whether that is to Capitec or FNB, or both perhaps. The innovation and transactional banking wars are just beginning is my sense, and that might be great for consumers, not necessarily for the banks themselves.

I asked myself a question on the ABSA credit card book, which was boosted by the Edcon book acquisition, isn't that unsecured lending by another name? There is an approval process for a credit card and as you can appreciate, the banks see this as a very lucrative business. So whilst ABSA may not have been chasing the unsecured lending market, they boosted their credit card book by 53 percent with the Edcon transaction. The market is strangely unimpressed with the special dividend, seemingly that is not enough either. Whoa. For the time being we continue to head away from the big banks, ABSA is seemingly a cash cow for parent Barclays, but Maria Ramos suggests that is not the case. Stock looks cheap, maybe for a reason.

What the hell? Crazy Russians up to their tricks again yesterday! This time in the world of fertilizer and in particular potash and in doing so Uralkali was breaking a cartel that controls around 70 percent of the globes volumes. What happened? Who is Uralkali? Uralkali is a Russian based business with their primary listing in London, I suspect that the London location at least gives you a sense of ease from a corporate governance point of view. It is a potash fertilizer producer headquartered in a small city, Berezniki, which is nestled in the Ural mountains on the banks of the Kama river. Thanks to Wiki for that information, thanks to the universe. Boris Yeltsin was at high school in this town, perhaps that is where he learnt to drink vodka.

According to the Uralkali website, Berezniki-4 expansion aims to increase the capacity to 20 million tons per annum. By far and away the most important potash mine to the company. And possibly to the world, the company produces nearly one fifth of all potash globally. And as of yesterday, their trading company negotiated directly with a Chinese fertilizer importer, CNAMPGC. That is possibly the longest company acronym that I have ever seen. As far as I can tell from the Chinese fertilizer manufacturer, this is a huge bulk order for them, and the contract runs all the way through to December end. The Potash contract price however has been under pressure for a year, down from around 465 Dollars a ton to around 390 Dollars a ton currently.

Oh, and did we mention (no we did not) that Suleyman Kerimov (a pal of Michael Prokhorov, together they control Polyus Gold) is one of the principals at Uralkali. Plus, Kerimov owns his hometown football team, FC Anzhi Makhachkala, which bought Samuel Eto'o. Now you are connecting the dots! Kerimov bought the controlling stake (53 percent) with other investors and investment vehicles of his own, from Dmitry Rybolovlev in 2010. His business, Nafta Moskva, owns a 17.2 percent stake in Uralkali.

Wait for it, Dmitry Rybolovlev's company that sold the stake (he retained some at the time, around 13 percent) was called Madura, which was based in Cyprus! Aha! The Russian links to Cyprus. I wonder if any of these guys had their bank accounts raided, or are about to see their account raided? But that is not the point here.

That still does not answer what happened yesterday! Well, in terms of existing agreements, by which Uralkali was part of, there were (like OPEC) quotas that limited the volumes. That is gone, Uralkali are out of the cartel and will now focus on volumes, churning it out! And that is absolutely excellent for all farmers and consumers of food, methinks. That is all of us. But this is absolutely awful for the Potash producers, their prices have fallen, effectively overnight by around 100 dollars a ton. Potash Corp. share price fell 16.54 percent, Intrepid Potash sank 28.55 percent, Mosaic Co. fell 17.28 percent, Israel Chemicals dropped 16.32 percent, it was absolute carnage out there for the producers! They must have been seething at another Russian coup of sorts, it reminded me somewhat of the palladium dumping, that crushed the price.

I suspect that in the coming days the expectations, after being sliced, the stocks will settle. The damage is however done. I wouldn't hold my breath with the Russians however, the trust element needs a lot more repairing. I would not be surprised to see, after having ramped volumes, that prices start to creep higher. It is certainly not a charity case, and with business in some part of the world being done in a gung-ho manner, I would not be surprised to see a u-turn. If you own potash assets, wait for it to settle, the price that is. For the time being however, I presume BHP Billiton will not rush at the Jansen project now. The project cost was estimated at 15 billion Dollars. I suppose that the economics work even less now. Shelved.

I am not going to do a detailed analysis on British American Tobacco today, I am going to wait for the market to decide in time. The dividend was hiked by seven percent on profits that increased 6 percent in constant currencies and 4 percent in Pound terms. Basic earnings per share grew 9 percent to 106.6 pence a share. Group volumes declined 3.4 percent to 332 billion sticks. And that for me is the critical part, you cannot go on losing volumes forever and hoping to grow earnings through cost saving and share buybacks. Eventually something gives.

The only region that grew volumes was the Asia-Pacific region, up 5.5 percent. Both the Americas (down 9.4 percent) and Western Europe (down 8.3 percent) continue to decline at a rapid rate. Their EEMEA region fell 4.5 percent. That region includes Eastern Europe, Russia, the Middle East and Africa. It is a little more than one third of their business. Let us take a scenario where the group continues to see the Asia-Pacific region grow by the current amount and sees the current sales in these other regions slow at the current rate. What will stick volumes look like in three to five years? This is of course not very scientific, but let us just imagine that volumes sink in those three territories and grow in that one territory, mostly led by South East Asia.

At the current run rate, volumes across the group would be 12 percent lower by the first half of 2017. That sounds bad to me. I don't care what you sell, you could sell hand cream for all I care. But selling fewer widgets or anything and continuing to see that as an industry norm worries me. So we continue to steer clear of the industry as an investment, we do not think that it is defensive. And think that there will continue to be tighter regulations around point of sales and marketing and bigger excise duties. Healthier lifestyle choices too by richer individuals, the richer you are, normally the less you smoke. That is the norm.

At the end of the day, we would rather own a business like Discovery, that encourages healthy lifestyles (and by function pays their life insurance claims later). And ironically, on a forward basis Discovery looks cheaper. Healthcare or cigarettes? I know which sector has a sounder future. But until the volumes offset the profits in a more meaningful manner, shareholders will enjoy the "defensive" yield that the company somehow attracts.

Byron beats the streets

It's been a busy couple of weeks with results been thrown at us both locally and in the US. On Friday we received results from Amazon which I will cover now.

As always Amazon is a tough one to analyze because still the company does not make meaningful money. I have explained this before so I will be brief. The company is not focused on profits at the moment, they are focused on getting as many people on their platform as possible and then be able to supply those masses with e-commerce services. I saw a very cool quote from CEO Jeff Bezos the other day: "Your margin is my opportunity."

Now that we know what the business is about, let's look at the numbers with more focus on revenues rather than earnings. Net sales increased 22% to $15.7bn. Operating income decreased 26% to $79 million. This resulted in a net loss for the quarter of $7 million or $0.02 per share. Despite these numbers the share price is up 27.43% in the last year giving the company a market cap of $136.7bn.

But this explains the loss. Amazon increased spending on technology and media content by $500 million for the quarter. The total came in at $1.6bn. This includes deals to stream movies and series in order to compete with Netflix. In very simple accounting terms had they not spent that amount of money and reported it as profits we would have a 10% operating profit margin from the sales of $15.7bn.

And that is why the company still trades at such a high price. And believe me the company is busy. Here is a very summarised list of projects they are up to at the moment. Deals with Viacom, NBCUniversal and others to provide thousands of TV shows to clients; TV show pilots launched by Amazon themselves; kindle services aimed at children; the Amazon App store; An Amazon currency to purchase apps and other things on the platform; Kindle Worlds which allows writers to publish their content on Kindle; Kindle Fire is now available in over 170 countries including China; features for the blind and visually impaired; the launch of an online market place in India; Goodreads, their book recommendations site reached 20 million members and lastly strong development of their cloud service.

Having initially seen the numbers in the headlines I must admit I started doubting whether this stock was still a good investment. But having read through the results in detail it has restored my confidence that this business will one day shoot the lights out with profits. There are just too many other opportunities to invest in at the moment, a great problem to have especially when your shareholders are patient. And I am still willing to be patient, hold.

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Monday 29 July 2013

Anglo. That is very nice, but.....

"Unfortunately Anglo shares have lagged their peers. What can Mark Cutifani do different to his support base? The Vale and Anglo share price performance over the last year looks identical, both down around 30 percent. Rio Tinto and BHP Billiton share price performance also looks exactly the same, up a few percent, this is all in London. Are we being too scientific about the South African specific issues?"

To market, to market to buy a fat pig. On Friday I was about as far removed that you could get from Mr. Market, although there was a 3G connection (not always), it was kind of tough to be around and on top of "things". I was in the town I was schooled in, Grahamstown, and along with a whole slew of folks, we were celebrating our respective reunions. It is strange that most people look exactly the same, you all age the same, so I guess that is about right! So we had big heaps of fun, and missed the market action. Never more than a smartphone away however.

After all was said and done in New York stocks were little changed, but that hardly tells what was a very encouraging picture, during the first hour of trade stocks were markedly lower. Nearly a percent lower on the Down Jones industrial average, which managed to squeak out the most modest of gains at the end of the session. That translated to 0.02 percent, which might cause some folks to say, why bother? That late rally from our market close (lowest point of the day) onwards, has seen our markets locally gain around two thirds of a percent this morning. The gold stocks have been boosted by another bullion rally.

I have seen some early signs of people's estimates for the S&P 500 next year, the bull case is for 122 Dollars collective earnings. Even on a multiple of 16 times, which is at the long term averages, you get to 1952 on the S&P 500, a full 260 points from here. Which is not that much really, around 15 percent more. Chinese manufacturing data and factory activity slowing is creating a lot of anxiety, but for the time being it seems pretty contained. At least from a market chatter point of view. It seems to me that China and their data remains a moving target for many, I am sure that there are lots of people on top of it all, but it just seems so huge to me. And foreign. And far away. So for many people on the boxes that I watch, there is mass generalisation about the country and its economic prospects.

Talking of which, this week is huge. There is GDP data in the US for Q2, another look at the data, I have even seen that some folks revise down to a negative print. That would be a shocker. Wednesday. And at the same time, more or less, there is the ADP employment report, which is a precursor to the Labor Department's employment report on Friday. The non-farm payrolls report, the biggest and best employment report since the last one!!! But there are "other" things on the go, the BussinessInsider has it as This Week Is So Stacked With Mega Economic Events We Might Just Feel The Axis Of The Earth Tilt. I wouldn't get too excited, in some peoples eyes every week is the most exciting week!

Anglo American reported their half year numbers on Friday, and because this used to be the South African company that everyone talked about, it still attracts more attention than most. When I was growing up, folks asked "what, do I look like an Oppenheimer?" when asked to pay a seemingly outlandish amount for something. Nowadays I guess you can substitute that with a whole host of names, Christo Wiese, Patrice Motsepe are among a couple.

In our core client portfolios around a decade ago we added Anglo American as the diversified miner of choice. We dropped them when the Rand strengthened through the 6 to the Dollar mark, figuring that the currency would weigh on earnings. It was in 2004 that we started adding BHP Billiton, we liked their energy mix, uranium at the time, plus a growing oil and gas business. And we preferred their geographical mix, BHP Billiton that is. How was anyone to know what the resources boom would throw out, and how insatiable demand from China would change the resources and mining landscape as we know it. Suddenly, the diversified miners became some of the most exciting investment opportunities, their share prices reacted accordingly. But then "things" unwound in 2008. The Chinese however boosted their infrastructure build, and demand for raw materials remained robust.

But. Something then happened. In the case of Anglo, and many deep level miners in South Africa started having serious problems. Electricity prices, wages, labour issues, government push back to company plans, it all got a little toxic. And let us just say that landscape remains frigid looking. But we know that, the share price in London has reacted accordingly. When the market peaked in May of 2008, the share price was at 35.40 Pounds. It fell to around 10 Pounds in late February 2009, and then picked up all the way through to 34.20 in February of 2011. But then fell to a 52 week low of 11.95, just a few weeks ago. Currently the price has recovered to 13.91 Pounds. The last 12 months however have seen a return of negative 26 percent for shareholders. And loads of questions unanswered, plus a new CEO. Some would argue that the new CEO is a net positive, I would be inclined to agree on that score.

Anglo American have implemented a new program called "Driving Value". Mark Cutifani has only been on the job for three and a half months, but already he has already been hard at it. Identifying places to cut costs. And shrinking the business divisions from ten to six, I think that makes sense from a costs point of view. Minas Rio is the project that Cutifani has been handed, in the same way that you are handed old ingredients and must come up with a masterchef piece. The project is, as Cutifani discussed, 4 in 1. And approvals are 98 percent complete.

Numbers wise, higher tax rates, higher debt levels, greater levels of minorities at Anglo American Sur (they were forced sellers to an extent) translated through to lower profits. But even though operating profit was down 15 percent to 3.3 billion Dollars, it was more than the market had anticipated. Underlying earnings sank by 28 percent to 1.3 billion Dollars, translated to EPS of 98 cents. The dividend was maintained at 32 cents. I guess earnings "move" as a function of the exchange rate, at the current exchange rate that translates to 961 ZA cents of earnings for the first half of their financial year, and 313 ZA cents dividend. I guess you could argue that the stock is fully priced currently.

I would think however at best that the next two to three years are going to be really tough to grow earnings significantly. Even though the analyst community have pencilled in pretty aggressive earnings growth for that time. It all depends on volumes and prices, one is able to be controlled in large part, the other is a moving target. We have a pretty good idea of what the demand picture looks like. But that isn't a given I guess.

Unfortunately Anglo shares have lagged their peers. What can Mark Cutifani do different to his support base? The Vale and Anglo share price performance over the last year looks identical, both down around 30 percent. Rio Tinto and BHP Billiton share price performance also looks exactly the same, up a few percent, this is all in London. Are we being too scientific about the South African specific issues? Is it a case of perceptually the market says, this is a developing world mining company, sell it, this is a developed market mining company, it is OK-ish.

So until everyone starts to get the faith back about emerging markets, this stock might lag. Outperformance will be determined over the next five years. Time will tell whether Cutifani and his team can cut costs and make the business a leaner machine. I am sure he will. And in the process he will shape the corporate culture for the coming years. Whether or not their diversification mix will stand up the next commodity moves, Chinese consumption, that remains to be seen. We continue to recommend and buy BHP Billiton as our main diversified miner.

Home again, home again, jiggety-jog. Stocks are up smartly, as we mentioned. It is a huge week, you know that too. Earnings are all important. On the Zacks website, under the Earnings segment there is a total of 131 earnings announcements today, 270 tomorrow, 255 Wednesday and then a whopping 355 of Thursday. With only 56 on Friday. That is absolutely astonishing. 1067 earnings announcements this week, it has to be the biggest earnings week. Coupled with all those announcements, economic and from central banks, this might well be the biggest week of the year.

Sasha Naryshkine and Byron Lotter

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Thursday 25 July 2013

Giant wheels, likes and swipes

"The view that developing markets which continue to urbanise (and urban people use more resources) is a generally held view. On top of that, with more resources required to feed the appetite of the urbanites in developing markets, mining companies on balance would have depleted the best grades. It is expected that falling grades of ore bodies could and should lead to more loads needing to be moved. Which in turn translates to more heavy equipment required to move higher volumes, it makes sense, not so?"

To market, to market to buy a fat pig. Not much green on the screen yesterday, the pause button has been hit after a recent little rally, that in large part has been driven by earnings. Resource stocks took a drubbing yesterday, perhaps the strengthening Rand has had something to do with it. For sure, industrials also under some pressure, some of the heavyweights in there, BATS, SABMiller and Richemont are direct Rand hedges. In part the Rand firmed because of positive fundamentals in the form of local CPI data, that was most pleasing. Like almost any data point in life, there are people who question the collection methodology and the presentation of the data. Check it out yourself and let me know if this represents your basket, I suspect not: Consumer Price Index - June 2013.

But hey, that does not mean because your life does not fold into the basket that it is wrong. Statistics South Africa employ armies of people to collect and collate the data. Personally I have to be in the shops at least two to three times a week and I keep a mental scorecard. Technology items get cheaper and of a better quality, transportation costs get more expensive as time goes on. Every litre that you put into your tank is one litre less of fossil fuels. Surely. And remember that the stones did not run out when the stone age ended. Talking stone ages and stuff that us humans have done every day, here are the items that are cheaper and here are the ones that are more expensive:

"The food and non-alcoholic beverages index increased by 0,1% between May 2013 and June 2013. The annual rate increased to 6,8% in June 2013 from 6,4% in May 2013. The following components in the food and non-alcoholic beverages index increased: other food (1,6%), cold beverages (1,5%), hot beverages (1,0%), milk, eggs and cheese (0,8%), oils and fats (0,8%), sugar, sweets and desserts (0,7%) and fish (0,1%). The following components decreased: vegetables (-1,0%), fruit (-0,6%) and meat (-0,5%)."

Your coffee and hot chocolate is more expensive, as is the milk that you put in it, whilst your veggies, meat and fruit are all cheaper. All good. However, as always, when US markets open that dictates how we end the day. Perhaps the Caterpillar weakness in their outlook did have an impact on the local resource stocks. After all was said and done and the herd had retired for the day, the Jozi all share index had shed 0.7 percent to close comfortably below 41 thousand points. Barloworld feeling the weakness, they of course own the licences for Caterpillar in 12 African countries, Iberia and parts of Russia. The stock was down three and a half percent. You cannot be master of your own destiny, the world is interconnected.

Over the seas and far away, in New York, stocks failed to register another gain, even though once again the collective flirted with the all time highs as the market opened. The NSADAQ was boosted by a five percent plus uptick in the Apple share price, which has been pleasing for ~~long~~ short suffering shareholders. That is easy to say when the stock was bought two years and further back, but the all time high is NOT so long ago. Will the stock crest 700 again in a hurry? Well, I think that I covered that yesterday when talking about multiple expansion and new product development. Short answer, yes, timing, not so sure. Worst hit were the basic materials stocks, like our resources complex here the flash Chinese HSBC PMI number weighed. All the European PMI data is coming off a low base, but trumped estimates and it is only a matter of time until they all start to clock 50 and higher. There are green shoots happening in Europe as we speak, we are months away from that being the generally held view is our sense.

Caterpillar results yesterday were a wide miss, and the company guided for the full year lower. It is almost the same story as it was last year, beginning the world fabulously and guiding higher, expecting a better year and then all of sudden in the middle of the year guiding lower. Whilst the global economic outlook has been revised lower from the beginning of the year, the second half has changed that. The mining industry is cutting back on capex, which means lower sales for the resource industry segment. And that is almost the entire reason why the quarter was worse than anticipated. But some important points were made by the company, in a YouTube clip on their website, presented by their CFO, Brad Halverson. Mining is a cyclical business, notoriously so. There are some investors who give the industry a wide berth as an investment, too much boom and bust.

But Caterpillar is connected to the resource boom, joined at the hip so to speak. Their view on the turnaround in mining production is interesting. The view that developing markets which continue to urbanise (and urban people use more resources) is a generally held view. On top of that, with more resources required to feed the appetite of the urbanites in developing markets, mining companies on balance would have depleted the best grades. It is expected that falling grades of ore bodies could and should lead to more loads needing to be moved. Which in turn translates to more heavy equipment required to move higher volumes, it makes sense, not so? The company has a very positive long term outlook for their mining division, one which we share here at Vestact.

Their construction business was not as hard hit as their mining business, but still fell for the quarter. Whilst anxiety around their Chinese business still continues, sales excluding acquisitions are up around 20 percent from the comparable quarter in 2012.

Dealer and internal inventory reductions had positive cash flow implications, but it is not good for profits. Dealers are obviously cautious, as is the company in the medium term. Their outlook, as we said, has been revised lower. Sales are seen to be lower at 56 to 58 billion Dollars for the full year. Expectations for EPS was also revised lower to 6.50 Dollars for the full year 2013. Dealer inventory reductions are expected to be more significant during the course of the year. Underselling this year, but that has positive implications for 2014. A restocking of inventory will have to take place during the first half of 2014.

On a fundamentals basis, Caterpillar is not as cheap as it has been before. The stock is more expensive. 6.50 worth of earnings for the current year, at a share price of 83.44 Dollars, puts the stock on a forward multiple of 12.8 times. Not that expensive either. Expect a quarterly dividend of 60 cents (annualised to 240 cents) to give the stock somewhat of an underpin. At current levels the dividend yield is 2.9 percent. We would advocate that at the moment the stock is a hold, they are nearer to the bottom. A great moment in a CNBC interview yesterday with the CEO Doug Oberhelman, in which he ended off:

"I've said this before. 7 billion people on the planet, going to 9. Rising living standards will require minerals and energy. Certainly it's not going to be a straight line up and we knew that. Super cycle or not, I don't know what you call it, but definitely a cyclical business. We're used to it. But I think you have to look out, I don't know, three, five, ten years, mining will come back."

Hold them. Add on weakness, somewhere in the mid seventies if they get there. You are going to have to wait for this time next year for any great shakes.

Facebook. Me like. You like. Not much to not like about last evenings quarterly numbers. I was saying to Byron this morning, for crying in a bucket, this time last year the so called experts were incredibly anxious about the fact that Facebook was perceived to be unable to monetize across their mobile platforms. Well guess what, Mark Zuckerberg is smarter than most people, including the chattering classes of "investors" out there. So what if the stock price didn't pop and the IPO was a disaster. Are we all scalpers now? The company raised more money at a higher rate than the market anticipated after the greed got the better of everyone.

But hey, that is history. Now the company has 699 million active daily users. 142 million in Canada and the US, 182 million in Europe and 181 million in Asia. Of course that excludes China, although some folks do get around "the firewall". 195 million in the rest of the world, that includes us down here in "the Africa". Which is not one place, but that depends on where you live. The active monthly users number jumps to 1.155 billion people, mostly made up of developing market folks. And get this, mobile users, on a daily basis number 469 million people. 7 percent of the worlds population use Facebook daily on their mobile devices. I can't think of too many other companies that have that reach.

How are their sales split up? Mostly advertising really, not much of a split at all! And the top line grew 53 percent when compared to the comparable quarter a year ago. That is some serious growth! Mobile ad revenue now accounts for 41 percent of the total, not bad for a business that was going to be able to do it. I am being totally facetious of course.

So what now? Expected earnings are around 50 cents for the full year. At a 30 odd Dollars share price that is still wildly expensive. But earnings are expected to be around a dollar in two years time, so the bottom line is growing really quickly. And until users become irritated with the advertising propositions, the company knows more about their users than anyone else. They know your likes, your family members, where you live, your age, your marital status, whether you have kids, in what city you live, where you live and so on. More than your high school headmaster knew about you. Or knows about you.

Make no mistake, as an investment it has many risks, including valuations. Something different. But more than 1 in seven people worldwide use the service and more continue to sign up. The service goes to our very core as people, communication with one another. Forget the pictures of dogs and cats, motivational quotes, your food, your kids, their kids, your view and your holiday. The advertisers want you. They need you. You just need to like them! The database applications are endless. I like this company a lot. The earnings will come. For the time being it is the biggest smallest revenue most talked about company in the world. For its size. It trades on a price to sales of double that of Google. I like both of them!

Byron beats the streets

Last night we received third quarter results from what is now our biggest holding in New York, Visa. Thanks to its performance and consistent additions it has overtaken both Apple and GE in our portfolios. So far this year the stock has returned 23.2%, 48.51% over the last year and 155% over the last 5 years. That is just the share price and excludes dividends. Let's look at the results and see if we can expect these kinds of returns going forward.

Net income for the quarter came in at $1.2bn which was up 16% compared to this period last year. Earnings per share came in at $1.88 which is up 20% and comfortably beat expectations of $1.79. They expect operating margin to come in at 60% for the year and earnings to grow over 20% for the full year. That sounds impressive but the market already knows this. Earnings for this year are expected to come in at $7.58 and $9 next year. The share currently trades at $190 or a forward earnings multiple of 21. For a share growing earnings in the lower 20's I think that multiple is easily justified.

The payment volumes are huge! In the 3 months the volume eclipsed $1 trillion which is up 9% from the comparable period. It is interesting to see how Visa categorise their revenues, see below from the report.

"Fiscal third quarter 2013 service revenues were $1.3 billion, an increase of 7% versus the prior year, and are recognized based on payments volume in the prior quarter. All other revenue categories are recognized based on current quarter activity. Data processing revenues rose 15% over the prior year to $1.2 billion. International transaction revenues, which are driven by cross-border activity, grew 14% over the prior year to $854 million. Other revenues, which include the Visa Europe licensing fee, were $179 million, a 1% increase over the prior year. Client incentives, which are a contra revenue item, were $521 million and represent 15% of gross revenues."

After doing a bit of research I have worked out that service revenue is what Visa charge the banks. Obviously Visa give the banks a great service. If your bank did not have Visa or Mastercard you could not do swipe transactions. Data processing revenues comes from the actual transaction when you swipe your card at a merchant. This will be paid by the merchant and Visa and the bank will split the revenues. International transactions is self explanatory, when you swipe outside your own country, that service is provided by Visa. The Europe licensing fee, I have explained before. Visa do not actually own Visa Europe, the banks do and they pay a fee. Client incentive revenues will be loyalty points type products which as mentioned is contra revenue.

The other day I saw an interview with the Mastercard CEO Ajay Banga and he stated that 85% of transactions still take place in cash. Although I am sure he is talking about volume of transactions as opposed to actual value it gives you a good indication of the potential growth of these companies. The company also announced a further $1.5bn buyback programme. We continue to add to Visa even at these levels.

Home again, home again, jiggety-jog. SABMiller unfortunately delivered a poor trading update. Growth is all the developing markets, not so much luck in North America and Europe. The whole market is lower, and Mr. Risk is back. Strange how the Detroit bankruptcy has suddenly made Meredith Whitney relevant again, I am not too sure who should be "blamed" for that mistake of epic proportions. Bad local government? The government itself? The unions? Cheaper production elsewhere? And whether or not there is "systemic risk", who knows the answer to that. Great! Something else for the market to get anxious about.

Sasha Naryshkine and Byron Lotter

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Wednesday 24 July 2013

iCheap

"I guess in some ways the company has been incredibly innovative and has released so many blockbusters that I am not surprised that the fans are looking for more. After all, we are not Oliver Twist, are we? Their products are expensive, but quality almost always trumps price, provided that it is also at the reach of most rich individuals. Some quick facts and figures, the latest iPhone, the 5, is the most successful iPhone to date. Yes. Even though you and I are looking out for the next one, this present one is the most successful. Sales of iPhones for the quarter were more than both the company and the analyst community expected, 31.2 million sold, and a further 600 thousand fewer in inventory."

To market, to market to buy a fat pig. Another big day for resource stocks, dragging the broader market higher along with it. Industrials sold off, as the currency continued to gain against the greenback. The Rand has outperformed some of their emerging market peers, and now over the last four weeks has trumped both the Real and Rupee against the US Dollar. I suspect that in recent days the higher commodity prices are partly a positive catalyst for the exporters of bulk and precious metals. Those stock prices have rallied in recent days, in particular the gold stocks. Yesterday it was the turn of the platinum companies that traded nearly two and a half percent higher.

In the afternoon of two sessions ago, Monday, there was an announcement from MTN on the resignation of their CFO. Now, the resignation of any board member, other than a personal reason, or perhaps age (I guess that is personal) is always frowned on by the broader public and in particular the investment community. The reasons given may appear more sinister than they really are, but this is equally not good: "Mr Patel explained to the Company that he does not wish his continued employment with the Company to prejudice the Company in respect of certain allegations made against him, which are subject to an ongoing investigation which had been commissioned by the Company.". I guess immediately the morbid curious creatures that we are, we ask, what allegations? And often presume the worst, even paint the fellow into a guilty corner. You know what Steven Segal said about assumptions!!!

The MTN share price dragged the industrials complex lower, down by 2.78 percent on the day to 175 Rand a share. Until we hear further news, we have to assume that the company and the CFO are acting in the best interests of the people that own the company, the shareholders of course!! Issues related to corporate governance as far as we understand it. But what would that mean? The broader market closed the day better by nearly seven tenths of a percent to close out the day around two percent away from the all time highs. Over on Wall Street, the broader market S&P 500 made a reach for 1700 points, but fell a little short at the open, falling back to close slightly lower on the session. The Dow Industrial average closed the day at a record high, plus registered an intraday high at the beginning of the session.

As for the ignored nerds of NASDAQ, yesterday the tech heavy (non financial) index closed at a 13 year high. It has been tough going. All the while however, whilst the big new techs continue to register close to record earnings, the index on a valuations basis gets cheaper. Year to date (205 days in!) the NASDAQ is up 18.5 percent. Blue chips, the Dow, has slightly outperformed the nerds, up 18.8 percent year to date. The broader market S&P 500 is about exactly the same as the NASDAQ in terms of returns. I managed to find a little data on the best and worst years for the Dow Jones. In 1915 the market nearly doubled, just a single year. Ditto in 1933. But that was after some heavy beating in the three years prior to that!

The worst of the ten best years (that is a complicated way of saying the tenth best) for the Dow Jones was 1938, where the market added nearly 34 percent, or a little over one third. 1931 was the year that sucked the most. Markets more than halved losing nearly 53 percent of their value. 2008 was also awful, stocks were down over one third, 33.84 percent in fact. In point terms on the Dow Jones, the very worst year was also 2008, where there was a 4488.43 point drop. Those were some dark days my friends. Listen in here closely. The very worst week for the Dow Jones Industrial average was an 18.15 percent sell off in October 2008.

I remember that week well. From the 6th of October through to the 10th, in fact, I found all the notes archived from that week, the headlines are hilarious: Start bailing, that plan is out!, Where is the barf bag?, Perhaps time to use that barf bag, Directionless gaggling geese and Pass me another barf bag please. Ha-ha!! Lucky those days are far behind us! I have no doubt however that there will be bumpy days again, but the secret is not to get spooked. Stay the course. Own the quality. Ignore the noise. In fact, buy the sell offs, if you have the money. On that last day of the week, that Friday the 10th of October, that is perhaps when you should have known. It is still the highest volume day on record. And also the largest point swing day, 1215 points swing in a single day. Bizarre.

And then we had the results of Apple inc. for their third quarter last evening after the market closed. Possibly the most anticipated results of the "season" so far. Surprising on the upside, but truth be told, the expectations bar had been set pretty low. Possibly the chattering classes who are looking for newer gadgets and hoping that the cycles are shorter (like the full moon cycle, 28 days!) between products redesigned and new releases. The iPhone and the subsequent refreshers pushed the boundaries and at the fringes (seemingly) very little has been added, but that is not entirely true. New gadget seekers have just become more impatient and excitable. Google glasses, Apple watches and so on, these are the innovators that both investors and consumers demand something wow.

I guess in some ways the company has been incredibly innovative and has released so many blockbusters that I am not surprised that the fans are looking for more. After all, we are not Oliver Twist, are we? Their products are expensive, but quality almost always trumps price, provided that it is also at the reach of most rich individuals. Some quick facts and figures, the latest iPhone, the 5, is the most successful iPhone to date. Yes. Even though you and I are looking out for the next one, this present one is the most successful. Sales of iPhones for the quarter were more than both the company and the analyst community expected, 31.2 million sold, and a further 600 thousand fewer in inventory. Popular across both developed and developing markets. Strong sales in Japan too, yowsers, up 66 percent year on year! Rising equity prices have meant people have felt richer and possibly buying products like Apple's. See, Abenomics works! For now, the long term implications, your guess is a good as mine.

iPad sales were disappointing, 3 percent down year over year to 14.6 million units for the quarter. In the earnings call, the CFO Peter Oppenheimer said that iPad's accounts for nearly 85 percent of tablet web usage in the US and Canada. What is quite interesting is that the company is noticing that many businesses are starting to adopt the iPad in business, with thousands bought across companies like Eli Lilly, Novartis, Cathay Life, Roche, and SAP. Those were the ones mentioned, remember that companies then customize these tablets with multiple applications. iPad sales to the US education department registered 1.1 million units, a record for the company in a quarter. The adoption of tablets by education is key for future sales, think of how the ecosystem will "lock" people in. Adoption of a new product is easy and exciting, the prospect of changing to another product is less exciting and there is almost always pushback. I know people who own a product and won't change, because the thought of doing that is as appealing as a department team building weekend at the dam.

Onto the Mac, the company saw sales fall 7 percent from the comparative quarter in 2012. Before you get your knickers in a knot, that would indicate that they stole market share, because industry wide sales were down 11 percent. The Mac is certainly a beautiful device, but I have up close and personal seen two folks shift from a Microsoft Windows environment to the Mac and I'll be honest, they have both had their problems!

iTunes sales for the quarter were a record 4.3 billion Dollars, with the best week ever for the company being the very last week in June, the end of the quarter. A 29 percent increase in sales, this is the "ecosystem" that the company refers to, once you have the products, you will start paying more and more for apps (you can never have too many of those) and buy more music, both old and new. Seriously, when last did you buy a compact disc? So out of total sales of 35.3 billion Dollars, iTunes still represents a small part of the overall business, but should continue to achieve these types of growth rates for the short term.

On those slightly higher sales the company posted quarterly profits of 6.9 billion Dollars. That translates to 7.47 Dollars worth of earnings (measured against the 9.32 in the corresponding quarter last year) per share, with a cash dividend of 3.05 Dollars a share. The dividend is unchanged, the total cash returned to shareholders during the quarter was a whopping 18.8 billion Dollars, in both the div and buybacks. Amazing. That is pretty huge. That is nearly 4 billion Dollars more than the Nokia market cap. In fact, if you add the Blackberry (formerly Research in Motion) market cap of 4.73 billion Dollars onto the Nokia market cap (14.91 billion) and minus the cash returned to Apple shareholders during the quarter, you get to 840 million Dollars. Or roughly 11 days worth of operating profits! So, don't compare the companies. That is like comparing Germany and Greece. No wait, people do those comparisons!

So what now? The stock over the last 52 weeks peaked at 705 Dollars and bottomed out at 385 Dollars. The stock in the aftermarket is trading 4 percent higher at 435.77 Dollars, a long way away from the highs. But on a forward multiple (expectations for the full year are just short of 39 Dollars) of only 11.15 times. And at that pre market price the dividend yield is 2.8 percent. Earnings are expected to increase around 10 percent next year and 12 percent the year after that. The cash pot is around 147 billion Dollars, that is cash and cash equivalents and both long term and short term marketable securities. That is roughly 36 percent of the market capitalisation. On an ex cash basis (just imagine if you could for a moment) they trade on an earnings multiple of close to six and a one third. That sounds crazy cheap still, notwithstanding that growth rates look pretty muted for the time being.

And I guess that is why the discount is applied. Because even if the market affords Apple a 12 multiple, 510 odd Dollars is where it could trade for next years earnings. A 15 times multiple afforded to the company would translate to a share price of 640 Dollars. The company needs excitement around new products to generate a multiple expansion of that magnitude, so that the growth trajectory can be restored. In the mean time, their cool factor remains, they remain in developed markets the product of choice, along with a few peers. The company needs to simply get their "coolness" back, but that will only happen with newer product developments, new blockbusters. Expectations are high for a new sized handset, tablet, a watch of sorts, a TV and so on. Whilst that continues to happen in the background, we will continue to recommend a buy on the stock. It is cheap.

Byron beats the streets

This morning I went to the Ellies full year results presentation. I have always found the company quite intriguing and wanted to get some extra insights and a feel for the management. Before we delve into the numbers and what I picked up from the presentation lets have a look at what they do.

Essentially the business is divided into 2 segments, consumer goods and infrastructure. The consumer goods segment which contributes 65% of revenues and 74% of profits has a wide variety of products which are either manufactured or imported and distributed around the country. These products include Terrestrial TV reception products, accessories, remotes and satellites. So basically all the appliances needed for your DSTV offering.

They also supply a variety of energy saving products such as light bulbs, solar panels, solar geysers, plugs and adaptors. These are sold in either Ellies stores or in the Ellies section in a Builderswarehouse or a Game. This store within a store concept has allowed them 115 selling points with very little capital expenditure. Genius.

The infrastructure segment which runs under the name Megatron (a business bought in 2008) specialises in the manufacture and importation of Transformer Sub-stations, switchgears, diesel generators, overhead lines, power transformers, solar panels and wind projects. They then install and service this equipment. Basically it is all geared towards power generation. Megatron owns and operates a water purification plant. Other side projects include solar powered internet schools. All sounds very exciting. I hacked a picture from their presentation which should give you a good idea of divisional contributions.

Ok, numbers time. Revenue was up 16.6% to R1.99bn, EBITA was up 27.4% to R348m and headline earnings per share were up 36% to 74 cents. The stock trades at R8.15 which puts it on a PE of 11. That is not expensive at all. But management pointed something out. The share price listed at R2 and traded at 10 times earnings then. Having grown HEPS by 20% average per year the share price has followed suit, tracking those earnings and still trades at or around 10 times.

But there is kicker here and it also explains why they did not pay a dividend this year. HCI (63.8%) and Remgro (31.5%) are launching a free TV offering in October this year. It is called Openview HD and has about 15 channels, 5 of which are HD. It is free and is targeted towards the lower and middle LSM groups. All you have to do is buy the Set top box and you have access to these free channels. Ellies have been designated as the main supplier of this equipment. They have geared up heavily for this, having bought more storage space and a machine from Germany which can manufacture 3 aerials a second.

All is not smooth sailing however. The government have been set a deadline of 2015 to move from analogue to DTT. This means that in order to get SABC you also need to buy a set top box, again from Ellies. Ellies expected this happen this year but delays in government has prevented this. Ellies had geared themselves up and bought all the equipment which now sits in inventory and attracts storage costs. Short term holders sold the stock down quite heavily when it was revealed that this is still going to take time. Regardless this rollout will have to happen sooner or later.

This company has a great entrepreneurial spirit and seem to be growing in the right places. Especially if you like environmental friendly energy generation. Regardless of your preferences Eskom tariff increases will force you to find alternatives. They are small but exciting and certainly not expensive. I would be adding to this one as a long term hold, even if they withhold the dividend for the next 5 years.

Home again, home again, jiggety-jog. There are only 160 days left until the end of the year, even I can work that out. What that means I can't tell you, start doing your holiday shopping now and you can tell those folks in December that it is all done. All done, thanks! Markets are mixed here, the gold miners are enjoying another rip roaring day!

Sasha Naryshkine and Byron Lotter

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Tuesday 23 July 2013

McMiss

"McDonald's paid their first dividend 37 years ago in June. It was 2.5 cents. Adjusted for stock splits that would have been 0.062 cents. Nowadays it is 77 cents. But the amazing thing is that it has risen each and every year since that first dividend. Unbroken."

To market, to market to buy a fat pig. Wow. Giddy people about the birth of someone born into titles and wealth, how is that possibly news? I guess if you believe in all that pomp and ceremony, then go for it. The history of it all is fascinating, but in reality, did you ever stop to think how those folks managed to get into that position of favour? Don't call me anti anything, I just think that it might be a little overdone, and people with real jobs, people like Lloyd Blankfein and Jamie Dimon are vilified as a result of "their part" in the financial crisis. A banker is seemingly not the best "best friend" to have, but they certainly add more value, despite what popular might dictate to society. Not sure how you feel about that!

The biggest story of yesterday, locally in the markets was the tearaway action in the gold companies, as a collective they added over seven percent. But the year has been awful, still awful for the collective. Down over 42 percent as of this morning, the collective platinum stocks are down 29 percent plus. The day in the sun was amazing, let us hope the earnings are there to justify the stock prices and that the companies can actually continue to develop their assets, creating jobs along the way, and wealth for long suffering shareholders. For those who hang in there at least.

You have to keep learning each and every day. Otherwise you will no doubt get stale, isn't that right? We are lucky because we have a community out there with many different skill sets. And that includes mining of course. So when I said that I was confused about the mining terminology, and how Amplats had presented a figure yesterday, of course folks would come back to help.

And help understand they did. Remember the comment first, from yesterday: "Average platinum mined per employee increased two percent, even if metres squared mined per employee per month was 1 percent lower to 6.5. Six and a half metres squared, that sounds weird, surely it should be cubic metres?"

Of course the community out there pointed out what I was missing, firstly Daniel Limpitlaw, the principal over at Limpitlaw Consulting. As per the website, this is right up their alley: "The Company provides technical services in mining, environmental and sustainability disciplines to mines and exploration projects"

Daniel had this to say to me:

"I thought I would throw in a penny's worth for your information: the measurement "centares" or m2 is used in narrow vein mining (both gold and platinum). A centare is the area of reef mined or advanced and takes the strike length into account (i.e. the length of the mined face) but not the mining height. It is useful because in many narrow vein orebodies, most of the mining height is made up of waste, so if the miners produce more cubic metres of rock, they are mining more waste and so decreasing the profitability of the mine (each tonne of waste rock costs the same to handle as a tonne of payable ore). Often bonus schemes for miners are based on m2 and not on m3 for this reason."

Thanks so much! We are now all the wiser.

It did not stop there, because knowing the brilliance of the readers, a fellow from down under (yes, Australia), who works in the mining industry too, gave me his view:

"Tabular reef deposits such as SA gold and platinum have always reported stope labour efficiency in terms of square metres per man - two dimensions rather than three. Easy to calculate the tonnes milled per man from the company reports if you prefer a more 3D orientated trend.

No doubt the big message is the gradual drop in efficiency over time, whatever the measure. Twenty years ago, I remember 12 square metres per man per month for stoping efficiencies on the shallower West Rand gold mines. Depth, cost, better conditions for labour, safety improvements, probably have all had an impact in the interim."

That is also wildly interesting, because it goes to the heart of productivity. Sometime there are factors that genuinely hamper the ability of labour to push the envelope. Safety is a major consideration, in this half a single employee lost his life. Of course all (labour, the business and shareholders) will share the feeling that one death is one too many. Mining is a dangerous business.

Thanks so much, keep them coming, we always appreciate the feedback, a lot more than you would think! Oh, and it turns out that more than one of you thought I was wrong about Dublin and Rome, thinking that Dublin was a wonderful place. Phew. Individual preferences I guess!

MacMiss. Not a supersized miss, but a miss over the seas and far away might as well be any size. Supersize, downsize, less in size. The actual quarterly miss was 2 cents earnings, the currency translation was exactly 2 cents, but I would think that the analyst community knows well enough about the currency ebbs and flows of a multinational business like McDonald's. 69 million people are serviced in 34 thousand restaurants across 118 countries each and every day. And more than 80 percent of all the McDonald's globally are owned and managed by franchise owners. So essentially these folks are their own bosses, but of course have to pay royalties to the parent company or to the super franchise owner. As per the company profile on the McDonald's website 59 percent of the stores are conventional franchises, whilst 21 percent are licensed to "foreign affiliates or developmental licensees". The balance, one in five stores, are owned by the company.

Oh, and just recently the company announced that they had issued a developmental licence for Vietnam. That is right, around 40 years after the Americans were persona non grata in Vietnam, they are back with one of their most recognizable landmarks. What is also great about the business is that they are able to customize menus for specific territories. No two regions are the same. What sells in India would probably never sell in the USA. In India there is a McVeggie, the McSpicy Paneer burger, in Singapore there is a Teppanyaki Chicken McGrill and in France you can have a Petit McBaguette. So, it is a case of horses (no meat of that sort though) for courses.

But we are getting distracted, here is the release: McDonald's Reports Positive Second Quarter 2013 Results. US sales were only a percent better. Europe was a struggle, good performances in Russia and the UK offset weaker German and French sales. Across to Asia, Australia, China and Japan were all laggards, whilst other markets did better. In the region, which is the Middle East, Asia Pacific and Africa! That would include ourselves. Sales for both the six months and comparable quarter were only two percent better, earnings for the second quarter was 6 percent better at 138 cents per share, for the half EPS was only 5 percent better to 264 cents. Expect less than double that for the full year, and a little over 6 Dollars EPS for the year after that. I would be surprised if the dividend was notionally increased toward the end of the year, for the last quarter.

McDonald's paid their first dividend 37 years ago in June. It was 2.5 cents. Adjusted for stock splits that would have been 0.062 cents. Nowadays it is 77 cents. But the amazing thing is that it has risen each and every year since that first dividend. Unbroken. Notwithstanding the Asian debt crisis, the recent financial crisis, and all the other different moments of angst that you can think of along the way, the dividend has continued to tick higher. There were many, and surely there are many still to come. But the company has continued to reward their shareholders. Price action? Well, as per the McDonald's investor relations segment: "Since going public in 1965, McDonald's has executed twelve stock splits. In fact, an investment of $2,250 in 100 shares at that time has grown to 74,360 shares worth approximately $6.6 million as of market close on December 31, 2012."

Wow. That is huge. But it is not 1965. It is 2013, where people are more conscious about their waistlines and portion sizes. There are at the same time more of us now than ever before, and populations should continue to grow. And McDonald's will continue to tweak their menus to adjust to the changing tastes of society. Check out the original menu, which I found through a Google search: Early McDonald's menus.

Valuations? Is the stock expensive? Well, it sank around two and a half percent to 97.58 Dollars. On the assumptions that they are likely to make somewhere in the region of 6 Dollars next year and 5.60 dollars this year, the stock trades on a multiple of 17.4 times current years earnings, and 16.25 next years earnings. For slow growth rates, I would hardly argue that is cheap. The dividend is important though. With a current yield of 3.15 percent, and a forward yield in the region of 3.3 percent (assuming 80 cents) that should at least give the stock a very decent floor to work with in the medium term. So no great shakes with regards to the share price, as growth rates slow. If you own them, continue to do so, I would think that if the stock were to get anywhere near 90 dollars, that would represent a great opportunity. For the time being, hold.

Byron beats the streets

This morning we received 6 month results from Kumba Iron ore which were flat. That certainly does not paint the whole picture, there are lots of moving parts here. Headline earnings came in at R7.7bn for the period. This was the same as last year. However the drivers were different. The rand was on average 16% weaker which partially offset a 7% weaker average iron ore price. Overall revenue was up 4% even though sales volumes decreased 5% to 22.1 million tonnes (Mt).

This translated to headline earnings per share of R24.13 with the majority of that (R20.10) being paid out as a dividend. This is Anglo's cash cow and they are certainly milking it. Estimates are for R45 earnings for the full year. This is of course very hard to determine because both the iron ore price and the Rand have been extremely volatile. Using this forward estimate we have the stock trading on 10.5 times 2013 earnings and a dividend yield around 8%. That is an amazing yield.

Operationally we saw a 10% decline in production from Sishen to 16.1 Mt. This mine is still feeling the impact of the strike in the second half of last year. They took the opportunity to ramp up production, especially with waste stripping which may hamper margins slightly but will give the mine more flexibility. Kolomela has been a great success story as the ramp up starts to stabilise and fast reaching capacity. The mine produced 5.3Mt of iron ore, an increase of 62%. The mine now contributes 24% to overall production. That is very impressive for a mine that only started production less than 2 years ago.

And what do they think of the overall market? They explain the movements in the iron ore price for the first half of the year quite nicely. This is interesting.

"Global crude steel production increased by 3% to 787 Mt for the first half of 2013 (2012: 766 Mt), with Chinas record production of 385 Mt being 8% higher (2012: 356 Mt). However, faced with strong pressure on steel margins, Chinese steel mills reduced iron ore inventory levels and, as a result, demand for seaborne iron ore grew at a slower pace than crude steel production. Europe's ongoing struggle with austerity measures translated into a 4% decrease in production, with the rest of the world contributing the difference. The improvement in the outlook for the Japanese domestic auto industry has driven increased domestic crude steel production with anticipation of higher finished steel export volumes."

And looking ahead? Here is what they think of the iron ore market for the rest of the year.

"Steel fundamentals remain under pressure as the Chinese economy slows down, with manufacturing activity receding as a result of declining export orders. Iron ore prices are expected to remain under pressure as supply exceeds demand in the second half of the year, though restocking by steel mills may support prices in the near term."

I guess that explains why the stock is fairly cheap. And I agree, infrastructure spend does look like it's slowing in China. But China is not the be all and end all, the long term picture for infrastructure demand in India and many countries in Africa is still huge. The company rightfully state that their main objective is to satisfy domestic demand and focus on their own operations. This is the only South African mining company I would invest in for that juicy dividend and strong production from Kolomela while Sishen production stabilises. It will be a bumpy ride though as the Rand and Iron ore price fluctuates.

Home again, home again, jiggety-jog. Mr. Market is up and away this morning, around two thirds better. Apple earnings are post the market this evening, I see that some folks in recent months have lowered their expectations for the number of units sold across their product lines, fewer iPhones, iPads and Macs than previously thought. We shall see.

Sasha Naryshkine and Byron Lotter

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Thursday 18 July 2013

L'Oreal, are they worth it?

"New Markets are growing fast. Although it is already 39% of sales you can see that this is going to become more and more significant. Africa and the Middle East only contribute 3.6%. Wow that is nothing. I am told that people in Nigeria love their cosmetics, when they become wealthier and can afford the higher end brands of L'Oreal it will become a huge growth market for the company."

To market, to market to buy a fat pig. Markets roared and the bulls ran as if they were possessed, the Jozi all share index nearly scaling 41 thousand points for the first time in four weeks. We are around two and a half percent off the highs, 1000 points or so. Resources of course led the charge, BHP Billiton was up nearly three percent on the day after a better than anticipated production report, at least on the iron ore side that is. The yield is becoming more impressive on a forward basis, which I guess is good news for long suffering shareholders who were always feeling a little aggrieved that the company was not rewarding them for the risk that they were taking.

Over in the US, all the chatter is still around Ben Bernanke, tapering talk and in this case he was presenting a semi-annual report ahead of the House financial services committee. Check out the full prepared speech that includes the outlook: Semiannual Monetary Policy Report to the Congress. Of course the Fed will "watch it" like everyone else and will be data dependant like the rest of us. It is all rather tiresome that this is the main focus of smart people on the screens that I watch, trying to guess one way or another. It was Blondie right, who said: " One way or another, I'm gonna win ya', I'll get ya', I'll get ya'"

So rates are going to go up! If you want the summarised version, these guys at AEI have done a wonderful job: AEI's Fed watchers react to Bernanke's prepared testimony. UPDATE: Key takeaways. And then of course another take away: Bernanke Calms Treasuries After Taper Concern Drove Yield Surge. I ask you with tears in my eyes, how can a single person calm treasuries? How can anyone calm treasuries? Are treasuries some kind of a horse?

Discovery Limited, what happened there, the stock was up 6.63 percent to close out at an all time high of 92 ZAR a share? It is now the 25th biggest company by market capitalisation listed on our exchange. Bigger than AngloGold Ashanti. Yes, really! Interesting coincidence, Life Healthcare is nearly bigger than Gold Fields. New economy globally is trending towards healthcare, as people want to maintain a healthy lifestyle and of course in Discovery's Vitality program incentivising them to do so. For instance in my personal case, I am both a member of their medical scheme as well as having life insurance with Discovery. If you quite simply do a whole lot of tests (easy ones), you can get paybacks for the "health integrator" systems. Significantly more if you lead a healthier lifestyle, as you can see this is great for the company that you are sharing your personal medical details with them. If they can tell that you are healthy, they don't mind incentivising you and giving you rebates on all sorts of things.

OK, that is all rather *nice* to share that with you, but what happened to Discovery yesterday? Why did the price go up so much? A fairly simple announcement: AIA and Discovery announce new joint venture. And quite simply, as per the release: "AIA Group Limited ("AIA") and Discovery Limited ("Discovery") today announced a strategic joint venture to introduce Discovery's successful wellness-based life insurance model to the Asia-Pacific region."

First question, the world is a big place (sometimes), so who are AIA? As per their website: "The largest, independent listed pan-Asian life insurance group in the world." Wow. The company is listed in Hong Kong, you can obtain more information from the Google Finance profile: AIA Group Ltd. It is big. 413 billion Hong Kong Dollars. That is roughly 525 billion Rands. A 90 year old business that uses the payoff line "real life never stops". Quite, this is true!

It is a huge company in a fast growing market in a part of the world where the middle class is growing at a serious click, and this is a major score for Discovery. Innovative is a word that you continue to associate with Discovery, their management team looks like the Saturday morning crowd on the road. But when they meet at the Vida later on, they eat nothing and have a skinny cafe latte without the sugar!

Expensive. And then not so much anymore. Sometimes (almost always) you have to pay up for earnings, provided of course that they are quality in nature. There are some share prices that look perpetually expensive, but they always seem to deliver the earnings to back the share price appreciation. Woolworths is one such company.

The company released a sales update and a trading statement ahead of their results which are scheduled to be released on the 29th of August 2013. This is for the 53 weeks to end 30 June, the extra week does sometimes make a massive difference for retailers. Why would a week make a difference? Well, remember in the US that all the way through to the Friday after Thanksgiving Thursday (which is the third Thursday in November), retailers are "in the red". Black Friday was the day that the companies began to turn positive in their books, and the cream was all the way through to the end of the year. Retailing has never been and will never be an easy business.

But here it is: Trading update and Trading statement for Woolworths Holdings. Total stores sales increased 23.2 percent. And earnings? "We expect earnings per share ("EPS") and headline earnings per share ("HEPS") for the 53-week period to 30 June 2013 to be respectively 23-28% and 25-30% higher than the corresponding 52-week reporting period last year. The impact of the additional 53rd week has added approximately 2% to earnings."

So what to expect? Sales last year to June were 28.813 billion, so expect a sales number of around 35.5 billion Rand. And expect HEPS to register between 334 to 347 cents, with EPS around 331 to 344 cps. On the 75 percent payout ratio, the dividend for the full year should clock between 250 to 260 cents per share, but that seems too high. I would be more conservative and suggest that somewhere around 230 cents for the full year, 144 cents for the second half. So what does that mean?

Cheap/Expensive? On an earnings multiple at the top of the range the stock is trading at 18.9 times currently (price 6565 at present) and a dividend yield of around 3.7 percent. I think very fair for the growth rates, and the anticipated growth rates too. The growth rates forward I have for the next two years (as good as the analyst community can give me) are in the region of 17-18 percent for HEPS, and around the same for the dividend, means that your yield at current prices for 2014 dividend is around 4.3 percent. And at current valuations, this is as cheap as the stock has been over the last 18 months.

Byron beats the streets

On Tuesday evening we received a sales update from one of our favourite companies which fortunately for us has an ADR listing in New York. Its primary listing is in France and its two biggest shareholders are Nestle (29.3%) and the Bettencourt family (30.7%). Any guesses? I'm talking about L'Oreal.

Sales came in at 11.7bn Euros which was up 5.4% on a like for like basis. Highlights include further market share gains in Europe and North America and strong growth in emerging markets. This however came in below expectations which sent the share down 3% on the open. Then "investors" realised that people around the world do still want to look beautiful and that a little hiccup is not the end of the world. The share closed flat for the day.

I realise it is a lot to take in but below I hacked a table from the sales announcement which came from the L'Oreal website. It tells you what products they sell, where they are selling it and how fast sales are growing per region and per division. The difference between the 10,988 million Euro you see there and total sales is the individual operations, The Body Shop and Dermatology.

As you can see from the table, New Markets are growing fast. Although it is already 39% of sales you can see that this is going to become more and more significant. Africa and the Middle East only contribute 3.6%. Wow that is nothing. I am told that people in Nigeria love their cosmetics, when they become wealthier and can afford the higher end brands of L'Oreal it will become a huge growth market for the company.

L'Oreal remains one of our core aspirational consumer stocks. We will look closer at valuations and other details when the results come out in August. Another interesting story came to my attention via The WSJ after the release. In an article titled L'Oreal Breaks a Nail in the US the author Renee Schultes make an interesting point. Her words, better than mine.

"Of course, unlike its lipsticks, L'Oréal's shares don't come cheap. After this year's 22% rise, they trade at 23.1 times forecast 2014 earnings for just over 8% earnings growth, according to FactSet. That partly reflects hopes of a change in L'Oréal's shareholder structure, where Nestle holds a 29.3% stake. An agreement that gives the Bettencourt family the first option to buy Nestlé's L'Oréal stake expires in April 2014. If L'Oréal bought and then cancelled Nestlé's stake it would be 17% accretive to 2014 earnings per share, estimates Barclays."

It will be interesting see what happens there. Yes it may be a short term kicker if Nestle is bought out, the company has zero debt so this is certainly a possibility. But we are long term holders of this stock and if it happens then great but if it does not, we will not be too upset.

Home again, home again, jiggety-jog. The market has done better in the second half of the morning. Earnings tomorrow, we will look at IBM last evening and Google results tomorrow. Exciting!!

Sasha Naryshkine and Byron Lotter

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Wednesday 17 July 2013

BHP barrels ahead

"A few surprises, mostly with the iron ore division, and that is good, because the margins are great there. The stock is up in London and Johannesburg and was up *nicely* in Sydney. This is pretty pleasing, bearing in mind that some of the negatively perceived Chinese growth numbers. I mean, if you didn't believe the Chinese numbers, then companies like BHP Billiton would respond to the demand side by cutting back on production of base metals and ferrous metals, energy and metallurgical coal. Wouldn't they?"

To market, to market to buy a fat pig. Markets were lower globally for the first time in over a week, perhaps the short termers have Bernanke fatigue. It must be really, really tiring talking about the Fed, a Chinese slow down and European anxiety all the time, missing the most important part of the market, earnings. And that we are in full swing now, with second quarter results from the US, and locally we are on the cusp of June half and full year numbers. The real meaty part of the market, what is actually happening with the companies underlying the index. So forget the index levels, remember the levels of your businesses that you own. You own businesses, part thereof, and the people who run the businesses are accountable to all stakeholders, including yourself.

Back to the market levels, resources actually registered a slight gain on the day, industrials took some pain, perhaps the firming Rand had something to do with that! In amongst retailers there was some pain, as Shoprite released a trading update that did not quite sit with the markets lofty expectations. Africa's largest food retailer released a trading update for the 12 months to end June. Group turnover of 12.1 percent to 92.7 billion Rand was just not quite good enough.

To the north outside of our borders the company still continues to grow at a breakneck speed, up 27.9 percent in ZAR and 21.2 percent in local currencies. But, with only 153 stores outside of the borders out of 1800 stores plus in total, it is unfortunately not significant enough yet. But, that is why folks out there are prepared to pay 26 times earnings for Shoprite. The stock was down 4.8 percent yesterday, this really disappointed Mr. Market. Holders of Shoprite are going to have to roll with the punches over the coming years and decade as they expand quickly and aggressively. Expensive today, not so much in half a decade is my overwhelming feeling.

And to think that Christo Wiese and Brait tried to buy the company and take it private in 2006 for 13.2 billion Rand. Current market cap, notwithstanding the price under pressure yesterday, 103.8 billion. A whole 90 billion more!!! Granted that the collective market would afford a higher valuation to a business like Shoprite, rather than a selective subset of investors in an unlisted environment, but wow, that would have been a coup and score for Weise and Brait.

But Wiese is still doing alright, he owns 16.54 percent of the business. Or more accurately, as per the last annual report, 95 649 698 shares of Shoprite. And to think that Shoprite paid 303 cents worth of dividends last year, who do you think gets a bigger dividend in South Africa? I can think of a few, Vodafone from their 65 percent holding in Vodacom, Anglo American from their 69.7 percent holding in Kumba Iron Ore, the GEPF from their 12.7 percent holding in Sasol. As an individual/trust, Weise must have the biggest dividend cheque in South Africa. By my math (before dividend tax), he netted 289.8 million ZAR last year. Or maybe it is M1 Limited who own 183 152 564 MTN shares. But there are 8 holders there, amongst them the Mikati family interests. Too hard!

Shoprite is now the biggest listed retailer on the exchange, in 14th place overall. If you take away the secondary listings, then it is the 8th biggest South African company by market cap. And I suppose having failed to take the company off the market at 26 Rand a share (currently 180 ZAR a share), and having proceeded with expansion plans since then, he has made himself fabulously wealthy! And the other 5000 odd shareholders. That is right sports lovers, that is about all that there is, in terms of owners of this company.

Over the sea and far away (geographically we are really far away from everywhere) in New York, the market trended lower for the first time in over a week and a half. There were results from Coca-Cola, the stock met expectations, but I guess Wall Street is always looking for a beat. Economic weakness in the developed world and China, plus unseasonably wetter weather in those geographies too were to blame. And of course another interesting line: "shifting consumer tastes" in the US. That short piece is actually in the forward looking statements segment. Gosh, why can't people just suck it up. Trust the company and the people involved, make up your own minds. You do know that Coca-Cola sells ready to drink coffees? Plus also vitamin waters. Not a stock that we recommend, and we prefer the consumer swaying towards coffee beverages, and a push back against obesity from civil society. Peak obesity? Maybe for the developed world.

I couldn't sleep last night. No, not true, I slept well, it is a by product of boarding school, being able to sleep anywhere and at the drop of a hat. The reason why I wouldn't have slept, if I had sleeping problems, would have been that BHP Billiton released their full year production report this morning.

Annual records were set across seven operations and in five commodities. The Western Australia Force might be an average team, but BHP Billiton's Iron Ore outfit is powerful. The last quarter produced an annualised rate of 217 million tonnes, the actual output across their iron ore division was 17 percent higher than the year before at a whisker under 170 million tonnes.

47.6 million tonnes produced for the quarter. Just a little bit of perspective, when Kumba Iron Ore reported their quarterly production back in April, they had managed to produce 10.3 million tonnes. This one division of BHP Billiton, primarily located in Western Australia (there is also a JV with Vale in Brazil that produces around 12-15 percent of their total iron ore production.) Most of the iron ore is shipped out from the Pilbara to Port Headland, a port that has more than doubled their capacity in the last 6 odd years.

The petroleum division which produced nearly 236 million barrels of oil equivalent, which was probably the only major miss in the numbers as a whole, in terms of guidance given in the past. I can promise you that we lose very little sleep over a 1.5 percent miss in terms of guidance versus actual. Still, a six percent increase is more than acceptable. Eagle Ford is now their biggest producing field, having brought online more than 100 wells during the last quarter. Expect big things from these assets, even though of course the timing was not altogether "right".

Copper production was higher by 10 percent, thanks to better grades at their flagship mine, Escondida. I am not too sure about you, but I would not really want to live up there in the Atacama Desert, the temperature plummets at night, and is sky high during the day. And it never rains. A study suggested that some river beds have been dry for 120 thousand years. Mars is wetter. More iron ore on Mars. Good performance from the base metals division, the lead division aside, which was like a lead balloon, down 11 percent. I have never quite understood that saying, like a lead balloon. You can't fill a lead sphere with helium and expect it to float. Coal, both Metallurgical coal with an increase of 13 percent and energy coal (lower grade) of 3 percent registered decent enough gains.

There you go. A few surprises, mostly with the iron ore division, and that is good, because the margins are great there. The stock is up in London and Johannesburg and was up *nicely* in Sydney. This is pretty pleasing, bearing in mind that some of the negatively perceived Chinese growth numbers. I mean, if you didn't believe the Chinese numbers, then companies like BHP Billiton would respond to the demand side by cutting back on production of base metals and ferrous metals, energy and metallurgical coal. Wouldn't they? They would cease their 18 major brownfield projects that are coming online by the end of 2015. Five of those are petroleum, five are iron ore projects and four are metallurgical coal projects. I am guessing that they still see major steel demand. Next stop, results shortly, 20 August. Just over a month.

Byron beats the streets

Yesterday evening we received results from our favoured healthcare stock in New York, Johnson and Johnson. It was a healthy beat but let's look at that later, I want to first look at what the share price has done over the last year. In this low interest environment stocks like JNJ with high dividend yields have naturally done very well. So far the stock is up 29% this year. Of course that is not only because it has a strong dividend, the company has shown good growth. The company was flat for the second half of last year so the stock is only up 32% in a full year. You see patience does pay.

Earnings for the second quarter came in at $1.48, expectations were for $1.39. Revenues also beat which is a good sign, $17.88bn of sales versus estimates of $17.71bn. Guidance from management for the full year was raised to $5.47. This is expected to grow to $5.77 in 2014. Trading at 15.6 times 2014 earnings ($90) I wouldn't call that cheap or expensive.

This business is divided into three divisions, let's look at how each one has done over the period.

Pharmaceutical. This division was top of the class growing sales by 11.7% as new blockbuster products enter the pipeline. This can be quite volatile as some products become flyers and others taper off to cheaper competition. This division compromises 39% of sales. To go through the actual details of the products you need a chemistry degree so let's leave it at that.

Medical Devices and Diagnostics. Sales grew 9.6% versus the prior year, mostly on the back of the Synthes acquisition. Without the acquisition, sales were just above flat. The products that did well in the division were from the cardiovascular care division, disposable contact lenses and specialty surgery, just to give you an idea of where people are spending, whether forced or elective. This division compromises 40% of sales.

Consumer. Sales grew 1.1% which is encouraging because this is a division that has slowed somewhat in prior quarters. International sales of Listerine Mouthwash, baby care products and Women sanitary protection were the big drivers. This division compromises the rest of the sales, 19%.

Geographically the company is growing its diversification nicely. The US is now less than half of sales, contributing just less than 44.5%. As you can imagine as populations grow and people get more wealthy, JNJ products will be consumed more and more. These people will inevitably get older and will be even more reliant on JNJ products. It is a great developing market story while still relying on developed markets for its stable sales growth. People are certainly getting older in those countries.

We also like it because of its diversity. A business that is purely a drug maker can be very volatile depending on its pipeline. Having said that the business also poses as a potential value unlock if it were to split up its division which will benefit shareholders in the short term. We continue to add at these levels.

Home again, home again, jiggety-jog. Resources leading us higher here today, good news and no guesses who is at the front of the charge there. Results galore, L'Oreal tomorrow, we will cover those. And an announcement from Discovery.

Sasha Naryshkine and Byron Lotter

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Tuesday 16 July 2013

Naspers cash pot

"The net proceeds will be used for general corporate purposes, including future acquisitions and the repayment of certain amounts outstanding under the Naspers group's revolving credit facilities."

To market, to market to buy a fat pig. It is not often that this happens, when you get a day that the bourse (when we close) basically registers a flat line. Well, not exactly, five and one quarter points better, or 0.01 percent. Unfortunately the gold miners sold off, nearly one and two thirds of a percent. The wage negotiations between the industry and the unions are ongoing, the gold miners put their best foot forward and offered a four percent wage increase and a benefit increase too, but it is literally a universe apart from what was put forward by some unions. NUM said this was an insult. More on the gold miners in a second!!

Over in Europe markets were pretty decent, the French were celebrating Bastille Day (the roll over to Monday from Sunday) and again the visuals from Europe's second biggest economy suggested that they were not finished. No potholes. No people in rags on the side of the road. No buildings going to ruin. Rather some pretty good looking aged buildings in the beautiful countryside. A lovely advert for France each and every year, the Tour de France, the 100th such event. On the other side of the Atlantic, stocks ended the day better than where they started, despite worse than anticipated retail sales. Check: A Slower Rate Of Growth For Retail Sales In June, But The Annual Pace Rises.

But hey, I stumbled across this piece: Irrational Exuberance Again? (excerpt), which suggests that based on collective S&P 500 earnings of 117.3 Dollars for 2014, the forward multiple is just a little over 14.3 times. Hardly expensive, it was maybe just too cheap at the beginning of the year. Another closing high for the S&P 500 tells you that this is the case, the collective think so too. 8 in a row!

As expected, we are going to start to see some of the trading updates of the Anglo stable companies, this first one was from Amplats yesterday. The release says that "Headline earnings per share ("HEPS") for the period is expected to increase to between 480 cents and 535 cents from 273 cents reported for the six months ended 30 June 2012." Sounds a lot better. Due to what? Well, the weaker Rand did benefit them, but there were also higher sales volumes which sounds encouraging. Results expected Monday next week. We will do a detailed write up then.

An ex Anglo company that still shares the name to some extent, but not the shareholder, AngloGold Ashanti announced yesterday alongside their results that they would look to "sharpen (their) focus on efficiency and to tighten up on costs, overheads and capital." And what that means is lower production guidance for the year, but pleasing to note that cash costs are in-line with expectations. Lower yield mines would attract less capital expenditure, that would be deferred to their higher quality production. Next quarterly results when we can expect more information is the 7th of August.

Byron beats the streets

On Friday Naspers announced a successful bond issuance of some significance. They managed to raise $750m 6% notes due by 2020. This compared to a similar raising done by the company in 2010 of $700m at 6.375%. A lot has changed since then, the company has grown a lot but interest rates have also increased significantly in recent weeks, especially for emerging markets. According to Bloomberg this is Africa's first overseas corporate bond sale in two months following a massive pullback on emerging market funding. You see how quickly money can talk.

What I find interesting is the sheer size and scale of the bond raising. $750m or R7.5bn is equivalent to the annual profits made from the paid TV business. The cash from that business is what they usually use to fund acquisitions. According to the balance sheet of their latest results, cash and cash equivalents sits at R15.8bn. Balance sheet gearing only sits at 12% so there is plenty room to raise some cash and probably why they got such a competitive rate.

But why are they raising this money? Here is what the announcement had to say: "The net proceeds will be used for general corporate purposes, including future acquisitions and the repayment of certain amounts outstanding under the Naspers group's revolving credit facilities."

It is pretty vague. Companies roll over debt because they feel their cash reserves can be put into better use elsewhere. This means that Naspers have lots of opportunities in the pipeline and as a shareholder this is good news. The company is taking advantage of the low interest environment so that they can grasp any opportunity that presents itself with both hands.

And we are well aware that the company is acquiring with a big focus on ecommerce in developing markets. It is certainly the way of the future. People are busier than ever before. Shopping online saves you time and money. Just the thought of having to park at Sandton City makes shopping online worth every cent. I am sure that parking in Turkey or India is even worse. It is simple and efficient and once people develop trust in the system, I think it will fly. Anyways who are we, or anyone else to question what Koos Bekker thinks the future of technology will be.

As big holders of the stock we welcome this news and wait with anticipation to hear what and where the next acquisition will be.

Jules Verne.

It has been exactly a year yesterday since GANGNAM STYLE was released by PSY. As I was doing this piece, the video had 1,743,631,346 hits. The most watched YouTube video of all time is not in English (the most spoken first and second language worldwide), it is not mandarin, which is the world's largest first language at roughly 12.5 percent of the globes population. But rather Gangnam style is in a language that is spoken by only 76 million people (as a first language), 1.14 percent of the globes population. And you can bet that the vast majority of the 24.5 million people in North Korea have not seen the YouTube clip, because of the oppressive regime that means a lack of internet connectivity. And an oppressive regime, oh, we said that. I bet that the folks would rather have freedom than the internet.

Google bought YouTube in late 2006 for 1.65 billion Dollars, not long after the company was founded on Valentines day in 2005. I went onto the YouTube website to get an idea of views/hits/uploads. Amazing, check it out: Statistics. The factoid that blew me away was: "Over 6 billion hours of video are watched each month on YouTube, that's almost an hour for every person on Earth, and 50% more than last year" More interesting is that in the Google first quarter results there is not a single mention of the word YouTube. Because it probably still costs them a lot (a huge amount) and probably does not make them that much. Yet. Results on the 18th of July, two days time. I can tell you that I am pumped for them!!

Staying with that theme of search, interwebs, download the Rimm-Kaufman Group Digital Marketing Report for the second quarter. You probably will have to give them a little information, but hey, who is anonymous anymore? Want that? Move to the Mosquito coast!! I have no idea why that bigot had such an impact on me in that book. Some interesting "stuff" in there.

"Stuff" that I picked out: "In Q2, 58% of visits from social sites were generated by Facebook." AND, this takes a couple of reads to sink in: "Although the iPad saw its share of tablet traffic slip from Q4 to Q1, it has held steady since then, generating 85% of tablet clicks." And then lastly: "Google commanded 80% of search spend and 81% of search clicks in Q2 as Bing Ads continued to chip away at both metrics." Bing, too little too late? I see that Microsoft is rated a sell by a couple of investment houses whilst Apple, Google and Facebook are mostly buys. All fun.....

In recent months I have been hearing this theory. And it was bound to happen. After 15 years of higher than anticipated oil prices the price has levelled off over the last half a decade. Here was an interesting article from the BuzzFeed business segment: Here's Why "Peak Oil" Peaked. Peak supply is what everyone is talking about. And the reason why is that humans are becoming far more efficient than ever before. True story. I am however the furthest thing from a petrolhead. I have watched maybe two whole episodes of Top Gear in my life. A motor vehicle gets me from home to work and back. And all the other driving in-between. Free piston Stirling engine, bring it on!! But to get to the core of that argument, is this peak oil production? Will efficiencies trump longer term demand, because of the price of a barrel of oil? Possibly. Time will tell.

This is not a widely held view, but it should be: Wal-Mart deserves the 2013 Nobel peace prize for improving the lives of millions of low-income consumers globally. OK, perhaps not the Nobel peace prize, I would give that to "the internet" if there was such a recipient. But lower prices equals more spending power and lower inflation, which translates to higher standards of living. Labour might view the company as exploitive, but without the business consumers (the majority of us) would be all the poorer, both literally and figuratively. The largest company by sales globally, but not the most valuable, that tells you that retail is a tough old trade!!!

Home again, home again, jiggety-jog. Sis. European motor vehicle sales released this morning are terrible. Signs were there a couple of months ago that we had bottomed. False bottom? What does that even mean? No bottoms today, stocks are lower to start with!

Sasha Naryshkine and Byron Lotter

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