Wednesday, 4 March 2015

A few charts today - China, Russia, Australia

Ahead of another busy European corporate reporting session a few charts and thoughts...

Europe / debt – ‘The Alpine region of Carinthia faces probable bankruptcy after Austria’s central government refused to vouch for debts left by a disastrous banking expansion in eastern Europe and the Balkans’ (link here). Very surprised at the lack of attention being paid to this.  50% haircut for bondholders potentially…signal for Greece?

China HSBC Services PMI (Feb): 52.0 (prev 51.8), China HSBC Composite PMI (Feb): 51.8 (prev 51.0). ‘steadier growth footing in February’. Annual National People’s Congress also starts today.  Economic growth for ’15 target to be announced tomorrow.


Australian growth – two graphs nicely summarise latest numbers (via Fast FT).  Weak numbers but all a bit lower quality when it comes down to inventories moving about...

 


Russia - HSBC Russia Services PMI (Feb): 41.3 (exp 42.5 prev 43.9), HSBC Russia Composite PMI (Feb): 44.7 (prev 45.6) ‘Output fell at the fastest rate in over five-and-a-half years, despite an increase in manufacturing production’.  Further economic pressure on Putin...and Russia stays as the worst performing BRIC on an economic growth basis...



Smith & Wesson: firing ahead

I have been an investor in the firearms manufacturer Smith & Wesson for the last few months (see my more recent report here) in the belief that a high inventory induced sell off in the shares would prove to be temporary.


As always with the market even though headline results showed an effective halving of operating income over both the last quarter and the last nine months...


For the Three Months Ended

For the Nine Months Ended


January 31, 2015

January 31, 2014

January 31, 2015

January 31, 2014


(In thousands, except per share data)
Net sales

$130,550

$145,881

$370,865

$456,195
Cost of sales

86,726

87,230

243,083

266,834
Gross profit

43,824

58,651

127,782

189,361
Operating expenses:








Research and development

1,901

1,456

4,830

4,119
Selling and marketing

10,088

8,921

26,884

24,150
General and administrative

16,136

17,154

43,765

53,184
Total operating expenses

28,125

27,531

75,479

81,453
Operating income

15,699

31,120

52,303

107,908

...forward guidance above market consensus drove the shares up over 8% in after hours activity. Reflecting again the importance of product and brand the company noted on the conference call that very importantly 'distributor inventory has declined...(believe) substantially below eight week threshold'.  This was exactly the market response I was looking for. 

Even though certain market trends such as poor long gun demand remain established this has been countered by the company's strength in pistols/concealed weapons which fit closer to the requirements of their customer base today.  No wonder they noted that 'our broad product offering remains popular...market leader'. I also note their fledgling accessories business (BTI) appears to be making good progress. 

In terms of the balance sheet the company noted the following structure on the conference call: 

$175m notes
$100m bank revolver access if required
near $60m cash

Looking forward they 'expect our cash balances to rise in Q4' (typically best seasonal period)...'probably end the quarter with around $90m of cash'. Which they could use to pay down revolver, call some of the notes in the summer or make inorganic acquisitions.  The important aspect is that they have flexibility.  With an EV given the above of prospectively just over US$900m and a recovering earnings profile I would place the company on a forward EV/ebit multiple (FY16e) of around x8s.  This feels still too strategically low.  There is still scope for a run at US$15+ share price again (c. x10 prospective EV/ebit valuation).  I am remaining long.



Tuesday, 3 March 2015

Financial Orbit wrap 03/03/15

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. Chat that Japan govt economic adviser thinks that the yen fall is a the ‘limit of comfort zone’.  Unbalanced economies generally get weaker and weaker FXs… Wage data in Japan still shabby…I still anticipating a tilt at 140 yen to the US dollar at some point.



2. Glencore results were inevitably mixed...but I like their structural optimism about their mining sector exposures: 



3. Paddy Power shows why mobile/the internet is such an all-pervading theme.  Look at that proportional Australian growth! 


4. I write my first finance sector book review on Financial Orbit (link here).

5. Sign of the fixed interest and currency times:

A flood of blockbuster deals, including a $21bn offer by Actavis and a $7bn sale byExxon, will push total offerings of new debt securities above the $30bn mark by the end of the day — making it one of the largest on record for new bond sales

Want to defend your currency peg? That will cost you $25bn. Denmark spent that amount - or kr168.7bn in its own currency - in February in a series of interventions to defend its peg to the euro, its central bank said in a statement...That pushed foreign exchange reserves up to kr737.1bn.
I am not sure which one of the above quotes via Fast FT worries me the most...

Book review: "Print: The Central Bankers Bubble" by Lindsay David


In order to shape the future we need to understand the lessons of the past.  Anyone who has participated in financial markets over the last few years is a richer, stronger investor/analyst for having seen (or suffered directly from) the mistakes, fear and losses made during the 2007-9 period.  The following five or so years have been rich in educational narrative too - with the difference this time being that mistakes have become returns, fear has evolved to at worst a 'buy on the dips' mentality and losses are seemingly not allowed unless you are a short seller.  

The title of Lindsay David's book is a nice summary of this switch around.  Expanding the central bank balance sheet has become the one-way ticket to cure all evils. As with most non-medicinal cures however there are side effects.  Lindsay refers to it as an 'IZNOP business model' or a business model that is akin to the more naturally famous "PONZI" scheme and spends the latter half of the book moving through each of the major geographies of the world pointing out policy short comings and challenges emanating from such a financial system set-up.  

Early chapters focus on the building blocks to the current crisis.  Whilst this is a story that has been told in many places I enjoyed the personal insights ('I was in New York on a business trip in September of 2008. I will never forget the shocked faces I saw on the day Lehman collapsed. A grown man in a suit walked past me on a busy Midtown Manhattan street openly weeping') which added vivid colour for the reader.  The re-telling of the slip slide of what were initially temporary stimulus measures in the context of a patient evolving from being a temporary morphine user to a drug addict seeking new higher highs to today's "Interest-Rate Flatline Era" worked particularly well in my view:  
"Even if it’s the slightest headache, he wants to take more heroin—until the inevitable when he takes too big a dose and his heartbeat flatline"

The linking of Japanese historical-current policy-making with Europe's evolving choices is well thought out even if events in the latter are moving at such a speed currently that it is difficult to stay timely.  Lindsay's personal insights again add colour here with his observations from attending IMD’s Executive MBA program in Switzerland in 2013 making particularly galling reading for French policy makers.

A particular strength of this book is the discussion of the Australian property and financial markets drawing off Lindsay's previous publications in this area.  This certainly caused me to (negatively) reconsider my perceptions towards the potential range of outcomes - and the extent of the inter-relationship with the evolving Chinese economy.  I agreed less with Lindsay's assertions that not only is QE4 not likely (or sensible) for the US economy but that the inherent strength of the US economy means that it is not required.  My own view is that the date of a material rise in US interest rates is years off and that in terms of ultimate economic strength some of the creditor emerging market nations hold a stronger position.  

With ending chapters pulling together many of the above factors into some viable and practical policy applications, Lindsay nicely lays out an alternative vision of how to counter some of the accidents, challenges and mis-allocations of the last decade or so.  These policy prescriptions made general good sense and provide a feeling that this unorthodox economic journey could have a finale which is not apocalyptic. Readers however are likely to conclude that some element of private prudence with their finances remains highly sensible.

In conclusion an enjoyable and accessible read for practitioners and amateurs alike on a subject where an understanding of historic and practical/reasonable policy applications are both hugely important.

(Purchasing link here).

(Disclosure: Lindsay David provided a pdf version of his book to allow this review.  No remuneration or editorial control was provided for this review).  

Glencore - not completely pessimistic about mining sector prospects

The mining and related marketing giant Glencore is back below the 300p level - a line in the sand I noted in my last write-up on the stock (link here).


Of course the eagle-eyed of you will have spotted that it has gone via 240p...but I am not too worried as courtesy of Randgold and (below) BHP Billiton (which I last wrote up here after their own results).  

The marketing division of Glencore continued to push on, particularly helped by the agriculture division.  

By contrast the classic industrial division struggled across the board.  No surprises there of course.

Before I do a quick sum-of-the-parts it is also useful to note that despite the lower prices for most minerals the company did generate free cash and make distributions to shareholders...albeit that the latter was assisted by net sales and positive working capital developments too.  A nice clear exposition by Glencore here (if only other companies would do something similar...)


The net impact of this was to reduce debt.  I like the look of the ND:ebitda multiple at x2.4 nicely less than the self-imposed x3 peak multiple.  


Of course these initiatives have to continue given the lack of immediate bounce back in metals prices.  Lower capex is no great surprise.  


However it is important not to be too defensive.  On this basis I was intrigued by this appraisal of the potential of the five core areas of their operations.  There are opportunities in the space.  


 So the sum-of-the-parts analysis.  I agree the marketing division is relative 'defensive'. Put a x12 multiple on a US$3bn earnings base and that is US$36bn.  As for the industrial mining side, we clearly are seeing below par earnings currently.  With suppressed margins maybe ebitda is the 'easier' earnings measure to use.  Traditionally a x6 multiple is some kind of sensible forward multiple for a cyclical but ultimately worthy business.  That would give a value of around US$60bn.

So adding the two above gives US$96bn, deduct the US$30bn of net debt and this gives a US$66bn EV or the equivalent of around a £43-44bn market cap.  With a current market cap of a little over £38bn that implies around 15% upside scope or a target price of c. 335p/share - which is close to the six month high.

My instinct is to still prefer BHP Billiton at the margin given its strong balance sheet, 5%+ yield and non-core upcoming spin-outs but Glencore has that mixer scope with this core mining position.  Interesting.


A few global macro stories today

A few global macro stories today...

Greece…headlines from Varoufakis sound fine ‘No Chance Greece Won't Pay Debts In March…return to Drachma is not a solution in any way’ but then rumours circulating that ‘Greece is preparing to tap its final pension reserves at the country’s central bank if needed to avert a devastating default to the International Monetary Fund and keep the government going over the next two weeks’ (link here). Volatile uncertain situation.  Still amazed it is not overspilling into markets more (it should).  Anyhow, here is a good upcoming important dates graphic: 



Asia #1 – Australia’s central bank RBA does not cut rates but does warn on slower China and too high Aussie dollar 

Asia #2 – China insight from Macau casinos: Casino revenues fell 48.6 per cent in February, slightly less than expectations of a 53.5 per cent drop

Is China QE next? What an interesting link here.  Real rates in China are quite high…


Asia #3 – chat that Japan govt economic adviser thinks that the yen fall is a the ‘limit of comfort zone’.  Unbalanced economies generally get weaker and weaker FXs… Wage data in Japan still shabby…I still anticipating a tilt at 140 yen to the US dollar at some point.  



Russia – dwindling reserves but note y-axis, still time on their side


Nasdaq Comp Closes Above 5000 For The First Time In 15 Years, S&P & Dow Jones Indices Also At Record Highs.  Markets…firm to say the least given underlying earnings trends.  


And finally...take a look at the top of the 'misery list' countries (worked out by added the percentage inflation and unemployment rates).  You thought things were bad in Greece and Spain....how about Venezuela, Argentina, South Africa and the Ukraine (inevitably): 


Monday, 2 March 2015

Financial Orbit wrap 02/03/15

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. Whilst China cut rates over the weekend, real rates are going up.  That sounds like the scope for a lot more cuts to come...


2. ...which is why potentially the Chinese yuan is at an extreme against the US dollar 


3. European manufacturing PMI numbers were a bit mixed...


4. ...although the global manufacturing number was broadly moving in the correct direction albeit with lower input prices and falling output prices (well it is a low inflation world...)


5. And finally sleep and wealth: not what I expected to see!