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
Follow Sasha and Byron on Twitter
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