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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