I wrote a piece titled...

"Tesco's early Christmas present"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

I wrote a piece titled...

"Tesco - a recovery buy"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here. 

"Marks And Spencer: the management better hope Margins Are Sustainable"

I wrote a piece titled "Marks And Spencer: the management better hope Margins Are Sustainable" which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"Tesco's is just like Brexit (or maybe a hedge fund)"

I wrote a piece titled "Tesco's is just like Brexit (or maybe a hedge fund)" which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

Dollar General: small box discount retailer earnings thoughts

It has been over a year since I last looked at the 'small box discount retailer' Dollar General...

...when I concluded that I was going to take some profits after a good trade (link here). I was rather surprised by the strength of the Dollar General shares in early 2015 but what is interesting is that after a big fall in recent months the shares are now around the level I sold them for:

So what to think now?  Well in the Q3 numbers disclosed today the company noted same-store sales rising 2.5% in Q3 as both traffic and average transaction basket increased.  The 9 month equivalent same store sales growth numbers rose 2.9%.  Operating profitability edged up around 5% year-on-year over both periods.  In terms of outlook akin trends were seen although note the comment that Christmas will see a 'shop closer to events'.  

'The Company's revised outlook for the 2015 fiscal year anticipates net sales to increase by approximately eight percent over the 2014 fiscal year, with same-store sales expected to increase 2.5 to 2.8 percent. It is still very early in the Company's fiscal quarter with a core customer that tends to shop closer to events'

The actual full year guidance was tweaked down slightly on an income tax related issue (which can be looked through). Elsewhere the plan to open over 700 new stores in 2015 followed by 900 in 2016 remains.  

In terms of comments on the conference call the company noted: 

‘returning cash to shareholders remains a priority’ - $1.6bn expected

‘our core consumer is still struggling…no real income growth’

‘phase 1 stores on track to achieve our sales expectations’

‘shrink improvement one of our great opportunities’

‘clear vision on where we want to buy and how we want to get there’

‘we see a real opportunity to save our consumers time and money each day’

I like the return to shareholders (7%+ of market cap) and note the continued store roll-out and what seems to currently be a continued solid same store sales profile.  Chat about the potential of re-modeled stores (open them up, increase cooler doors etc.) offers some further hope re the 2016 guidance but - of course - first we need to get through Christmas first.  

The company is not overleveraged (x1 net debt to ebitda) and cannibalisation has not yet kicked in at first glance.  The consumer backdrop is not easy but at x11 EV/ebit the share is not horribly expensive - as I noted back in mid 2014 the mid US$50s is rude for this share.  Below US$60 I would be comfortable buying this name.  At c. US$65 (with a positive reaction to the numbers today) I may just await a couple of bad days for the share/the general market.

However is this a share that inherently I like?  The answer is 'yes'.

A final trading thought - in the US discount-y retail space maybe you buy the share out of Dollar General and Wal-Mart (last write-up here) with the lower share price.  Currently that would be Wal-Mart...

Interesting times at Wal-Mart

Well...today is an interesting day for Wal-Mart shareholders.  I have written about the company a number of times but have never bought the stock.  Given today's move...

...which if this magnitude happens would be the biggest one day fall since 1988...

(h/t @fastFT)

...that was possibly a wise move. So what was said?  Here are a few headlines: 

• Shares of $WMT gyrate after comments from shareholders meeting; CFO says expects flat sales in FY16
• $WMT saying FY17 EPS will fall 6-12% driven by increased spending on wages
• Wal-Mart CFO: Sales now expected to be flat in fiscal 2016.
• Wal-Mart CEO says investments in tech and people will continue to pressure earnings next year

Well that's not...great.  As I have chronicled over a number of articles (the most recent here) revenue growth has been on a structural growth rate decline for a while.

As I noted back in August in the above piece when I reviewed the status of the company and its turnaround plans and pulled it together into some valuation thoughts:  

'We are getting closer to value but for me the continued deterioration of the earnings line has pulled that number further down.  A 5% free cash flow yield on Wal-Mart is around US$65/share, a single digit EV/ebit multiple nearer US$60.  The three year chart may shout support but my instinct is that it is still too early in an industry which is still volatile/seeing change and competition'.  

Clearly that single digit EV/ebit multiple is going to be lower now, at the very least below US$55 a share, a price approaching the lowest bound of the 5 year range: 

The important question however is to ask whether this is deeply structural with Wal-Mart. Tesco's after all in the UK as the market behemoth who lost their mojo as more customers wanted a different experience elsewhere.  Wal-Mart has few issues with discounters but it may be struggling with the lack of real wage growth for its core consumer group and - of course - a commitment to raise the wages of its own workforce as noted above. 

As I detailed in August the turnaround plan is centred on funding extra capex/wages with lower costs and simplification which sounds sensible, certainly with Wal-Mart's strong balance sheet (net debt around x1 historic ebitda).  No surprises that they have announced a US$20bn buyback (just over 10% of the market cap!) then at a certain level. 

Clearly scepticism is going to remain high for a while - and my instinct is to wait for this prospective single digit EV/ebit level again, which suggests around a US$55 entry price statically. The buyback and 3%+ dividend yield (see below) are undoubtedly supports. 

As this piece (from which I took the above dividend chart) correctly observes:

'There is a structural shift happening right underneath WalMart's feet. Consumers, particularly younger consumers, simply don't go to WalMart nearly to the extent their parents and grandparents did.

WalMart has seen its public image suffer greatly as a result. It's about time the company takes these issues seriously and positions itself to better compete in the new age of retail. While the stock has performed very poorly, and may continue to, WalMart may finally be on track for a real turnaround'.

I think capital growth investors wait for US$55 at today's newsflow.  Longer-term income/total return investors cannot really be criticised for giving a sub US$60 level a go so long as they have a 2-3 year minimum holding period in mind. 

Interesting times at Wal-Mart.  

"Tesco: the super tanker starts to turn"

I wrote a piece titled "Tesco: the super tanker starts to turn"'' which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

So what do you do about a stock like Wal-Mart?

Back in May at the time of the last Wal-Mart results I observed (link here) that:

'So here's the trouble: at a still US$290bn+ EV you are trading on a static x12 EV/ebit with a 3-4% free cash flow yield.  That just does not get me excited.  I don't mind buying a recovery story at that multiple but I fail to see it in the absence of much stronger general growth levels.  

For me I am still waiting for around US$70/share'.  

Well here we are.  After another downward nibble at forecasts...

...Wal-Mart shares are trading below the US$70/share level today:

It is pretty clear why as noted in clearly the most important chart from their presentation document whilst sales have moved into growth mode in the US(1.5% comparable sales growth in Q2, 1.3% YTD), earnings were not good: 

So why this trend?  Essentially the cost of doing business in a more friendly and less austere fashion.  Simply put if Wal-Mart wants to raise wages and put money into store infrastructure and look then they will have to find efficiencies in their operations and sourcing divisions:

Of course not an impossible corporate objective and actually I like the sound of some of the initiatives:

International revenues/earnings could not offset either.  Of the company's main markets only Mexico showed both rising sales and higher gross margins.  The UK showed the latter but not the former, whilst China and Canada were the other way around.  

Pulling it all together the trouble is...time to help make it work (and what you pay today).  Wal-Mart is on track to deliver around US$10bn worth of free cash flow which it is assiduously returning to shareholders via dividends and buybacks...

...and that is a 4.5% free cash flow yield - not too shabby at all.  However akin to my conclusion three months ago we are still not at the stage where earnings are providing much support (consensus x14 forward P/E, EV/ebit around x11.5 times).  We are getting closer to value but for me the continued deterioration of the earnings line has pulled that number further down.  A 5% free cash flow yield on Wal-Mart is around US$65/share, a single digit EV/ebit multiple nearer US$60.  The three year chart may shout support but my instinct is that it is still too early in an industry which is still volatile/seeing change and competition.  

"Tesco – every little improvement helps (and hello 225p again)"

I wrote a piece titled "Tesco – every little improvement helps (and hello 225p again)" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Walmart - still sadly indicative of malaise

Has it really been six months since I last wrote on Walmart?  Apparently (link here) it is.  Back at the link above I gave the view that at/around the US$70 level I could see some value in Walmart shares.  Well since then we have not even got close...despite the retailer's shares having fallen over US$10/share since the early January high:

So what to make of today's Q1 numbers?  Well whilst constant currency revenues rose (headline sales hurt by currency translations), operating income and EPS did not.  

Looking at US sales by divisional line grocery was flattish but all other categories moved ahead.  As shown below comparable traffic was positive (and even strong in the more convenience centred 'Neighborhood Market' stores)...but via lower margins operating income was down mid single digit.  

And the less retail centred Sam's Club faired even worse even at the basic category sales level:

A ray of hope at the international divisions (even if they generate less than a quarter of US profits)?  Well sales were good except in the ultra-competitive UK (where at least gross profit rose - in fact the gross profit rate rose in four out of the five International operations).

But even ignoring the translation into the (strong) US dollar operating profit was up just a pathetic 0.1%.  Not inspiring at all.  

So here's the trouble: at a still US$290bn+ EV you are trading on a static x12 EV/ebit with a 3-4% free cash flow yield.  That just does not get me excited.  I don't mind buying a recovery story at that multiple but I fail to see it in the absence of much stronger general growth levels.  

For me I am still waiting for around US$70/share.  

So if Walmart cannot get any momentum what is that saying about the average American and spending capability?  As the company noted on the conference call:

Based on recent surveys, we know that many of our U.S. customers are using their tax refunds and the extra money from lower gas prices to pay down debt or put it into savings.

Hmm.  

"Tesco: don’t look at your holding for three years or don’t bother"

I wrote a piece titled "Tesco: don’t look at your holding for three years or don’t bother" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

"Why you can call Morrisons shares better than overpaid City analysts"

I wrote a piece titled "Why you can call Morrisons shares better than overpaid City analysts" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

What price am I planting my 'look again' flag re Wal-Mart shares?

I observed in November that I felt that relative value in the international food retail space lay more in stocks like Tesco than Wal-Mart.  After a bumpy start that call worked out ok:

Which brings us back to Wal-Mart who reported today.  Of course all the headlines are about the employee friendly initiatives the company is enacting but for me the big US operating takeaways are not just dull like-for-like sales and (due to modest margin decline) small reductions in operating profitability...

...but that the company did not replicate last year's share repurchasing.  

Actually looking at a two year Wal-Mart share price chart you can probably see why.  As good guardians of capital better to buy back shares at a lower price.  

Of course the whole global food retail environment is a bit challenged too.  Whilst four of the company's largest five international divisions saw better gross profit rates, two saw lower net sales.  

Nevertheless international is a little stronger than the core US operations as is Sam's Club (helped by fuel sales in particular).  Still the greater influence of the core US business means that it could well be a no growth EPS year (as the guidance encompasses the FY14A earnings number):

With Wal-Mart trading at x11.8 EV/ebit FY15e with a 2.2% yield (but a stronger 5.8% free cash flow yield).  At those metrics it feels to me more a balance sheet story than a valuation one today.  On this basis around a US$78 share price the company starts to look more interesting (x11 EV/ebit/balance sheet options/technical support).  I will put a flag there.

"Has Tesco Dave played a blinder?"

I wrote a piece titled "Has Tesco Dave played a blinder?" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

"Tesco – rounding off the annus horribilis"

I wrote a piece titled "Tesco – rounding off the annus horribilis" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Investor day insights from two recently volatile sectors

Hard to think of two more recently volatile sectors than food retail and gold mining.  Of course I am invested in both :-)   More seriously these are two sectors I see real opportunities in over the next year.

In food retail my second largest position is Morrison's the smallest of the big four UK supermarkets. I last wrote about the company here and recently they augmented those tentative improvements with a bolder trading update which highlighted better than expected performance on debt reduction (as well as a continuing sales revival).  As the share price over the last year shows we are still at the early stages of any turnaround:

So last week's investor day (it has taken me nearly a week to get hold of the presentation...) was of great interest and, I believe, importance.  There was no overt trading update other than a reiteration of prior statements, this was more about the retail underpinnings to the turnaround.

I liked the way the company started the presentation.  It is always good to be clear what you stand for...and value and a focus on fresh food is as good as anything:

The two charts that really caught my attention were perhaps the ones where they showed the greatest differentiation with the other big supermarkets - as the smallest of the 'big four' you have to be different to survive.

And then there is the manufacturing.  Certainly Morrison's vertical integration is higher than any of the other big four.  

Overall thoughts?  Interesting and a forward step but no huge surprises - and perhaps there should not be in any case.  I still feel comfortable with the turnaround and understand some of the underpinnings better.  Now it is time for delivery.  Next stop the post Christmas trading statement.  

Turning to the gold sector today Acacia (formerly African Barrick Gold) held an investor day.  Many moons ago I was invested in the then African Barrick Gold and ultimately was disappointed by the underlying business execution given that - as shown below - the reserve grade of the business was always fantastic (and even better than my favourite two gold stocks Randgold Resources and Polymetal).  

Where it all went wrong was nicely captured by this chart which showed the terrible position on the industry cost curve the old ABG was at.  Unsurprisingly when the gold price fell so did their share price.  Note though where Acacia aspire to be 'moving to the 1st quartile' with a cost profile closer (but not as good) as someone like a Randgold: 

I note throughout the presentation today the company talked about many of the softer issues Randgold (in particular) highlight such as partnership with local communities and relevant governments.  Acacia operate primarily in Tanzania (in contrast to Randgold in Mali, Cote d'Ivorie and the DRC) but have hopes to expand into countries like Kenya and Burkina Faso as noted below.  

Whilst hearing about expansion hopes the key shorter-term is cost control and taking full advantage of the underlying grade in the Tanzanian operations.  I was quite heartened by what I heard which including some fascinating insights into the importance of their position in the Tanzanian economy.  Improving relations/driving the partnership with important Tanzanian actors is all important. It is good to see they have reduced the expat workforce and proportionately now rely much more on local labour (although not to the extent that Randgold run their operations).

Overall a good effort by Acacia.  They are on my watch list for possible investment although it is clear to me that despite being an Africa focused gold operator they are no Randgold.  Still - compared to some generalised poor performers across much of the global gold mining industry - they are now of above-average interest.

Two interesting investor days in good value/opportunistic parts of the market.

Wal-Mart: good numbers have international implications

Food retail has been an atrocious performing sector during 2014 caught between structural change towards online and convenience, price competition from discounters and a general lack of food price inflation.  I have documented the trials and tribulations of a number of UK names (link here for example) as well as Wal-Mart in the US.  However in the last few weeks there has been a slight performance improvement across the board as shown in the chart for Tesco and Wal-Mart below.

Note the big bump in Wal-Mart's shares today - quite surprising given the downbeat nature of the capital markets day a few weeks ago (which I wrote up and published my top ten charts from here) which included a negative guidance update:

Well the guidance per se did not particularly get better...

'The company now sees FY14 EPS of $4.92-$5.02 vs. $4.98 consensus'.

...but the tone of comments did.  Take the hugely critical and influential US sales note how the Q3 numbers were clearly better than the YTD ones assisted by a couple of the positive themes mentioned at the capital markets day: e-commerce and convenience.  

Even internationally there is a mixed but improving picture.  Whilst only two geographies had rising net sales, three had an improving gross profit rate including the UK division Asda (a statistic which the US business still has not quite achieved).

I noted previously that a single digit EV/ebit ratio for Wal-Mart would be consistent with a US$70 share price but the share blazing through the US$80 level indicates much more optimism/valuation inflation.  On an international basis good news for the pressurised UK listed supermarket sector.  That's where the relative value lays.  I remain long Tesco and Morrison's.  

"Tesco – no improvement forever = today’s share price"

I wrote a piece titled "Tesco – no improvement forever = today’s share price" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.