Apple is not Microsoft
August 21, 2012 in Uncategorized
“Some people are taking this all time high in their stride, others are rubbishing the facts (claims), suggesting that the world has seen more valuable companies before, on an inflation adjusted basis. I am taking a different angle. I am suggesting that the valuations are probably more important than absolute market value.”
Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E. We sank one fifth of a percent yesterday, the gold miners took a drubbing, I have noticed that poor Harmony sank, and continues to sink to near their 52 week low. Which is strange, because from where I am sitting, without looking, I would have thought that the gold price has done “well” in recent weeks. Or so I thought. A quick glance at the Kitco Christmas tree says that the 30 day change in the gold price is 2.6 percent. The one year change shows a slightly poorer picture, the Dollar price has slid 12.3 percent. The Rand price however, which is more important to Harmony, is flat over the last year, indicating that the Rand has weakened to the US Dollar by around the amount that the gold price in Dollar terms has weakened. Harmony relative to that Rand Gold price however has underperformed, down just over 13 percent over the last 12 months. The ALSI over the same time period is up nearly 21 percent. Ouch. This has been a recent thing however, the divergence over a three year period comes in early January of this year.
It is not just a gold miners “thing”, Anglo has underperformed the index by over 25 percent. BHP Billiton has done a whole lot better, in part due to their non exposure to the poorly performing platinum sector, that is currently the focus of global attention, due to the human tragedy through last week. BHP Billiton has underperformed the index by around two percent, if the results are good tomorrow, then I would think that BHP Billiton could turn the table somewhat on the broader market. As has been well documented over the last week and a half, the impact of the rising costs and lower production of a weaker priced metal has not only hamstrung the platinum miners, but has weighed heavily on their shareholders. Collectively the platinum stocks are down nearly 22 percent year to date. And this is on top of a 28 percent fall last year. It has been a really tough half a decade for what was once the darling sector of South African mining. I guess the mantle was handed to the likes of Kumba Iron Ore and Exxaro to a lesser extent.
Another darling of the equities market for the better part of the last decade has been Shoprite. It has been an amazing story of being able to leverage off the ever increasing middle class in South Africa, who have been growing their spending power dramatically. The lowest Shoprite share price was during the financial year to end June 2003, 530 cents. The stock now trades after their results this morning, at a little over 158 Rands a share. Add onto that 530 cents (if you were lucky to have bought them then) and you get 1234.5 cents worth of dividends paid since 2003. Christo Wiese, who owns just over 16.5 percent of the company has become a very (more) wealthy man over the last decade. And according to some weekend papers as a result of this has a very tricky SARS problem to deal with, as much as two billion Rands, is that right? I am not following that development too closely. At the current share price Wiese is worth just shy of a whopping 15 billion Rands. Gulp, that is more money than a small village could spend in a lifetime.
So here goes, the full year numbers for Shoprite holdings. Turnover increased over 14 percent to 82.73 billion Rands, profits for the full year topped 3 billion Rands for the first time. Costs were contained below top line growth, which I guess is encouraging in this higher cost environment. Earnings per share rose 19 percent to 590 cents, headline earnings per share rose by slightly more to 607 cents per share. The total dividend for the year was 303 cents, 194 cents in the second half of the year. So, on a simple valuations basis at 158 Rands a share, the company trades on a historic earnings multiple of 26 times, and a dividend yield of just less than two percent, 1.91 percent to be exact. Hmm… whilst their merchandise might be competitively priced, their share price hardly sounds like a bargain.
We often tell you however that the price is set by foreigners, who view Shoprite and Massmart as great proxies for retail in Africa. Just yesterday I sent my colleagues an Economist article titled A continent goes shopping. A very low base is what we have here in Africa, and you can see why many investors get wildly excited about our continent. Sure, we have the same old stereotypes about the African continent, but I think therein actually lies a massive opportunity. Africa has many opportunities. But many problems, ummmm, sorry challenges as we like to refer to them down here. Challenges. The right price for Shoprite then seems more like a philosophical argument, which it should never be. It is an out and out monetary and economic decision that the equity holders decide on a daily basis. Because the assumption is that all investors are paying attention, factoring in past information and making assumption about the future. The current share price reflects the balance between the buyers and the sellers, and their lack of bias on the company presuming that investors are irrational. So I don’t care much for what your price target is. But rather, I care what you pay for at a specific point in time, whether or not you will be rewarded for buying the quality that is available to you.
The business is still very much a South African one, and whilst non South African supermarkets revenue grew by 25.4 percent, this segment only represents 11 percent of group sales. But we are at the bottom of Africa. We are African. All sales are African for the company, they do not have a footprint in South America or South-East Asia. So perhaps the time must come for us to stop referring to Africa. This is an African company. With only 11 percent of their revenue outside of our borders, which means that there is huge scope for growth. For the time being however, the company are giving rather cautious guidance, but this is not new.
In their prospects column “The board expects trading conditions to remain largely the same for at least the first half of the new financial year.” But it gets trickier beyond that, the company continues: “Nothing on the horizon suggests that the pressure on consumers’ disposable income will ease off; if anything, it will increase further with a rise in global food prices at this stage seemingly unavoidable.” I like the sector, I like the company, clearly they have identified and acted on their instinct and executed their strategy to perfection. You know we are buyers of Massmart, which is in a similar space.
I only have two issues with Shoprite. One is that the Checkers colours are not the most appealing in the world, that is a personal thing, the other is that I think that the company overpays their chief, but that is a shareholder matter. All I know is that this South African success story employs more than 100 thousand jobs, having added another 7000 this last year. Long live Shoprite, long live. And until sales and profits do not keep up the pace that shareholders are used to, the stock should continue to deliver more than above inflationary returns to their shareholders, based on all the facts that I have at my disposal. The biggest risk for me is if there are fleeing international shareholders, selling at all costs. Because in the same way that “they” are happy to pay up, “they” are as comfortable to head for the exits. That is the biggest risk to existing shareholders, methinks.
Byron’s beats explores a space of the economy that has burst away, private education. Why? Well, what is the alternative for middle income earners? I want to know how you feel on the whole education landscape in South Africa, try and remove the emotion. I did say try…..
- Yesterday we had 6 month results from Curro one of my favourite stocks but wow has the ride been wild. How is this for some share price moves? The stock listed at 550c in June 2011 and closed at 799c on the day, it then fell all the way back down to 550c before starting its upward surge. It reached as much as R20 this month before pulling back to R16 a couple of days ago. After these results it is now sitting above R18 and a market cap of R4.2bn.
So how did the numbers look? Clearly the market liked them as the stock shot up over 10% in 2 days but is it sustainable? Revenues increased 103% to R161 million, learners increased 125% to 12497. In 2009 the school had just 2059 learners. EBITDA increased 226% to R18 million while earnings per share still came in at a loss, -1.8c compared to -9.6c. It looks like we may see some profits for the year end.
But these numbers look awfully small for a company of R4.2bn. Assets which of course includes their schools comes in at just over R1bn. The biggest question is whether the company has the potential to make enough money to justify the share price. R18m EBITDA is clearly not enough at this stage. It seems to be a capacity issue. This Moneyweb article got the following from the company.
“At this point not many of these schools are profitable. Curro expects a school to become profitable after three years of operation. Currently just two schools are operating at almost capacity (between 75% and 100%); seven are operating at between 50% and 75% capacity; nine at 25% to 50% and four are operating at below 25% capacity. Earnings per school are not disclosed but at year end Curro disclosed that one school was operating at almost full capacity, earning R9.2m before interest and tax. At the same time (last December) six schools were operating below 25% capacity, incurring losses of R3.3m.”
So do you believe they will be able to fill this capacity? I believe the answer is a resounding yes and that is why I like the company. The demand for their product due to the failure of the state will increase more in more. I think even at this stage the demand is so high that we don’t even need an economic boom to fill this capacity. Opportunity’s are also flowing as many small private schools lack funding and require consolidation. Chris vd Merwe had this to say in another Moneyweb interview.
“What we clearly see in the marketplace, Alec, is that I think we underestimated the number of opportunities that we have to develop these Curro schools. Naturally we reassessed the situation and now we are of the firm belief that the target of 40 by 2020 is too small, and we can even up that to 80 schools.”
And this is why the share price is where it is. Opportunity to grow by acquisition, willing funders (remember the Education Impact fund) and a massive gap in the market for a product that is an absolute priority. Short term I think the price will remain volatile but long term I would be happy to hold.
New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. Stocks started slower, but closed as close to flat as you could get. Early in the session stocks had lost half a percent, but clawed all the way back. Northern Hemisphere Summertime volumes are looking poor, that is perhaps the case all the way through to labour (sorry, Labor day) weekend, September the 3rd. This is the American version of May day, reading up, and unofficially marks the end of the summer vacation for Americans and Europeans. So sad for them, but for us the exact opposite is true, I dispensed with both my beanie and running gloves this morning! No need for those bulky things, spring is here. No spring in the step of Mr. Market, the S&P 500 ended a whole 0.03 points (not big enough to register a percentage move) lower to 1418. I saw the ever bullish Tom Lee, from JP Morgan suggest that by late November the level on the S&P could be 1475. 60 odd points in three months does not sound like a tough ask, four odd percent. But, when you look back over history and come to a number of around 8 percent per annum as an acceptable return over time, then 4 percent is a lot more moving from here than you might think. Again, I don’t think that the S&P would be stretched with around 102 Dollars of earnings for the year.
Apple became the most valuable company ever last evening. But not on an inflation adjusted basis, but then again who is checking that? It turns out that there are some folks. The stock closed at a 52 week and all time high at 665.15 Dollars a share, to give the company a market valuation of 623.52 billion Dollars. This tops the Microsoft all time high back in December of 1999, where the company was
grossly over-valued at 616.34 billion Dollars. The strike out is for obvious reasons, Apple currently trades on a multiple of only 15.64 times, historic that is.
For the financial year to end September 1999, Microsoft earned 34 cents per share. 34 cents? There has been one stock split on the 18th of February, so adjusted for that you come to 68 cents for the full year. At that stage, adjusted for the prior split the stock reached 58.37 Dollars the day before Christmas 1999. Back then the stock then traded on a historic valuation of 85 times earnings. You can adjust that market valuation back then for inflation (see someone here did that -> Apple Becomes the Most Valuable Public Company Ever, With an Asterisk) and come to around 856 billion Dollars, but the point that I am trying to make is that back then Microsoft was way overvalued. Crazy.
And Apple? Well, the stock hardly looks stretched at just over 15 times earnings. The analyst community, for what it is, suggest that the company can deliver next fiscal earnings of 52.77 Dollars per share. Check out the MarketWatch Apple Inc. analyst estimates. And adding more to the conversation is that someone has gone further back and said on an inflation adjusted basis that IBM would be worth 1.3 trillion Dollars, had it maintained the same rating afforded to the stock back in 1967.
Some people are taking this all time high in their stride, others are rubbishing the facts (claims), suggesting that the world has seen more valuable companies before, on an inflation adjusted basis. I am taking a different angle. I am suggesting that the valuations are probably more important than absolute market value. And on that basis I think that you can continue accumulating Apple, in anticipation of the release of a new iPhone and increased sales of the iPad, which have multiple uses in both the work and education spaces/places. I see average price targets, but you know my view on that. Earnings. Future, both immediate and longer dated depends on where the stock will trade. Because as sure as eggs are eggs (and Blackberry’s are Blackberry’s), the new products are being lapped up by Joe Public. Be careful, that can all change in a flash, consumers are notoriously running at the next new thing. Their greatest risk is also their greatest attribute, making amazing products, keeping the consumer allure.
Currencies and commodities corner. Dr. Copper is last at 341 US cents per pound, the gold price is steady to slightly higher at 1625 Dollars per fine ounce. The platinum price has crept up, it seems that the extremely tricky labour force issues at Marikana (which is nearly all of Lonmin’s operations) continue, keeping supply under pressure. The platinum price is last at 1489 Dollars per fine ounce. The oil price is also higher, 96.54 Dollars per barrel is where it traded last. The Rand is firmer at 8.26 to the US Dollar, as risk on visits us today. Our market is comfortably in the green to start with.
Sasha Naryshkine and Byron Lotter
011 022 5440