Money with a dash of Funny: Snap

Showing posts with label Snap. Show all posts

Tuesday, 7 March 2017

SNAP, cracking and POP

"The metrics are there, hyperactive and FOMO millennial types making sure that their mates are watching and liking. Who on average check the app 19 times a day, or over once an hour in a normal waking day. Nobody controls the content that people search for, it is the collective that do the searching. Snap is quite simply about visuals, photos and videos. I read yesterday that YouTube has ten times the watched videos over Facebook on a daily basis, we don't think of Google/Alphabet as a videos/movies company though."

To market to market to buy a fat pig Resources, aka materials, took a bit of a pasting yesterday, the stocks as a collective were down over one and three-quarters of a percent here in Jozi. Kumba, Amplats, Glencore and Anglo, all down three percent and more on the day. Was it the Chinese lack of detail or focus on a lower growth rate that was to blame? Perhaps. South32 was ironically at the other end of the spectrum, the best mover and shaker in the ALSI 40, up nearly two and a half percent. There are many times that something happens that you cannot explain. Vodacom and Shoprite made up the other two "winners".

There were a few sets of results on the local front, AVI, the owner of the brands like Freshpak Rooibos and Five Roses Tea (and the fifth one is for you, remember that cheesy ad?), Bakers biscuits and I&J, as well as Spitz and Green Cross shoes, reported numbers that looked about spot on. Growth in snacks and less so in shoes, it makes sense in relation to where we are in the economic cycle. The stock is trading at about their all time high, as is competitor and the one we mostly own, Tiger Brands.

Is AVI cheap? No, not screaming cheap. There is a decent dividend underpin there though, that may always keep the stock at a certain level. I am wondering what companies are likely to do in a higher dividend tax environment, would the shareholders encourage them to hold onto more of the cash, look for deals that make sense? We shall see, the only company to mutter anything of that sort I think was Sibanye. In the end the stock fell by around one-third, less than the market which was off by just over four-tenths of a percent.

Across the oceans and seas, stocks tried hard to gain back the lost ground, after an iffy start, in the end falling flat and short. The Dow Jones lost one-quarter of a percent by the close, the broader market S&P 500 was down by one-third of a percent and the nerds of the NASDAQ were down a little more than that. I did note a few headlines that suggested that Snap Inc. was a "sell" and it was the first day that the stock was down. Sure, they have only had three trading days so far, give the stockholders and company a break.

Talking break, is the crackle after the snap going to end with a pop? Time will tell, when we compared to relative market caps, profitability and revenues, they looked "light". In the end, it is not for Evan Spiegel and his team to worry about being worth double Oprah (at the ripe old age of 26), or whether Snap is three times the market cap of Twitter, it is his job to stick the business on an even keel. At this cash burn rate they will be all out in the next few years. So the team needs growth, rapid growth, and they need the advertisers to come flocking.

The metrics are there, hyperactive and FOMO millennial types making sure that their mates are watching and liking. Who on average check the app 19 times a day, or over once an hour in a normal waking day. Nobody controls the content that people search for, it is the collective that do the searching. Snap is quite simply about visuals, photos and videos. I read yesterday that YouTube has ten times the watched videos over Facebook on a daily basis, we don't think of Google/Alphabet as a videos/movies company though. Snap is a form of entertainment, to get your mates news and gossip (and real news). As well as to post weird and wonderful filters and lenses, vomiting rainbows, flower crowns to friend face swaps. There are risks to this business, for sure, as they say in the prospectus:

"If we do not develop successful new products or improve existing ones, our business will suffer. We also invest in new lines of business that could fail to attract or retain users or generate revenue. Our business is highly competitive. We face significant competition that we anticipate will continue to intensify. If we are not able to maintain or improve our market share, our business could suffer. We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability."

I suspect that the share price could come under heavy pressure if the selling started on cue, at this point the naysayers are getting louder. I think you just have to know that you own a business that is an advertising platform, and if the advertisers decide that another platform is better, then your product better evolve. For the time being I can see that Instagram have taken the competition very seriously, their product is evolving to keep pace. The hardware is in some cases making this "next level". If people get bored with the entertainment platform (user fatigue), that would be a big problem. For now, Facebook and their 1.86 billion users are having a great time sharing pictures, statuses and videos en masse. In this space we continue to own Facebook as a primary investment. Alphabet and Apple are of course beneficiaries of all these platforms.

Company corner

Luxottica, the eyewear manufacturer, designer and distributor reported results last week. The business is made up of a few parts, the retail outlets you would know well as a customer, the Sunglass Hut, you would also be familiar with their brands if you bought online or at another outlet, Ray-Ban and Oakley, as well as Persol and a couple of others. You might also have worn one of the many licensed eyewear products that they manufacture for many luxury brands, here is a list of some of the brands you can buy at their outlets: Giorgio Armani, Burberry, Bulgari, Chanel, Dolce&Gabbana, Michael Kors, Prada, Ralph Lauren, Tiffany & Co., Versace and Valentino.

There is also another part to the company, their LensCrafters business where they are a global leader in prescription eyewear. There is always an irony for me, as a previous wearer of spectacles (and no doubt future wearer of spectacles), that someone with prescription eyewear is a "four-eyes and a nerd", yet someone with sunnies (essentially the same thing), is cool and hip and with it. How does that work? The mysteries of humanity, sheep thinking and what is cool and not. All I know is that the sunnies protect your eyes against the glare and that spectacles help you see better. As simple as that, they are both helpful.

Sales for the 2016 financial year topped 10 billion Dollars, 10.056 to be more precise, an increase of 2.6 percent on the prior financial year. In Euro terms, sales grew a little over 2.8 percent. Basic earnings per share in Dollars (all that we care about) clocked 1.96 Dollars, an increase of 5.6 percent. The dividend is 50 percent of earnings, and as ADR shareholders, one will get the annual dividend on the last day of May, the equivalent of 92 Euro cents per share, less Italian dividend withholding tax. At nearly 52 Dollars a share, the stock trades on over 26 times earnings. And you and I can plainly see that the growth rates have definitely slowed. Added to that, Italian dividend withholding tax is 26 percent, so the yield pre tax at 1.88 percent is hardly a "steal".

The 2017 outlook is for low to middle single digit sales growth, most of the other metrics "staying the same". The stock reacted negatively, as you can understand. On what is a pretty demanding multiple, the year forward represents few opportunities for shareholders. There is something very different going on in the background, there is a deal pending with a French competitor of a similar size and scale, we wrote about this - Essilor & Luxottica to merge. We are currently not adding to this stock, we are awaiting the outcome of the deal and will assess post that. For the time being, we see little growth here, yet at the same time this is a growth industry.

Linkfest, lap it up

Imitation is the sincerest form of flattery but what happens when the imitator becomes the leader? (China's Twitter clone will soon have more users than Twitter) If you had invested in Weibo when it listed in 2014, you would be up 145% now, Twitter on the other hand you are down 62%.

As Naspers shareholders, we all know how great the Tencent investment has been. Here is how it stacks up against other Tech investments - The Startup Investments That Really Paid Off

You will find more statistics at Statista

What?! Not checking email daily is why people get inboxes with 300 unread emails, many are just spam but some are important ones. As smartphones become more prevalent that 18% number should decline - How Often Do You Check Your Inbox?

You will find more statistics at Statista

Home again, home again, jiggety-jog. Stocks have started mixed here again, it has been tough out there, company cash pots are growing and they are less inclined to invest whilst politically, it looks a little "jaded" and growth rates are very low. Meanwhile, Trump policies are less than clear for the time being, Mr. Market awaits some action. Soon. It may well only be coming in the next few months, although healthcare reforms seem to be coming.

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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Friday, 3 March 2017

Fed Hawks fly

"If consumer confidence is at a 15 year high, then perhaps it is time for the Fed to raise rates and make credit a little more expensive. To take away the proverbial punchbowl before the disco gets out of control."

To market to market to buy a fat pig There is a saying that my late mother used to tell me, she said that there was a Japanese saying that said "tomorrow never comes". Meaning that when you wake up today, it is still tomorrow. I suspect in many languages there are similar sayings, including, why wait for tomorrow to do what you can do today? Markets are always wanting more, wanting some action today, clarity on this and that. Whereas in reality, there are many processes that evolve very slowly.

Including rates and the Fed. I am sure that I have told you this many times, it is always worth sharing. There is a book called It Was a Very Good Year: Extraordinary Moments in Stock Market History. It covers equity market rallies through the ages and deals with the events leading up to those great years. Those years when you have to be invested in equity markets. Those years that you HAVE to just take part in equity markets.

There is a theory around here that as long term investors that you always have to be in the markets. Like ..... always. Nobody knows what will happen next, it is best just to own companies and stay the course. If you have a pattern recognition model on markets, know that no two times are the same, and it is best left to back testing to be 20/20. Tomorrow, we don't know what is likely to happen. Another important part of our job is to act as shock absorbers when markets are tough. And make no mistake, markets have been very tough locally. Quality businesses being buffered in some parts by a very stodgy local economy and a stronger Rand not helping offshore sales at all. Same companies, different environment.

In a phone call yesterday to a client that has been around the block multiple times, we agreed that in times of weakness, companies set themselves up for strength when the tide turns. i.e. Cost cutting and making sure that when top line expansion finally arrives (it almost always does), then you have done all the hard work, margin expansion leads to much higher profits. In-between now and then however, one has to "constructive". And often the best thing to do is to do nothing as a shareholder.

Second point about the book above, the Fed is always spoken about. At length. The Fed this and the Fed that. Punchbowl, this and that. Angst over when rates are going up, excitement when rates come down. Is there anything you can really do about the Fed and their interest rate policies? Like the weather, this is beyond your control. Can you time in and out for the cycles? Perhaps, possibly too hard to do consistently. If consumer confidence is at a 15 year high, then perhaps it is time for the Fed to raise rates and make credit a little more expensive. To take away the proverbial punchbowl before the disco gets out of control. As ever, this is noise in the bigger picture. One looks back in five years time when the rate cycle may have returned to something resembling a "normal" pattern, and rates may be on their way back down.

Quick scoreboard check, seeing as there is plenty to do, at session end the Dow Jones had given up just over half a percent, the broader market S&P 500 had basic materials weigh heavy (down over two percent), whilst the nerds of NASDAQ sank nearly three-quarters of a percent. A pause in the rally and it looks like futures are lower. The biggest news of the day was undoubtably the Snap listing, shares ended up 44 percent on the day, round about where the first trade was. In other words, having IPO'ed at 17, the first trade was more or less that level higher.

I suspect, having watched the process at arms length, that the company may have eked out a little more (and felt the price was too low), it is no used crying over what may, or may not have happened. First piece of Snap - Snap Inc. Announces Pricing of Initial Public Offering. Second piece of Snap, 44 percent higher. And as somebody else pointed out, Snap is already worth 2.5 Twitters.

As Twitter pointed out, SpaceX has a market cap of 12 billion Dollars. And lands successfully (after taking off), the most important of the rocket again. It costs 70 million Dollars. The rest of the quote that explains what Snapchat is, goes like this "20 billion Dollar valuation: Rainbow filters." In the end, both companies will be valued on their future profitability and ability to create value for shareholder, existing and exiting and future. The holders, the sellers and the buyers. Am I going to buy Snap any time soon? Nope, I don't think so. First Friday of the month normally signals non-farm payrolls, this one happens to fall too close to the last day of the prior month, so your hyperactive trigger finger is going to have to wait for next week, capiche?

Back home, in Jozi, Jozi, it was a mixed bag, financials rocked, up nearly a percent and a half, courtesy of some better than anticipated results from Standard Bank. That stock flew off the shelves, up over six and a half percent by the close. Nedbank also touched a 12 month high. Both stocks were joined by MTN, which had results that obviously beat expectations. At one stage MTN was up over ten percent, tailing off at the end of the session, still up 8.32 percent by the close. We will have a look at those numbers below. The quarterly update from Steinhoff was obviously dimly viewed by the markets, I did not think that it was that bad at all. Mr. Market sent the stock down nearly 4 percent by the close. Also faring poorly, on what I thought was "ok", was Aspen, down just over two percent.

There was quite a lot of other stuff going on too, the biggest brewer in the world had some average numbers, AB InBev sank over two percent. Brazil, it is still going pretty tough there. That looks in the end like a place that certainly can deliver the goods, it ticks all the Mark Mobius boxes. The generic ones, you know, young population, working off a low base, plenty of natural resources, hard working and so on.

Read this recent piece from a fellow that has now slowed down on the investments front (Mobius), at least from the perspective of full time employment - A Travel Transformation in Emerging Markets. I like Mobius, he is a cheerful soul with lots of optimism. You got to love that. So Brazil will be fine too in the end (as will China), whether or not beer volumes can grow a vast amount (how much can more people consume?) remains to be seen. In the end, stocks as a collective had managed a four-tenths of a percent.

Company corner

MTN had results yesterday. I guess the share price reaction tells you a lot about what the market thought, the stock definitely outpaced expectations, if you think that is important. It is at some level. The stock has disappointed bitterly after a period of sublime growth through the last decade, adding tons of customers and making sure that they were building out a continental champion, a brand that is well recognised alongside other multinationals, such as Coke. They are really that big in some territories. Michael is not a fan of MTN investor relations. I can see why, the presentation is still not up, the one from yesterday. That is, how should we say ..... not good. I sent a tweet to the MTNGroup handle, awaiting a reply.

So we shall have to do with the sheets and the emails, rather than the glossies. So here are the highlights and lowlights of the year. Revenues were flat, voice traffic fell (down 1,7 percent) whilst data traffic (up 143 percent) continues to become a much bigger part of overall revenues, 39.5 billion out of 146.9 billion Rand. The company managed to repatriate 6.3 billion Rand from Iran, which as they point out is "the entire amount due under the loan advanced for the licence fee in 2005." Group Capex was an astonishing 34.9 billion Rand, around 11 billion Rand spent here. Consumers are always demanding better services from their networks, this is a rather large amount to continually spend.

The reason for the positive reaction is simple. Last year, as they point out, was the worst in their 22 year history. Politics, economic factors beyond their control, and of course the big fine in Nigeria, as well as interruptions in that territory (which they refer to as material regulatory factors). Things in Nigeria have improved in the last quarter. I wonder what this recent bout of xenophobic attacks are likely to have on their business, it is one of the unknowns. I see that Nigeria are sending, or looking to send a delegation, to South Africa, that may include the foreign minister. This is a good thing to ease the tensions, incorrect rhetoric to the foreign community is not helpful for anyone. It is no different to Trump acting against others. No different.

The company took a 31 percent hit in EBITDA as a result of the Nigerian fine, fees associated with that fine, MTN Zakhele Futhi share-based payment expense, the writing off of a large portion of their South Sudan business (as a result of civil war). The fine itself had a 500 cent impact on HEPS. There was another 329 cents in forex loses. There were several other "issues" which lead to a 77 cent loss in basic headline earnings per share. Notwithstanding the accounting (and other real) losses, the group managed to declare a 450 cent dividend, bringing the total dividend to the year at 7 Rand. After tax of 20 percent (now), that equates to a four and a half percent yield. After tax. Vodacom, on the same basis have a historic yield of 4.3 percent post tax. Telkom is less than half of that. That is the simple reason the stock surged, IMO.

Another simple question, is the thesis still intact? Forget the oil price and regulatory issues, past, present or even future. The company has spent, and will spend a total of 100 billion Rand in infrastructure development over the last two and present financial year. Roughly one-third here in South Africa. Telkom has a market cap of 35 billion Rand, MTN will invest that in around three years in South Africa. Nigeria. That was supposed to be a country with great commodity wealth with a young and dynamic population. That part still exists.

In fact, I saw the Dangote Cement results the other day, the company operates in ten countries across the continent, including Nigeria as their home base. Dangote Cement reported cement volumes in Nigeria that were 11.1 percent higher than the prior year, raising their market share at the same time. Sales in the second half of the year were weaker than the year prior. The annual results also suggest that the countries economy contracted by 1.7 percent, according to the world bank.

Why is this at all important? If cement sales are a pointer to fixed capital formation increasing markedly, that indicates that at least the consumer is feeling a whole lot better than government finances, which are reliant on oil revenues, one should view this as a positive for all businesses operating in this territory. It is no secret that the current political dispensation in Nigeria, which was elected on a ticket of fighting corruption and growing the economy may have disappointed. Equally, in another of their territories that is key to growth, Iran, the weak relationship with the US is more than a little unsettling. There, in Iran, the economy has recovered smartly, as a result of capturing the higher oil prices.

MTN will be key in the data revolution across the continent, being able to deliver content to hungry customers with hungrier handsets. Music, movies, gaming and other sorts of entertainment, as we have seen in China and other countries and territories that have emerged from "developing" status, take on higher consumption. A phone and data is a form of freedom. Freedoms for watching, listening and learning. Whilst the numbers have been disappointing, the new management team inherit a structurally wobbly house in a good location. We continue to hold, we like the recent momentum with the existing business and continue to hold, the next year is certainly going to be one of rebuilding and continued infrastructure spend.

Linkfest, lap it up

There has been a little bit of a stink about ticket prices and the Soweto derby, tomorrow. See -> Kaizer Chiefs defend Soweto derby ticket prize hike. Surely it is about simple economics? 70 Rand might mean a lot or a little for tickets to watch the biggest derby in these parts. For the record, an El Classico ticket (between Barca and Real Madrid) costs close to 6500 to 7000 Rand (I checked myself on Viagogo). That is around 100 times more, to watch Messi and Ronaldo. Spain PPP Dollars = 32 thousand per annum. South Africa? Around 22 percent of Spain. What are your thoughts?

The big argument against high taxes and a big government is that the government is inefficient in operating and in the allocation of resources. Denmark is looking to cut their eye watering high 60.2% income tax - Welfare Icon Now Wants People to Take Care of Themselves

There are very few people, that when they talk the financial community listens. Howard Marks is one of those people and he also writes regular letters to his investors, just like Buffett - Howard Marks on What Matters Most

This dovetails nicely with our piece about communism from yesterday - Don't demonise capitalism - it's making the world a better place. This article, that suffers from Afropessimism, makes the point that since 1960, the gap has widened between the free market system in the USA and Sub Saharan Africa. They (the US) did have a twenty mile head-start though. It can be said that capitalism is still a superior system for populations.

How badly damaged have the banks been since the financial crisis? Some would argue not enough. This number looks like a giant pile to me, shareholders of banks have had to pick up the tab. From Bloomberg - World's Biggest Banks Fined $321 Billion Since Financial Crisis.

Home again, home again, jiggety-jog. Iron ore prices are all fall tumbling down. The global rally seems to have run into a few obstacles, it was bound to happen at some level. Onwards sportslovers!

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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