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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