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
Follow Sasha and Byron on Twitter
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