Friday, 24 October 2014

Financial Orbit wrap 24/10/14

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. Interesting decade-long Brazilian real - US dollar chart.  Elections this weekend.  An FX crescendo?

2. Why this chart below still excites me about Amazon:

3. P&G still looks to me an income-chasing investors type of stock only...

4. ...whilst I cannot even make that concept really work for Colgate at the prevailing price (and despite some interesting longer-term thematics):

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

Colgate - I use their toothpaste but won't buy their shares

Colgate updated the market with its latest thoughts today. Of course we all know the company as the world's leading toothpaste company (as well as a number of other complementary brands/product areas)...

...and stock market investors know it for a very steady/impressive rise in profitability: 

So how about the numbers today?  Well the first aspect would be the interesting contrast between the emerging market part of the group (over 50% of sales) being negatively impacted by FX...however the developed market part being hit by negative 'incentives' aka pricing.  

Still underlying sales were up a low single digit proportion.  At the operating profit line - negatively impacted by some of the FX and other issues- numbers were slightly down on a three month or YTD view.

So what to think?  Well thematically the company is well set as the global population grows and urbanises (as nicely captured by the chart below)...

...but the question is what you pay today.  US$3.6bn operating profit is probably as good as it gets next year and put this on a defensive/lowly indebted (the net debt: ebitda is around x1.25) and this gives you a US$50bn valuation versus today's EV of c. US$64bn.  Even the free cash flow yield of around 3.5% (2.3% of which is paid out as a dividend) is not class-leading.

In essence I am not surprised the share has broadly gone sideways over the last year:

So what to think?  Well below US$60 you could perhaps make a case for holding for income/longer-term potential but my buy price today is more like US$55.  For me one to keep watching - and using their products.  

P&G - good numbers but suits income chasing not capital growth investors

Last month I noted that Procter & Gamble was 'a solid franchise and I was nicely impressed by the savings slide but at today's shrae price its attractions are more for the income investor than the capital growth one'.

To be fair the share is doing a pretty good job for capital growth investors today by being up around 2.5% after the company's quarterly earnings disclosure:

So an interesting moment for P&G stock, right up at the top of the range and just above my mooted US$76-84 range.  Certainly one of the first comments they made in their quarterly statement today (their Q1) was quite striking:

To put this into context that level of quarterly free cash flow generation is equivalent to a 4.5% free cash flow yield...and clearly also by the statement above the company are returning in excess of this to shareholders via dividends/buybacks.  

So what is there not to like?  Well let's not forget there is a struggle for growth as nicely summarised here: 

I like the positive pricing and mix but - as previously noted in the report from last month - I really like the company's ongoing cost cutting and hence their capability to grow their core EPS by a mid-single digit.  Note however that FX/one-offs mean that headline EPS growth will be weaker than this.
So it is safe with strong brands and good cashflow/willingness to return excess cash to shareholders.  What do you value this at?

Well a prospective x15 EV/ebit FY15 is not exactly cheap...but that's the reason why I still believe the stock is better focused for income investors.  So a sensible set of numbers but I am not changing my view.  

Amazon - cash flow, cash flow, cash flow (and why I have just bought more)

I first bought some Amazon stock back in May noting that I 'bought an initial starter position below US$300 from a cash flow rationale'.

All was looking solid and profitable until yesterday's announcement which has pushed the shares back below US$300 and close again to my initial buying price.  So double or quits on Amazon stock?

So we all know the issues in the Amazon results.  As Fast FT noted:

'...shares down 8%+ AH as The world's largest online retailer reported a loss of $437m, or 95 cents a share, in the three months to the end of September, compared to a loss of $41m, or 9 cents a share, in the year ago quarter. Analysts had forecast a loss of 75 cents a share.Amazon's revenues, which also include sales from its data storage and Prime television and movie streaming service, climbed 20 per cent to $20.58bn. That was shy of analysts' forecasts for $20.85bn.  Company admitted that some of its investments not worked out as hoped'

So what to think...and how about the cash flow story?

So the bad news above is nicely captured by this chart: 

Pacing through the conference call transcript there were some negatives associated with costs around the Amazon Fire product and 'approximately $170 million impact related to inventory evaluation and supplier commitment costs, a vast majority of that was in North America'.  Clearly these factors did not help and clearly Amazon would have preferred this not to happen.  But it is not what they focus on.  

There was a fascinating exchange on the conference call about the metric that was most important to the company as noted in this answer: 

'...our goal is to maximize free cash flow over the long term, we don't focus on individual margins, but we do focus on the inputs that are going to help drive free cash flow and operating income'

The key chart from the presentation document is the one below.  What price do you pay for just under US$5bn in free cash flow over the last year?

We will answer that question in a couple of paragraphs.  Otherwise I noted that Amazon Web Service continued to grow well...

' terms of AWS, we're -- we saw a very good growth in Q3 as well. From a usage standpoint it's very similar to Q2, close to 90% and so the team is doing just a fantastic job. You can see our other revenue in North America went up a little bit sequentially and AWS is certainly the largest piece of that and is the vast majority of it and they're growing at a faster rate than that other line item'. did Amazon Prime:

'We had a price point since our initiation of, excuse me, since the launch of Prime. Its $79 and so it took us long time and we were very careful with that to increase it to $99. But since we've increased to $99 we've had -- we've had great retention. We're very pleased with the -- the retention we've had from customers. The program is growing very fast'

So some better aspects to the numbers...and Christmas (which they tend to hit guidance out of the park on) is a-coming.  

Back to the leading question then: how do you value US$5bn (and probably growing) in free cash flow?  

Well the market values this at a 3.7% free cash flow yield today based on the current market cap. Look at the sequential improvement though.  Taking the year ending (on their) Q114 the annualised free cash flow was just over US$4bn. So could free cash rise by 20% over the next year?  That would take the free cash flow yield to 4.5% getting ever closer to the 'magic' level of 5% where I get very, very excited about growth companies (see the recent Google analysis here).  

Yes I understand all the pushbacks, the x150 P/E and lack of 'proper' results jibes (see below)

I too, however, like to focus on cash flow.  And this is why I remain optimistic on Amazon.  We still are only relatively scraping the surface on retail online (5-10% of transactions) and Amazon are building the industry behemoth.  Follow the future cash flows.  I am going to add some on weakness here and make a note of the sub US$260 level which equates, I believe, to a future 5% free cash flow yield.  

Charts today - ebola, diplomacy, Brazilian real and Europe underperforms

A lot of corporate reporting in the last 24 hours...but some interesting charts too.  

Ebola in context (new cases in NYC, Mali in the last 24 hours)

Diplomacy is always an interesting challenge...

Interesting decade-long Brazilian real - US dollar chart.  Elections this weekend.  An FX crescendo?

As interesting is this multi-year S&P500 / EuroStoxx50 relative chart.  Unsurprising that value is in Europe if only the politicians could get their act together...

Financial Orbit wrap 24/10/14

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.  Earnings continue to lag the CPI in the US which is enough to make most consumers miserable I would have thought.

2. I muse on Tesco for ShareProphets...

3. ...and on big unhedged European ETF listed in the US record outflows for Yahoo Finance Contributors

4. Stunning AAII update.  What a bull-bear spread now.  So if everyone is bullish...

5. UK/Europe relations are going to get a little more sensitive via this front page graphic in The Financial Times

Thursday, 23 October 2014

"Crowded voting machine trades in the euro and US stocks"

My latest post as a Yahoo Finance Contributor titled 'Crowded voting machine trades in the euro and US stocks' can be found here.