Friday, 24 April 2015

Financial Orbit wrap 24/4/15

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. Miners...I like this sector with (outside of gold stocks) my core long being BHP Billiton ahead of their non-core spin-off at the end of May.  Good news then that after a terrible run the iron ore price has managed to increase every day for a whole week.

2. I write my latest Yahoo Finance Contributors column on Google and why the free cash flow level is hugely impressive...and useful.  I still see upside (link here). 

3. Amazon also had hugely impressive level of free cash flow generation...and a hugely impressive share price move today too.  I remain a holder here too (link here). 

4. Meanwhile I go more cautious on Yum! Brands (link here). 

5. And finally...have a good weekend. 

Yum! Brands: great theme but take a few tactical profits

Yum! Brands has kicked on well since my last write-up (link here) and is now trading at an all-time high:

The reason why the share pushed up was not immediately obvious when looking at the data as earnings and EPS both fell: 

However it is all about the future.  With China - as detailed at the previous link - being the key driver to results a reiteration in a continued improvement in this market helped boost sentiment.  

As the company put it on the conference call: there is ‘a lot to be excited about in KFC China’ and the operating leverage resulting from this essentially gave the company confidence that they will achieve their target of 10% EPS growth this year.

This was augmented by continued good KFC trading internationally...

...and positive momentum outside the US in the Pizza Hut division.  On this division management guided that they had a ‘firm view on what needs to improve’

Whilst there was an acknowledgement that the company was in Q2 lapping the strongest period for both general Chinese country trading as well as for the Taco Bell division.  Additionally there is some higher tax burden to bear. However this was partially offset by lower prices in both cheese and chicken.

As discussed previously Yum! Brands remains at the centre of a highly attractive theme of the growth (especially in China) of various fast food/casual dining outlets.  The question is what is a sensible price to pay for such exposures at the moment?

Even though debt is less than x1 ebitda the current EV/ebit of around x16 for FY16e is full.  A x14 multiple would be attractive (c. US$73s) to buy but here around the US$84 level I would have a more neutral view.  For longer-term holders no need to panic given this is a growth theme over time but for shorter-term and more tactical investors I would be more neutral/take some profits.  

Amazon - it is still all about the cash flow...

Back in February I noted in my last exclusive report on Amazon that 'it is all about the cash flow' and that in terms of levels:

'I have talked at buying the stock below US$300 as this level reflects a low sentiment point.  Ex a material crack in the markets I wonder if we shall see this level again.  Nevertheless reflecting the still high current earnings-based metrics (a x100+ P/E ratio and an equivalent EV/ebit multiple) I recognise the potential for volatility.  I have raised the 'buy on a bad day' level to sub US$315 though reflecting progress (and historic chart resistance at this point)'

Of course the share has not got anywhere near these levels since February reflecting last quarter's well-received numbers...

...and after yesterday's after the US close results the shares are called up a further 10%.  So why is this?  Well back to that cash flow again...a mega result here.  To put this into context if you annualise it up then it is a 6% free cash flow yield.  Most investors can make that work.  

Of course the company's profitability - even on the most favourable measure which excludes stock compensation under non-GAAP principles - is little more than half and actually was slightly down year-on-year.  Nevertheless Amazon is a growth business as shown by the constant currency 20% year-on-year increase in sales.  Usefully - and for I believe the first time - the contribution of the Amazon Web Services (AWS) division was split out.  In sales terms it is dwarfed by the US and global non-US core businesses.  

That is not so true from an operational perspective however.  Whilst North America is the most profitable part of the business and still showing good progression in results...
 ...the patchy profitability of the global non-US business (undoubtedly not aided by FX translation issues) means that the AWS business...

 ...starts to look like a relatively stable profitable performer.  For the latter not too bad for a business which Amazon noted had 'had 48 price decreases since inception. The team is doing a terrific job in terms of working on behalf of customers to pass on savings as they see it. But in terms of any comment on what to expect going forward there is not really much to add there'.  So not the easiest to value but at a US$1bn+ of likely nearer term profitability and growing at nearly 50% year-on-year in terms of sales you could certainly attribute a US$20bn+ valuation quite easily.  

So what should we expect for the overall business?  Amazon's management gave the following guidance: 

'For Q2, 2015 we expect net sales of between $20.6 billion and $22.8 billion or growth of between 7% and 18%. This guidance anticipates approximately 750 basis points of unfavorable impact from foreign exchange rates...GAAP operating income or loss to be between a $500 million loss and a positive $50 million of income, compared to $15 million loss in second quarter 2014. This includes approximately $600 million for stock-based compensation and amortization of intangible assets'.

So a nice broad guidance range...which will certainly not satisfy those looking for clear profitability progression.  But so long as they are generating strong cash flow I think you can justify holding the shares.  

Amazon shares will move around with the market and related sentiment but from a purely technical perspective I would imagine in a material general sell-off a first level of technical support will be around the US$345-360 level.  That is one level to consider a position augmentation/initial purchase.  For the moment though I am continuing to run my positions.  On the basis of longer-term positioning in an increasingly online world, sheer growth and, most importantly, cash flow generation. 

"Google: next step distributing its mega free cash flow?"

My latest post as a Yahoo Finance Contributor titled "Google: next step distributing its mega free cash flow?" can be found here.

A few macro and related stories today

Greece latest – it is Friday so it is Riga and the latest European leaders meeting to discuss/try to find a deal…don’t hold your breath!  Certainly none of the key 'troika' participants are anticipating anything: 

German FinMin Schaeuble: Not Expecting A Deal On Greece Today – BBG

EU’s Dombrovskis: Not Enough Progress On Talks With Greece -- BBG
-Greece Must Accelerate Work On Reform List

The Greek finance minister writes – ‘The Greek government wants a fiscal-consolidation path that makes sense, and we want reforms that all sides believe are important. Our task is to convince our partners that our undertakings are strategic, rather than tactical, and that our logic is sound. Their task is to let go of an approach that has failed’. All very worthy...but the realpolitics and reality of Riga and beyond will influence more (link here).  

UK election – 20 FTSE-100 business leaders anxious about the lack of a Conservative poll lead over Labour as per a story on the front page of the FT but…

UK election #2 – …maybe it does not matter: apparently hedge funds are building up long positions in the £ as believe fear over a post election fall overstated.  Certainly any £ fall would be net helpful to the average listed UK large cap (as they generate multiples more profit outside of the UK).

An example of this would be the miners...I like this sector with (outside of gold stocks) my core long being BHP Billiton ahead of their non-core spin-off at the end of May.  Good news then that after a terrible run the iron ore price has managed to increase every day for a whole week.  

Market levels -  (via Fast FT) Nasdaq Composite closed in record territory on Thursday, completing a 15 year recovery.  After hours good for the Nasdaq too with Microsoft +3%, Google +3%, Amazon +4% and Starbucks +5%. Meanwhile, the S&P 500 may be a long way from repeating the double digit gains of the last three years, but the US benchmark index touched a fresh record in late trading on Thursday. 

As a holder of both Google and Amazon - on whom write-ups will be completed pre the US open - I 'enjoyed' the above BUT at a general market level I remain cautious.  Maybe the better interpretation of the above is that stock picking opportunities do abound...especially as the average company lifespan on the S&P 500 index is getting shorter and shorter...

Interestingly European analysts have not been too optimistic...

Finally bitcoin and Asia.  Nice graphic here.  It strikes me that if bitcoin is ever going to work then adoption/use in Asia would be crucial.  

Financial Orbit wrap 23/04/15

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. Gold has slipped back below US$1200/ounce but as this report shows China is still likely to be accumulating the shiny metal far faster than declared in the official numbers:

2. This 'cov lite' statistic is going to smash the FY14 level by the end of the year.  When risk aversion kicks in then it is really going to ripple through the fixed income markets...

3. I spend a large part of my day listening to earnings season updates.  Lots of highlights...including Dow Chemical's shareholder commitments (impressive)...

4. ...and General Motors moving away progressively from incentives

But there were so many more...Pernod Ricard, Novartis, CAT...and then (for tomorrow's output) a bevy of technology giants out after the Thursday close (Microsoft, Amazon, Google). Days and days worth of output from the earnings season...

5. And finally the latest Financial Orbit Speaks is out.  Link here

Financial Orbit Speaks 23/04/15

Please find above a direct link to the latest Financial Orbit Speaks an enhanced podcast which covers a variety of subjects including 'magic' P/E ratios, the rise and rise of bubbles and thoughts from recent earnings season disclosures plus much, much more.

If the above does not work then a direct link to the enhanced podcast is here.

(Some of the graphics may be best perused in a full screen YouTube form).  

If you would like a copy of the presentation document then please contact me using the details below and I will happily email it directly to you.

Chris Bailey                                                                                 
Founder, Financial Orbit Limite

Twitter: @financial_orbit