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
Follow Sasha and Byron on Twitter
011 022 5440
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