Saturday, 29 August 2015

Financial Orbit Speaks 29/08/15

Financial Orbit Speaks is a regular macroeconomic and stock specific enhanced podcast by Chris Bailey, Founder and Chief Investment Officer of Financial Orbit Limited.

This week's macroeconomic and global investing enhanced podcast by Chris Bailey of Financial Orbit Limited reviews the recent market volatility...and prospectively what investors should be doing about it. 

You can listen/watch the latest "Financial Orbit Speaks" by clicking above or alternatively here directly on YouTube.


Chris Bailey                                                                                 
Founder, Financial Orbit Limited 

Twitter: @financial_orbit

Popular posts of the last week

The most popular posts on over the last week...and a bonus post which did not appear in the top five.

1. The Tuesday macro write-up was the most viewed of the week - China, volatility, demographics and other.  Link here.

2. My write-up of Thursday evening's Smith & Wesson was the second most viewed post.  Link here.

3. A link from a third party website meant that a wrap from July was the third most viewed.  Thanks to that WD-40 report.  Link here.

4. Monday's wrap after an epically volatile day was the fourth most popular post.  Link here.

5. No surprises that the Sunday regular Stories we should be thinking about made the top five too.  Link here.

And a bonus link?  In a Yahoo Contributors Column at the height of the market volatility I cited my very first column back last autumn to highlight the opportunities in markets earlier this week (link here).

Friday, 28 August 2015

Financial Orbit wrap 28/08/15

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. I have been perceiving value due to the dividend yield signals for a while: mega oil rally on Thursday...and continuing today with oil futures up 5-6% depending on how you measure it.  Bit of rotation...

nb liked this via @RANsquawk
crude Oct'15 futures are now up over 19% since the close on

2. Ah...Jackson Hole key highlights (via here).  Am sure that Fischer's comments are going to be the most followed meanwhile that his off-the-cuff comments today are kind of interesting...

Fed's Fischer: Fed doesn't intend rapid rate increases, hike trajectory will be gradual we assume

  • 1130 GMT - Fed's Bullard speaks to Bloomberg
  • 1315 GMT - Fed's Kocherlakota and Mester speak to Bloomberg
  • 1625 GMT - SNB President Jordan on a panel
  • 1815 GMT - Fed's Lockhart speaks with Bloomberg
  • 0225 GMT - BOE Governor Mark Carney speaks
  • 1625 GMT - Fed vice chair Fischer speaks on inflation
  • 1625 GMT - ECB's Constancio speaks

3. Really impressed by the Smith & Wesson numbers (link here) - shares at an eight year high!

4. I muse about the failed Monsanto bid for Syngenta and basically work out what to do with the latter (link here). 

5. And finally...will be keeping a close eye on the Saturday Jackson Hole output and issuing this week's Financial Orbit Speaks enhanced podcast on Saturday evening.  In the meantime have a good weekend.  

So what to do about Syngenta now that Monsanto have walked?

Syngenta shares have been volatile over the last couple of days following the announcement that Monsanto is not going to proceed with a bid.  And where did the company's shares end up?  Pretty much back to the levels seen in the March-May period before there was even a hint that Monsanto may be interested.

I chatted about top-slicing above the CHF400 level (link here) back in May and enacted this for my pension fund back then.  So should I rebuild the position or not?

Looking a touch further back in my notes I wrote in April (link here) that a fairer value for the Syngenta shares (pre any Monsanto bid talk) was US$70-80 a share...or the equivalent of c. CHF330s-380s which implies that the shares are at least a little cheap.  

Of course no surprises with this given that not only are quite a few shares 'at least a little cheap' at the moment but the credibility of the Syngenta management surely has to be in question today given they turned down a bid which could have been worth deep into the mid CHF400s a share on behalf (and without consulting) Syngenta shareholders.  

Why did they turn the bid down again?  As per Syngenta's press release: 

The 'sufficient clarity' aspects seem slightly strange given that my understanding (via Monsanto's comments) was that the Syngenta management refused to meet with any of Monsanto's representatives where many of these issues could have been progressed or maybe even cleared up (despite noting they 'engaged with Monsanto in good faith'). 

Possibly the most interesting aspect is the second paragraph which notes that the company is 'committed to accelerate shareholder value creation'.  I previously have noted the company's lowly geared balance sheet combined with good pricing power and some strong market positions plus a fairly extensive cost cutting programme. I believe there is good scope to augment the current 3.4% dividend yield for a start. 

Inevitably there is going to be little news until the company's Q3 results but at this point I think risk-reward is good for the simple reason that surely something is going to come out of this approach even if it is a revolt against the current Syngenta management by shareholders.  I like the underlying agriculture and related themes behind the shares and am happy to re-augment my position to put it back to how it was before the Monsanto approach earlier this year.  

So embrace the volatility and buy.  

Smith & Wesson: raising numbers

Back in June I noted about the firearm designer and manufacturer Smith & Wesson:

'Free cash flow for their FY15 equated to around 10% of market cap and net debt is modest as one of the revolver debt deals remains untapped.  From my perspective for FY16 the company trades on a high single digit EV/ebit multiple which just feels too low to me - especially in an environment where key broader industry competitors like Colt are in deep restructuring problems.

So a conclusion: I am keeping hold of my Smith & Wesson shares and I can see them hitting US$20/share over the next year.  A break below a US$15/share price should be viewed as an opportunity to augment given industry and company specific fundamentals'.

Since then the stock has resolutely traded in a US$15-17 range despite the recent market volatility.

Yesterday's (Thursday's US after hours) results contained some striking headlines including: 

'Our first quarter results exceeded our expectations for sales and net income in both our firearms and accessories divisions.  Higher  revenue in our firearms division was driven by strong orders for our M&P®15 Sport™ rifles, our Thompson/Center Venture™ bolt-action rifles and our M&P Shield™ polymer pistols...Based upon our performance for the first quarter and our current outlook for the remainder of fiscal 2016, we are raising our full year revenue and net income guidance'

So strong product performance leading to enhanced guidance...and strong metrics too with a 16% rise in operating profitability year-on-year for the first quarter and a switch to positive free cash flow generation.  Extrapolating the numbers puts the share on a single digit EV/ebit multiple and a 4%+ free cash flow yield despite the company noting '...our seasonal inventory build as we prepare for the upcoming fall hunting and holiday shopping seasons'.

And the materiality of the enhanced guidance?

'It raised guidance for full-year revenues to $610M-$620M (vs. an expected $612.7M), and for non-GAAP EPS of $1.14-$1.19, vs. an expected $1.07. For Q2, it's guiding to revenues of $135M-$140M (vs. expected $130.3M) and EPS of $0.19-$0.21 (high of a consensus $0.14)'

That's a pretty good enhancement...with the company noting additional help from the accessories business even if some of the seasonals get harder in their Q2 (the current quarter). Additionally they felt that general inventory levels in the marketplace continued to improve as the sector's fundamentals got better.  This is good news as it reduces the risk of extreme competitor action 'dumping' excessive inventory.  They also noted the high continuing levels of NICS firearm background checks ('a pleasant surprise') which should be some sort of indicator re demand.  

With a balance sheet of 'no borrowings on our $175.0 million revolving line of credit', the company were a little coy about the potential for future buybacks although clearly it should be on the agenda by the end of the current financial year (especially given the company has historically not been coy about applying buy backs).  

Other highlights from the conference call included:

Wal-Mart - further restricting sales is not a market insight as 'many retailers are in and out of the market'

General market - 'got a lot of research showing more and more people are showing an interest in shooting as a sport

Products in development - 120 including many in the accessories but generally 'a healthy increase over last year'  

Promotional activities - 'ongoing as want to take market share' 

Army contract - 'well positioned' but no further news on this tender at the moment.  

Overall I talked about the scope for a run on a good day at US$20 a share back in June and unsurprisingly I still see this now.  In short a company that may divide people in terms of their underlying product but one which - currently - is performing well.  For me - as a current shareholder - still a strong hold.  

A few macro and related thoughts today

Jackson Hole symposium properly starts today – schedule below.  Watch out for thoughts of Swiss central bank head today and Carney and very importantly Fischer tomorrow (link here). 

Let’s see the comments on all this: ‘Overseas Bankers, Officials Urge Fed Not to Waver on Interest-Rate Rise…Some international officials have a message for the U.S. central bank: Get on with it already’ (WSJ)

Global growth - Moody's revises forecast for G20 economies' growth downwards to 2.8% in 2016. the revision mainly reflects the impact of a more marked slowdown now forecast in China and more prolonged negative  of low commodity prices on G20 producers than earlier expected (link here).  

Meanwhile Moody’s also issued an interesting bond report

Ukraine  - ‘creditors…said the restructuring (20% bond haircut) would allow Ukraine to maintain its access to capital markets and provide the stable economic platform that will help the country to restore growth’.  Greece take note! However not all over…one big other creditor to deal with…

French labour market reform – Macron the French EcoMin said the French labour market must become more flexible, sees suitable political support to pass new reforms and pledges these in coming months. Sounds good but let’s see the reality. 

Outflows/inflows - Biggest US Stock Outflow Since August 2014 - US equity ETFs saw weekly outflows of $4.4bn to August 26, despite recovering with inflows of $5.4bn on Wednesday. Tuesday saw the biggest daily outflows in August while Wednesday saw the biggest daily inflows. Investors pulled over $25bn out of global-tracked equity funds, according to the data, and global-tracked emerging market equity funds are on course to record their biggest weekly outflow in over seven years.  Reflecting the volatile conditions the Dow has rallied for 2 days in a row, adding 6.3% making this the biggest two day gain since 5 December 2008, WTI crude Oct'15 futures settles higher by 10% which is the largest intra-day gain since 2009.  Still feel it is more about mix than anything else…

Volatility blame - China's devaluation of its yuan currency should not be made a scapegoat for the recent global stock market rout, a senior Chinese central bank official said on Thursday. Instead, Yao Yudong, head of the bank's Research Institute of Finance and Banking, said concerns over a possible US interest rate rise this year may have fuelled capital flight out of emerging markets (link here). 

(h/t @RANsquawk)

China profits - China industrial profits extend decline, -2.9% in July (after -0.3% in June). Biggest drop since Jan-Feb Chinese New Year lull of -4.2%.  Feels more important than the more tedious GDP/stock market debate...

Japan - Japanese FinMin Aso: Not Considering New Economic Stimulus At Present
Real Wages Are Rising, So Consumer Spending & CPI Will Remain In Upward Trend

Well he may be optimistic...but the lack of consumption spend is not the greatest...

Thursday, 27 August 2015

Financial Orbit wrap 27/08/15

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...

A day of travelling today so some brief thoughts...

1. Why China matters...(via the front page of today's Financial Times):

2. I have been perceiving value due to the dividend yield signals for a while: mega oil rally

3. Hang on...didn't US Q2 GDP second estimate look rather good?

US GDP Annualized (QoQ) Q2 S: 3.70% (est 3.20%; prev 2.30%)

Bit of life in the US consumer...although note did follow a bad Q1 hence really need at least another quarter to confirm...and patchy macro tells you that it is not a slamdunk.  

4. Was surprised to see Pernod Ricard shares marked down on their results report as I thought their Asian consumer readacross was solid:

5. Ah...Jackson Hole key highlights (via here):

  • 1130 GMT - Fed's Bullard speaks to Bloomberg
  • 1315 GMT - Fed's Kocherlakota and Mester speak to Bloomberg
  • 1625 GMT - SNB President Jordan on a panel
  • 1815 GMT - Fed's Lockhart speaks with Bloomberg
  • 0225 GMT - BOE Governor Mark Carney speaks
  • 1625 GMT - Fed vice chair Fischer speaks on inflation
  • 1625 GMT - ECB's Constancio speaks