Thursday, 30 October 2014

Charts and thoughts today: FOMC, QE, sentiment, Asia...and space launches

Lots of company and related data out in the last 12 hours...and the next 12 hours or so too!  Strategically, however, a few words on the FOMC and the end of QE.  My personal view remains that the chances of QE4 during 2015 remain quite reasonable but - at this moment in time - the focus is on the risk of tighter policy hence the rise in the US dollar overnight (109s versus the yen etc).  I still remain short both the yen and euro (much reduced in the latter, recently increased in the former) against the US dollar.  

I liked this chart ran in today's Financial Times too which sort of implies that the impact of QE in the US on the emerging markets becomes reduced over time.  That feels correct...and again shows the importance of other policies such as supply side reform.  

Given the above perhaps not surprising too that emerging markets are also trading at a discount currently.

We are still deep in the midst of earnings season and in Europe this chart via GaveKal Capital caught my eye.  Bottoming out?  Certainly - and generally - European equities have a contrarian/value angle to them.

Got to keep an eye on this situation with regard to gold and the Swiss referendum vote:

Plenty of numbers out of Asia today including insights from the Chinese banking system and Samsung whose profitability was as bad as previously guided (and hence the shares went up...).  I thought this chart was interesting regarding the company.  Some clear specific volume pressures...

Staying in Korea, the North Korean economy is apparently just about to lift off...

...talking about lift offs, it appears Russia is the clear leader in space launches

Finally back to overall sentiment.  I see the AAII bull-bear spread is - for the second week in a row - above 25%.  Got to be careful out there...

Survey Results

Sentiment Survey
Week ending 10/29/2014    Data represents what direction members feel the stock market will be in the next 6    months.
Bullish 49.4%
down 0.3
Neutral 29.6%
up 1.7
Bearish 21.1%
down 1.4
Note: Numbers may not add up to 100% because of rounding.

Change from last week:

 Bullish: -0.3
 Neutral: +1.7
 Bearish: -1.4

Long-Term Average:

 Bullish: 39.0%
 Neutral: 30.5%
 Bearish: 30.5%

Wednesday, 29 October 2014

Financial Orbit wrap 29/10/14

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. Inevitably I am musing more and more about the oil price.  This chart via Zero Hedge is simplistic...but kind of effective/insightful: 

2.  Goodyear continue to have success in cost cutting...

3. ...whilst Schneider Electric are actually a little bit more optimistic about global growth prospects, even a 'stabilisation' hint about Europe:

4. Elsewhere I found this public debt ratio chart interesting (although I am note sure that I believe that the 2018 targets will be hit)

5. Finally, I need to write analytically about Facebook at some point.  Here are the couple of charts from their presentation document which 'spoke' to me the most: 

Two US earnings reviews: Goodyear and Aflac

The tyre industry is globally oligopolistic and after noting some mixed trends at Michelin in France a few days ago (see the chart below)...

...I was not surprised to see the same occurring at Goodyear although at least the price-mix was lower  (over the YTD period) than the lower raw material decline. Still, disinflation is harder to manage but...

...fortunately cost cutting and the always wonderful 'other' (aka more cost cutting) continued to drive the numbers. 

And you have to admire the 'destination' shared by the company.  'Near the high end' of the margin target for 2014 implies the shares are trading in the x7s on an EV/ebit basis.  Yes there is still significant pension debt and some working capital outflows but I am quite impressed - and that has not been the case relative to other global tyre companies for Goodyear for quite a while.

I talked about '...a US$22s-28 range at the moment' three months ago and the company remains to the lower end of that range still.  I would rank Goodyear today as 'interesting'. 

Last quarter I noted that for the insurance company Aflac - with an outsized position in Japan - it was time to 'augment the position' due to the company being priced at:

'...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' 

Yesterday evening's results highlighted a variety of return on equity statistics ('Annualized ROE of 15.9%. Annualized operating ROE of 18.8%, or 20.8% excluding impact of yen').  I think it is reasonable to use one of the latter two and on that basis you could still see good upside with a near US$40 book value ('Book value of $39.63 per share vs $38.76 at end of Q2') versus a share price currently in the US$59s and hence still in that x1.5-1.6 price: book range.  

The theoretical fairer value near US$80 (near US$40 book at a 20% RoE) should not be a target though. Japan retains challenges for the group and, as noted below assisted by the weaker yen, did contract for the group unlike the US: 

'Aflac Japan: Premium income fell 5.4% to $3.5B, helped down by a weaker yen. Net investment income up 2.7% to $676M. Total revenues off 4.2% to $4.2B

Alfac U.S.: Premium income up 1.1% to $1.3B. Net investment income up 1.6% to $162M. Total revenues up 1% to $1.5B.'

Still the better news of a 5% quarterly dividend yield (boosting the overall yield closer to 3%) plus a lifting of the 2014 buyback to US$1.2bn and mention of a US$1.3bn objective for 2015 indicates opportunity as the latter number would reflect 5% of market cap.  In combination with the aforementioned dividend not a bad return to shareholders.  

With a broad (but still positive) EPS growth target for 2015 of 2-7% (currency neutral though) established I still see value in Aflac and will consider adding to my pension fund position.  I discount the theoretical US$80 target by 20% to give US$64 but also note the attractive shareholder return policy.  

Charts today - defensives, gold stocks, disinflation, yuan, oil, electric cars

A huge amount of corporate reporting going on at the moment which is getting most of my attention but here are a few interesting charts too: 

Looking at the market from a bottom-up perspective I would certainly agree there is more natural value - over a reasonable time period - in the cyclical area: 

I also see value in the gold equity space as this chart sort of indicates:

One theme impacting companies is undoubtedly disinflation which is happening globally as per this chart from The Economist...

...and also influenced the decision of the Swedish central bank yesterday to cut rates to zero:
Turning to Asia, the rise and rise of the yuan:

Inevitably I am musing more and more about the oil price.  This chart via Zero Hedge is simplistic...but kind of effective/insightful: 

And ahead of the FOMC what is the next step in this relationship?  Lower growth in US house prices to pull confidence down or a more positive combination?

Finally...electric car sales.  Becoming more popular in Georgia apparently...

Tuesday, 28 October 2014

Financial Orbit wrap 28/10/14

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. So Twitter is growing strongly...but that did not stop the share falling today.

2. I use the Agco numbers to muse about agricultural stocks... (link here).

3. At the start of the energy sector earnings season I was impressed by the numbers from BP

4. In a busy US earnings season period I also write-up some thoughts on Timken, Plum Creek and Coach (link here). 

5. Interesting disinflation

US earnings quick run-through thoughts on Timken, Plum Creek & Coach

Lots of numbers today...a few thoughts.

I really like the ball bearings company Timken and have held it for the last year through the spin-off of the steel business and a couple of upgrades.  Back in July I observed that:

'the US$4.4bn market cap puts the bearings side on a c. x9.5 EV/ebit FY14e which feels too low.  That is where the value is.  Forget that the Timken continuing share is kicking around near an all-time high.  I can see a return to the US$55-60 range for the bearings focused share alone'

This may still happen but the share has pulled back over the last quarter as markets have got volatile and the US dollar has gone up:

On an underlying basis the company continues to make really good progress with their two largest divisions pushing up margins although, as noted below, there have been a few one-offs going through the book.  The free cash flow target got tweaked slightly back too.  Nevertheless a c. 5% free cash flow yield combined with a (high) single digit EV/ebit profile...not bad at all especially with a lowly geared balance sheet and a willingness to buy back some shares (average price US$46!)

Especially as when every geography (pre FX application) is growing sales

I can see this one back at US$50...

Meanwhile the wood products / timber company Plum Creek are still as cautious about residential construction as they were back in July (link here)...and I note they continue to buy back shares at c. US$40 where funnily enough the share price support is occurring: 

 Whilst no dividend increase is likely for 2015 (currently the stock is a 4.3% yielder) timber and related is one of the top longer-term assets.  I am looking to put a starter position in sub US$40 with a double up at c. US$35 where the five year share price support kicks in.

Finally Coach. Seeking Alpha noted some extreme volatility in the stock today:

'Shares of Coach (COH -7.5%) have been on a wild ride this morning fluctuating 15% from high to low after posting Q3 earnings results.

Though the retailer's results beat expectations, even the -24% North American comp topped the -26% forecast, management's cautious tone during the earnings call seems to have swung sentiment.

Sales growth momentum in China appears to be a particular concern'.

You can see what they mean judging by this quote from the conference call:

'...we understand that there will likely be continued volatility in the near-term due to both macro issues and geopolitical events which are impacting trends in China and some key tourist markets notably Hong Kong and South East Asia. While we are still targeting China sales of about $600 million for FY15 driven primarily by distribution growth, current conditions are limiting visibility to PRC consumer travel and shopping patterns especially in Hong Kong driving more variability on a quarterly basis'.

Coach shares have been dire over the last year (as -24% comps unsurprisingly would suggest) or so and are down to five year lows (approximately):

I talked about the value opportunity in Coach shares before associated with their fashion relaunch, growing Asian exposure and continuing success in male fashion.  This opportunity still remains BUT the indication it is not a straight line at all is very clear.  Still a near 4% yield now.  

BP and BG: energy sector insights from two UK heavyweights

After some lurid headlines concerning litigation I observed early last month that opportunity in BP shares were building (link here):

'Even if you assume nothing extra was anticipated the application of the full US$18bn would take the shares down to around the 435p+ support level of last October'.  

After today's quarterly results disclosure the share is trading within half a percent of that 435p level:

So what to make of today's numbers?  Four key charts I thought.  First the actual numbers themselves showed dull upstream but vibrant downstream results (thanks the oil price...these companies are not called 'integrated' for no reason!)  Rosneft in Russia helped pull back overall profitability but the dividend showed year-on-year progression and operating cash flow was up: 

This progression in cash flow is shown below.  Note too the reduction in organic capex and the greater sustainability of the shareholder remuneration operations (dividends/buybacks) versus underlying cash flow: 

Divestments have been duller and if they are to hit the end 2015 target will need to be stepped up over the next year: 

My general observation however is that the net debt ratio remains opportunistic for further shareholder remuneration given the planned divestments and free cash flow generation:

Not bad for a share already offering a 6.3% yield and sitting on 2 year share price support.  

Turning to BP's UK listed peer BG Group I have written twice about the company during 2014 most coherently here when the share was at around 1000p (I subsequently top-sliced my position after the speculation in the shares pushed the price up over 1200p).  So where are we now? Back near 1000p again...

The first positive aspect of the release was that there were no overt negatives or changes to guidance for E&P production or LNG total operating profit.  Helge Lund, now working through his notice period at Statoil, will join as CEO next March.  

Still, however, the numbers were messy.  Headline operating profit and EPS were down heavily in Q3 yoy (and more modestly in the 9 month yoy period)...however if various 're-measurements and impairments' are included then miracles of miracles earnings are up: 

Interesting to contrast the difference with BP (above) on the cash flow side with negative free cash flow as investment continues.  Nevertheless gearing remains relatively modest.

With BG trading now at x14 next year's earnings and a 2% yield I think near the 1000p support level it is starting to show greater interest to investors again for new money...especially with a solid new CEO appointment (albeit starting in a few months as noted above).  

Energy has been a big underperformer in financial markets over the last few months.  The above two results analyses tell me that it is an interesting area for stockpicking.