Thursday, 31 July 2014

Charts today - US economic growth, telecoms, ebola, UK confidence

Charts today starts with some text...on the ins/out of US economic growth.  This from a report in The Financial Times

'Growth easily beat expectations of 3.1 per cent, with the strength of the rebound demonstrating
that the world’s largest economy is picking up speed, and robust jobs data in recent months were not a fluke.

The second-quarter strength comes after a dismal 2.9 per cent annualised fall in the first quarter – which was revised to a 2.1 per cent decline with this release. The rebound confirms there was no fundamental weakness in the first quarter.

Alongside the second-quarter growth numbers, the Bureau of Economic Analysis also published wide-ranging revisions to data for the past three years. This year’s changes were relatively modest but suggest the
recovery was weaker than previously thought. The average growth rate for the years from 2011 to 2013 was revised down from 2.2 per cent to 2 per cent'

Now onto an interesting chart showing the continued falling off of Blackberry revenues.  This is the reality of Samsung's observation that smartphone/mobile markets are getting more competitive (see link here).

The smartphone theme is still a compelling one - just look at the growth of Whatsapp...

...but the real value is with the telecoms sector i.e. those offering connectivity and contracts.  Slightly strangely presented in yen terms but here is an interesting global comparison of costs.  

Ebola flight risk...unfortunately an essential chart (interesting to see how limited inter-African travel is as a side point): 

UK consumer confidence...high but dipping?

(h/t @moved_average)

Asia today - Japan flirting with recession?, China and the IMF whilst the food scandal rumbles on

Asia today has to start with this excellent piece in The Asahi Shinbum about Japan:

'Japan could be flirting with recession after the weakest factory output since 2011, which, following a surprising fall in exports last week, could pressure the central bank to ease policy and complicate a decision on whether to raise taxes'

This totally agrees with my view...more stimulus required.  It is, however, the first time I have seen in print the notion that 'Japan could be flirting with recession' 

Turning to China, as the WSJ noted (with my emphasis added):

'The IMF urged Beijing to”promptly” carry out financial reform and exchange-rate liberalization and to make a number of fiscal changes within two years, including taxing real estate. The IMF now expects China to phase in such changes over five years, though there is a possibility that the changes would be delayed further or not enacted...“If they aren’t able to move reasonably fast [on reform], we see the risks of a disorderly adjustment rising,” said IMF China chief Markus Rodlauer in an interview'

It is all relative though - as shown by the IMF's own economic growth projection.

It still feels to me that the greatest risk/surprise will be sourced from the on-going microeconomic reform measures...such as the anti-corruption measures.  I thought this was an interesting insight from the South China Morning Post:

'A strong desire to leave a legacy comparable to that of Deng Xiaoping and a sense of crisis over the survival of the Communist Party are driving President Xi Jinping's relentless fight against corruption, say people connected to the party's inner circle'.

The other opportunity for China is, of course, the whole internet revolution.  Some amazing potential GDP boosts from a McKinsey report:

The China food scandal rumbles on...and it does have an impact.  Yum Brands noted that it has seen "a significant, negative impact to same-store sales at both KFC and Pizza Hut in China over the past 10 days" due to an undercover report regarding the practices of food supplier Shanghai Husi and that it's "too early to know how quickly sales will rebound in China."

Finally - on the broader strategic objectives of the major Asian emerging countries (plus others around the world) this excerpt from a piece in The Financial Times on the development of a 'BRICS development bank' was insightful - especially the last paragraph.

Samsung - still a competitive landscape

The full set of Samsung Q2 numbers is out today.  I reviewed the brief Q2 disclosures by the company earlier in July (link here) concluding that competition is still pretty high and that:

'the shares?...still not at that interesting Won1.25m level when I feel a lot is priced in (x5s EV/ebit, 20%+ of the market cap in cash).  It is competitive but at least Samsung retain some flexibility options.  Keep on waiting for that support level on the chart, no need to rush in before this level'

Samsung shares pulled back today...but still not to my preferred level.

The detailed numbers highlighted to me (again) the pressures in their 'IM' ('IT and mobile communications')...particularly at the operating profit level.

But we know this.  How about the future?  Interesting that 'competition to intensify' in mid/low end smartphones a theme akin in tablets.   That fits in with some of the themes here as discussed by the Best Buy CEO.  
Also interesting to see the company talking about 'mass production' on the 14nm semiconductor side and also noting a 'trend toward increased demand for large size and UHD TV'.  

I also note that the net cash position of the company did not improve during the last quarter sequentially.  They remain cash heavy...but an interesting insight into the competitive realities on the ground (and the need by Samsung to keep on investing in new product).  

My conclusion is to wait for the level noted above...and that the smartphone/tablet markets are getting more and not less competitive.  

Wednesday, 30 July 2014

Financial Orbit wrap 30-07-14

Five sentences or graphics which sum up the Financial Orbit output over the last 24 hours across the website, twitter account and anything else thought about...

1. More Japanese poor data and more Chinese reforms equate to some clear trends in Asia for global investors to think about (link here)

2. I have come across a couple of interesting money velocity charts:

(h/t @worthwray, @epomboy)

(h/t @DonDraperClone)

Hugely important for the debate will the money printing ever lead to inflation...

3. In European earnings today I still see value in Barclays, am warming up to Lafarge/Holcim but was disappointed with Total and still find industrials like Schneider Electric unappealing

4.  Meanwhile in the US it was all about the 'good' Q2 economic growth disclosures and the 'supportive' FOMC.  The Dow and S&P500 were sort of unchanged...what does that tell us?!  Meanwhile the CNN sentiment poll is at 'extreme fear'.  Confusing...

5. As for US earnings well I was not so impressed with Newmont Mining  and Goodyear but I see some value in Aflac and as for Twitter well I wrote a piece titled 'Why Twitter shares are not expensive to me' (link here).

Why Twitter shares are not expensive to me

The 20%+ bump in Twitter shares after the publication of its second quarter numbers was certainly pleasing for shareholders.  I have held the shares since the IPO and have taken advantage of market volatility to add to my position a couple of times since.  Through an element of judgement and a good slug of luck I am even ahead of my average purchase price.

As an investor who typically looks for value rather than the highly valued, Twitter appears an odd choice as one of my investments.  Even though various Wall Street brokerage houses are falling over themselves to justify this or that valuation (US$60+ seems the norm) the simple reality is that Twitter has a quite large market capitalisation for a fast growing but still quite small sales base and maybe some profits in a year or two.  Certainly if you have been schooled in price-earnings ratios, free cash flow yields and EV/ebitda ratios you are not going to find a lot of value.  You probably already have concluded that Twitter is a stock market bubble personified.

This should be me...but just as in a science fiction film I have switched to the dark side of 'concept', 'footprint size' personal user experience.

It is not even fifteen months since I started my Twitter account.  It was an innocuous Tuesday morning if I recall and getting onto Twitter was just another point on my 'things to do' list as I geared up for the launch of Financial Orbit.  I knew from the newspapers that a few sporting starts and politicians used to post the odd item of interest but otherwise I assumed I would be wading through meal photos and other forgettable minutiae.

How wrong I was.  Within a day I had realised that for investment and financial sector information, insights and opinions Twitter is like the best newspaper, conference or water cooler chat all rolled into one.  Even today I feel as if I am just scraping the surface of its insights that can make a real difference for me and my investments.  I feel more educated, in-the-loop and entertained than at any point in my working life.

The truth is the world of investment is a Money Game (to borrow the title from possibly the greatest investment book ever written).  Both aspects are important.  The P&L clearly matters hugely but the journey to get there is valuable too.  The allegiances, insights, banter, successes and failures of the investment search, enactment, monitoring and fulfilment.  Twitter's open architecture helps me to both play the game as well as to be part of the game.  That's a value beyond what a shorter-term P/E ratio can capture - even to a someone who typically sees himself as more of a 'value' investor.

I was always taught about the role of information and incentives in economic decision-making.  Well, the incentive for me to engage in the Twitter information tree is very high.  The level and multiples the share is trading at tells me that I am not alone in this view.

So maybe Twitter's share price and valuation is not so irrational...and if you have never tried it then you should.  You may well be surprised.

US earnings insights - Newmont, Goodyear and Aflac

US earnings season continues are three names that have reported in the twelve hours or so before the Wednesday market open that particularly caught my eye (for different reasons).

First Newmont in the gold mining space.  With the shiny metal kicking around the US$1,300/ounce level this chart from the company suggests good news as they have cut their all-in sustaining cost to just over US$1,063/ounce?

Well to a point.  I have been critical of Newmont in the past (link here) based on a variety of criteria and even though they are making some progress I noted that when they do talk about gold is always to talk about lower gold grades.  The Newmont chart looks as if it is bottoming...

...but to me that is saying as much about the gold industry per se as the company.  Meanwhile the gap between the company and my preferred large cap gold play (Randgold Resources - with clearer production growth and high, sustainable grades) just gets bigger:

The tyre industry is globally oligopolistic and after noting some mixed trends at Michelin in France earlier in the week (link here) I was not surprised to see the same occurring at Goodyear led by a price-mix deterioration being worse than the lower raw material price gain.  Fortunately for the company cost savings continued apace ahead of inflation but the former trend is not great and...

...based on recent history quite unusual (note the deterioration in Q2 was not quite enough yet to lead to a negative price/mix minus raw material spread but it is the closest gap in years).

This overhung the stock today and quite rightly so.  A company with getting on with a x3 net debt:ebitda burden (and some other liabilities too) needs all the positive trends it can get.  In hindsight, looking at the graph below, Goodyear's struggles at c. US$28 should have been fairly predictable.  It is not super expensive (x7s EV/ebit) but just inevitably a bit geared.  Feels like it is in a US$22s-28 range at the moment.

Finally, ten months ago I wrote up the insurance company Aflac noting (with a nod to their unique advertising campaign):

'With the company trading at x2 book, mid-range return on equity generation of 22.5% suggests 10% upside statically, with accretion each year.  From a 2014 perspective I could get a target of nearer US$68 than the current US$58 share price...You would not be quacking mad to look closely at Aflac'

Since then the share has gone up...then sideways...and then nearly back down to the levels of about ten months ago (albeit after paying a c. 2.4% dividend yield).  

The link above goes into material detail on Aflac but suffice to say that its Japanese exposure (clearly the majority of sales/profit) is...different from many other companies...and also the source of a dull trading update today:

Still x1.6 price:book for (depending on how you measure it) 19-21% return on equity still seems like value to me...even if some adjustment has to be made for the costs of hedging their Japanese exposure (I could actually envisage though that the combination of a rising Japanese price level and a lower yen may actually be ultimately helpful to the company).  Time to augment the position.

European numbers today - Total, Holcim/Lafarge, British American Tobacco and Schneider Electric

Lots of European corporate numbers out (again) today.  Here are a few thoughts.

First, the French energy giant Total.  Yesterday (link here) I noted that peer BP's shares had sort of rolled over and the same is true for Total which is now back closer to that Euro50 support level after a bit of a shabby set of numbers.  More from their conference call (and presentation deck) later but given 'Operating profit per barrel was its weakest in 4-years as opex and DD&A rose 9% y-o-y and 25% y-o-y respectively' this is going to require some explaining.  Large cap energy stocks look in the avoid zone at prevailing.  

Staying with another sector that I talked about at the link above yesterday, the other half of the big European cement merger reported today with Holcim disappointing the market as FX/cost issues combined to overhang yet another good pricing performance, as shown below:

Interestingly with further falls in both cement companies today, Holcim has pushed below the level it spiked from a few months ago on the announcement of the deal in early April.  That's interesting (Lafarge is just above this equivalent level):

I have written about British American Tobacco before (link here) and, although it is not a holding, I very much respect the business model.  FX again had an influence on numbers...but aspects like pricing (to offset volume decline) remained absolutely fine:

At the margin I would personally buy/hold Imperial Tobacco (link here) or Philip Morris International (link here) with regard to the big international tobacco names given the latter's underperformance YTD but, as I said at the above link, the key is to have some exposure in the first place:

Finally, I have not written about the electrical distribution and infrastructure company Schneider Electric  before.  The shares at prevailing do not particular interest me but I did note this interesting chart in their presentation deck showing the positive thematics behind the 'new economies' (versus the 'mature' equivalents) and also in 'services' versus the implied core industrial demand growth.

It still strikes me as a tough market for industrial companies.