Results rushing in
July 18, 2012 in Uncategorized
“You might frown on all of the stimulatory measures that the Federal Reserve has embarked on, but would you have preferred the alternative? If you needed reminding, Bernanke was perhaps the greatest student of the Great Depression, and the (lack of) policy response in the aftermath of the crisis.”
Jozi, Jozi. 26o 12′ 16″ S, 28o 2′ 44″ E. It could have been better, it might have been worse I guess, US retail sales disappointed, and perhaps that was the reason for the late selloff. At the end of session the Jozi all share index had sunk 0.12 percent to 33696 points. The industrials sector did the best out of all of the majors, rising nearly one third of a percent, whilst resources sank nearly six tenths of a percent. We were happy with the results that we saw during the day, and on balance most results have beaten expectations so far.
BHP Billiton released their production report for the full year this morning and on balance it looks good. I think that the thesis that we have on the company will hold true over time, and in the short term however all these commodity producers are lumped together from a quality point of view. But in our opinion, we agree with company and the CEO, their quality of their asset base is unrivalled globally. Tier one assets as Marius Kloppers often calls them.
Whilst the company might refer to the environment as challenging, they will still be able to produce annual production records across ten of their operations. This is also the 12th consecutive year of record Western Australian Iron Ore production which saw the June quarter register an annualised record of 179 million tons per annum. For the full year Iron Ore production topped 159.4 million tons actual for the year, an increase of 19 percent for the full year, and 8 percent on last quarter. There was a strong bounce back in the copper division, a 15 percent increase quarter on quarter, but because of the “challenges”, they registered 4 percent lower production, 1094.5 thousand tons of copper for the year. The biggest change, and I guess it is no coincidence, is the petroleum division which reported a 40 percent increase in the year to barrel of oil equivalent to end at 222.34 million. Or roughly two and a half days production to match our global usage.
So in this department (oil and gas) BHP Billiton are not necessarily a big producer globally, but it has become a significant part of their business. I remember when oil production was much lower than at these levels, but because of the high levels of the oil price relative to their other divisions, this division contributed half of the profits in 2007. Five years ago. Remember that Iron ore is now a strong contributor, as margins have widened significantly. Energy and metallurgical coal volumes both increased by 2 percent, perhaps ahead of folks expectations particularly with the flooding in Queensland.
I am pleased with these numbers, they seem to be ahead of consensus. BHP Billiton is for us the only truly well diversified mining company at that scale. At most scales really. We continue to believe that you must be patient here, whilst earnings are never going to be smooth with commodities companies, they are more likely to be reliable. We will be closely watching on the 22nd of August, that is five weeks today. I don’t think that I can wait that long.
New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. Markets did a whole lot better from mid morning onwards and perhaps that can be directly attributed to commentary from Ben Bernanke, as the Fed chair outlined what tools they have at their disposal to fight a slowing economy. Many armchair critics continue their Ben bashing and FOMC SMH’ing, but in my world they have done a fabulous job. Because whilst you might frown on all of the stimulatory measures that the Federal Reserve has embarked on, but would you have preferred the alternative? If you needed reminding, Bernanke was perhaps the greatest student of the Great Depression, and the (lack of) policy response in the aftermath of the crisis.
And decided to take on extraordinary measures to combat against the same happening again. Because regardless of your political affiliations, that is and was not good for America. The purists could argue that this is necessary to restore balance, but it does little for ordinary humans, mass unemployment, bank failures, GDP getting crushed (by as much as a third contraction from the highs to lows in the Great Depression) and general massive tax hikes to shore up government revenues. Although the purists would have said that the Fed were to blame in the first place. I don’t blame, I am in awe of that team.
Johnson & Johnson, one of the best known consumer brands globally, reported second quarter numbers before the market opened on Wall Street yesterday afternoon. Jozi time afternoon of course, I guess we are luckier that US markets are open whilst we are awake and not in the wee hours of the morning. Hmm… another reason not to live too far East of this time zone. JNJ reported revenue of 16.5 billion Dollars, which was actually lower than the comparable Q2 in 2011, mostly as a result of a negative currency translation, which had as much as a 7.5 percent impact. Excluding special items, EPS clocked 1.30 USD, slightly better than expected. The guidance for the full year however was lower than prior guidance with the range now expected to be between 5.00 to 5.07 USD for the current financial year. Prior guidance was 7 cents higher than the top end of the range given. The dividend was actually declared a day prior, 61 cents for the year. So, based on that guidance and 244 cents worth of dividends a year, the stock trades on a forward earnings multiple 13.8 times and a dividend yield of 3.8 percent. That is a huge attraction, that yield is really awesome when compared to that of US treasuries. Oh, and if you need reminding, the stock was higher than it is now in 2008, where it was a little above 71.50 Dollars. That looks like the all time high.
So what is compelling about owning this business? Well, the structure of the business for starters, first of all the consumer products divisions, a pharma division and a medical products division. Just recently that medical products division was boosted with the acquisition of Synthes for a whopping 19.7 billion Dollars in both cash and stock. AND, a smaller acquisition, the first of its kind in China, of a business called Guangzhou Bioseal Biotech Co. which is a manufacturer of controlled bleeding surgical product. Sounds like, I don’t know, a life saver?
In the consumer division there are awesome products in the baby care segment that you would know well, the baby lotions, soaps and shampoos. Neutrogena is another global brand that you would be familiar with, perhaps it is something that you use too. Band-aid is another iconic brand, the American word for plaster. Listerine, you know that one too. Acuvue contact lenses and products, that is a household name too, for those short of sight. And then in terms of the OTC products, again, there are well known global brands, check them out, scroll down to OTC under Consumer Products. This division is strangely the smallest, revenue for the quarter clocked 3.619 Billion Dollars, lower than the comparative quarter in 2011.
Next, you have the Medical Devices & Diagnostics division, which is the biggest revenue contributor, this last quarter revenue was flat at 6.565 billion Dollars. Again, I am sure that if you are a medical professional, you can vouch for their product. Lastly, the Prescription Products, which contributes 6.291 billion Dollars to overall revenue.
This is one of the most compelling characteristics of the business, its diversity. And many have been calling for the business to be split up. As per an excerpt from the Jim Cramer show, and a note from Goldman Sachs, both parties think that either two or three separate business (that have VERY little other than the shared brand name) would unlock enormous potential for shareholders. We agree. Although this is not necessarily the reason to own them, rather than their absolute quality as one of the key healthcare stocks you can own anywhere in the world. We continue to add to the stock at these cheap levels, from a historic point of view.
Byron’s beats looks at another of our favourites, and another company that reported results yesterday, the iconic Coca-Cola. A business whose flagship brand is seemingly everywhere, and perhaps deserves a better global ranking from Accenture (Most valuable global brands) last year, sixth place. And that was slotting behind Apple, Google, IBM, McDonald’s and Microsoft. Hmmm, methinks at a retail level it is better. I am sure that remote folk recognise Coke over all of these brands above.
- Yesterday we had second quarter numbers from one of our recommended stocks in New York and one I am sure you have all heard of and in fact probably contributed to personally. Coca-Cola released numbers which showed good growth in the developing markets, week numbers from Europe and pretty anaemic numbers from the US. In case you were in the dark, here are the brands that fall under the Coca-Cola umbrella. This from their website.
“The Coca-Cola Company (NYSE: KO) is the world’s largest beverage company, refreshing consumers with more than 500 sparkling and still brands. Led by Coca-Cola, …. our Company’s portfolio features 15 billion dollar brands including Diet Coke, Fanta, Sprite, Coca-Cola Zero, vitaminwater, Powerade, Minute Maid, Simply, Georgia and Del Valle. Globally, we are the No. 1 provider of sparkling beverages, ready-to-drink coffees, and juices and juice drinks.”
Let’s take a look at the numbers. Global volumes grew 4% for the quarter while comparable currency neutral net revenues grew 7%. Comparable earnings came in at $1.22 which was up 4%. Analysts are expecting around $4.30 for next year so at $77.7 we see a forward valuation of around 18. This seems fairly valued for a company which has so much brand equity and potential for massive growth in developing markets.
Let’s look at the geographic spread which always tells an interesting story. It’s broken up into 5 regions with the bottling business filling up the sixth revenue driver. Eurasia and Africa grew volumes by 12%. This was led by 20% growth in India, remember I wrote about their drive up into India a few weeks ago? South Africa even gets a personal mention up 10%. Well done guys!
European volumes declined 4% with unseasonable weather, large marketing campaigns for Euro 2012 and the Olympics and of course ongoing macroeconomic uncertainty in the region being the main reasons for the decline. The marketing campaigns should pay for themselves later in the year. In Latin America volumes grew 3% with 6% growth in Brazil, 4% in South Latin and 1% in Mexico. This is a massive region for Coke.
North America only grew by 1%, this was despite Easter and 4th of July not falling into the quarter. Obviously these are big holidays for the company. Interestingly Powerade grew 13% in the region which falls under the active lifestyle theme I like so much. The Pacific which includes the likes of Japan and China grew 8%. Margins in this region are strengthening as operating income grew 15% in the quarter. The bottling investment group grew revenues by 10% whilst operating income declined 15% due to structural changes and acquisitions.
All in all we really like the mix. Risks include commodity inflation decreasing margins and stiff competition but against its peers Coke seem to be gaining the best market share. If you like SABMiller you should like this one even more. It’s the same theme chasing after the developing market consumer but they don’t face the regulatory pressures.
Currencies and commodities corner. Dr. Copper is last 344 US cents per pound, the gold price is lower at 1578 Dollars per fine ounce, ditto the platinum price, last at 1409 Dollars per fine ounce. The oil price is last at 88.77 Dollars per barrel. The Rand is last at 8.17 to the US Dollar, 12.75 to the Pound Sterling and about to crack 10 to the Euro. In the right direction from an imported inflation point of view. We are higher here, thanks to the rally in the US. Yes, thanks for that.
Parting shot. Sometimes the same piece of news is interpreted differently. Or no, the same piece of news is good for some, and bad for others. Chinese housing data this morning suggested that the property sector has rebounded and as such makes it much more difficult to justify a policy response from the central authorities. So this is bad for the resource stocks, and as such they were sold down heavily in Aussie this morning. BUT, this is good news for the retailers in China, and we have seen a strong bounce back for Richemont this morning. The same news, different interpretation, good for some companies and not good for others.
94 years ago today one of the greatest statesman ever to have walked the planet of the earth was born in a small rural village in the Eastern Cape. Not Qunu, but Mvezo, the two are close though. I have read the autobiography years ago, the Long Walk to Freedom, it is a must read for any South African. Happy birthday to, without a doubt, the greatest citizen of this fine continent. I managed to find something really amazing, the Dow Jones Industrial average started the year that Nelson Mandela was born was at 76.68 points. It ended the year at 82.60 points. In 1964 when Nelson Mandela went to jail, the Dow Jones started the year at 874.13 points. When Mandela was released from jail, the Dow Jones levels was around 3000 points. It closed last evening at 12805 points. Amazing, and increase of 12700 points plus in the lifetime of Nelson Mandela.
Sasha Naryshkine and Byron Lotter
011 022 5440