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Isaac Newton floored

January 24, 2013 in Uncategorized

“So, should you freak out like Cramer? Should you shout and jump up and down that “they” know nothing? Is 460 odd Dollars a good price for Apple, the company? Do you want to be owning this company for the next half a decade? Well, on an ex cash basis the stock trades at an astonishingly cheap 7.1 times earnings. That cash pile, which includes both short term and long term securities tops 137 billion Dollars. As a few people pointed out, that is more than the entire GDP of Vietnam.”

To market, to market to buy a fat pig. The richest and most powerful gathering on the planet continued their jaunt, I suspect that the 75 odd billionaires going there are paying their own way, and for their entourage. I wonder if it was what Klaus Schwab envisaged? I suspect that it has gone past his wildest dreams. Good for him. I suspect whilst poor people around the world would be oblivious to these events, they do in a sense shape people’s perceptions of each other. Something that Google tries to do every single day. Google stock up 5.5 percent on those decent results reported after market the session prior. The British Prime Minister was really going out on a limb, presenting his vision for Britain which seems to fly in the face of his current coalition. Gee, sometimes I wonder if the masses are just always hoodwinked. Equal education for all I say, the biggest imbalances are created by improper education and uneven rules.

Just this morning the Chinese released PMI data, the HSBC manufacturing PMI rose to a 24 month high. Apple suppliers are under the whip this morning, more on that later when we take a detailed look at the Apple results from last evening. And the reaction from the market participants. All key here. Equally we will take a look at McDonald’s results. How often do you eat there? If ever. If service delivery was like McDonald’s we would be lovin’ it.

Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E OK, I finally found Davos interesting yesterday. Probably because of a few interviews that were useful to us here. The one Josh Brown tweeted from two days back was quite funny: “Tonight’s first Davos panel: Coping with how awesome we are in a globalized world”

There was an interesting Bloomberg interview conducted by Francine Lacqua with South African finance minister Pravin Gordhan. You can catch it here: South Africa Says No Plans for Nationalizations. At one point in the interview when Lacqua asked about nationalisation, the minister said something along the line that there were perceptions created by superficial reporting. Lacqua shot back quickly that it was not careless reporting, we heard comments from someone at the ANC. What she is referring to no doubt is the Gwede Mantashe interview with the national broadcaster and the Mines Minister Susan Shabangu comments on Anglo American and Angloplats. Check out what I mean here, with this MiningMx story: Gordhan brings perspective to tax fears. I am happy to say that the Finance Minister always comes across cool, calm and collected. But I guess some of the questions were undoubtedly tough.

The part that I never ever agree with on resource nationalisation is that the minerals belong to the people of the country. How so? Because someone else said so? Are we going to use all of their minerals? Are we the people who made the commodity prices higher? No, it was actually a Chinese economic miracle. And with regards to when those minerals formed on earth? According to Wikipedia, the bushveld igneous complex was formed 2 billion years ago. Life on earth began 3.7 billion years ago, or so the scientists tell us. The first fossil from the animal kingdom, according to Wikipedia, was a marine mammal about 542 million years ago. Now if only bacteria could figure out a way to institute full resource nationalisation, seeing as they were around when these minerals and resources bodies were formed. My cynical view. The people that are best placed to mine the ore bodies are those who can maximise the asset in the shortest possible time. After all, the first production catalytic convertor was built in 1973. Our old friend Gareth sent us this wonderful infographic, take a deep look: The Story: Platinum & Palladium. Excellent! Keep up the good work.

Another interview that I really liked was that of Patrice Motsepe, by the same anchor, you can also check those out at: African Rainbow Looking at Asset Buys, Motsepe Says. I really liked this interview. Motsepe said quite bluntly that the track record for nationalisation equals failure. And trumpeted democracy, but also pointed out that the masses feel like they are losing out. But most importantly he suggested that stakeholders should not be worried about nationalisation. It is finally happened I think, the idea that wholesale nationalisation by expropriation is not going to happen. Later on in the interview comes the meaty part. The part where Motsepe was pushed by Lacqua to answer questions around platinum mines and the purchase thereof. He did well, and suggests that there are discussions underway. Which is very, very interesting. Perhaps Amplats Union mine is a good start?

But then later in the afternoon came the CNBC Africa interview, Bronwyn Nielsen with both the South African and Nigerian presidents, SABMiller executive chairman Graham MacKay, Indian corporate titan Sunil Bharti Mittal, who is group CEO of his own company Bharti Enterprises and someone from left field (I thought), Louise Arbour from the International Crisis Group. But then a little research suggested that she was not out of place, check out here Wiki profile: Louise Arbour. Our president took objection to the topic: “De-Risking Africa”. Watch the interview, at least the first part, via ABNDigital: WEF Debate: De-Risking Africa – Part 1. My initial reaction to our president taking objection to the topic was perhaps listing a few countries. Mali, right now, Somalia (perhaps once), Northern Nigeria, the DRC seemingly forever. But then later Bharti Mittal put it into perspective I think. The overall take away, and remember that I am an Africa bull, is that Africa is not a country. And the base is still exceptionally low. And that is still the reason why our companies can take the opportunities with both hands. And run with it. Whatever that means.

You have probably also read the Moneyweb story from yesterday afternoon: A hefty price tag for Davos. We are, in terms of numbers of ministers, 6th on the list. 9 ministers, our president and three Eskom staffers in there. The IDC, the DBA with two delegates, two Transnet folks are all represented there. You can explore what looks like the full list here: Who is going to Davos 2013? Get the full list of attendees. Paid for no doubt by the tax payer and the share holders of the businesses concerned. Nedbank, ABSA Capital, Standard Bank, Investec, FirstRand, Sasol, Naspers, the JSE, these are businesses sending delegates to go to the snowy Swiss “city”. City in Europe qualifies for 10 thousand people or more, Davos has over 11 thousand permanent folks.

So, I hope that this delegation of 65 (I am guessing a few people are missing off the list, there could be more) will turn peoples perceptions of our wonderful country, that so many are passionate about. Let me try and quantify that by showing that Venezuela, who only have four delegates (two of them musicians, one who works for the UN), see this event as a capitalist hob-nobbing affair. Let us hope that by engaging business at a global level that we still embrace capitalism as a platform to advance ourselves as a nation. You cannot create wealth by dividing it. There is no way that can work. Happy days to all of you, we scored our first AFCON win since 27 January 2004 when we beat the mighty Benin, a country with 9.5 million folks. Hey, what do I care, a win is a win!

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W Sometimes when you are expecting Wagyu Kobe beef steak (the finest I am told, 258 Dollars per kg – 2321 ZAR per kg, it better be!) and instead you are slapped with a filet mignon. Apologies to my vegetarian, Hindi, Muslim and Jewish friends, you can send me another comparison. What I am talking about are the Apple results. You were expecting world class and all you got was enough to make the national team. Not all bad, because as the headline says: Apple Reports Record Results.

That is true, they sold more iPads and more iPhones than at any other time in their history. Bearing in mind that 6 years ago zero iPhones had been sold and three years ago zero iPads had been sold. In the last quarter, as the company points out, there were “47.8 Million iPhones Sold; 22.9 Million iPads Sold”. But that was a disappointment for the general market, as Gene Munster from Piper Jaffray said, if the number had a 5 in front of it, the market might have reacted differently. The first quarterly sales expectations for the iPhone were closer to 58 million, so working backwards from that initial number, you can appreciate the disappointment from the market. And, as ever, it depends what your reference points are. If you bought Apple at 700 bucks you are feeling wretched, at 7, well, not so much, the company is paying 2.65 Dollars a quarter, you should get your money back in three quarters. Most people however having been recently in the stock, it is one of the widest owned stocks by hedge funds, so I am guessing that they are all “wrong” in the short term. What drove the share price higher was momentum around sales, beating guidance and of course beating the whisper number comfortably. This is the first quarter in a number of years that you are seeing the momentum slowing somewhat. And that is in large part the reason why in the aftermarket the stock is trading down nearly 10 percent.

So, should you freak out like Cramer? Should you shout and jump up and down that “they” know nothing? Is 460 odd Dollars a good price for Apple, the company? Do you want to be owning this company for the next half a decade? Well, on an ex cash basis the stock trades at an astonishingly cheap 7.1 times earnings. That cash pile, which includes both short term and long term securities tops 137 billion Dollars. As a few people pointed out, that is more than the entire GDP of Vietnam. Last year of course. That is a 12.9 percent increase on the quarter. Wow. At the implied opening price of 463.49 Dollars, 31.2 percent of that, or 144.74 Dollars of the Apple share price is cash, and cash alone. The yield on that is low, really low, in an interest rate environment that is set to continue for the next year and into the year after that.

Rolfe Winkler has a great story, Paul steered us in this direction: Apple Draws the Short Quarter. The conclusion is interesting: “Clearly, Apple didn’t provide the kind of blowout quarter many have grown accustomed to. But the results aren’t the total disaster implied by the market meltdown.”

As Byron also pointed out, though, the guidance was mushy, because the management decided to go the route of “realistic” rather than “conservative”. And sadly the realism for the coming quarter was lower than the market wanted to see. Again, I have not answered the question, should you freak out? No. If all those people who activated products running iOS in the last two years, replace their devices in 2014, the number tops 200 million. If the Apple faithful just renew their devices, they can generate over 50 billion Dollars in cash flows. This is without adding new customers. And this presumes that they keep their existing customers. We continue to see share price weakness as an opportunity to accumulate more stock. This company six years ago used to sell only iPods and Mac’s, if you needed a reminder.

    Byron beats the streets. Although Apple stole the limelight one of our other recommended stocks released fourth quarter and full year results yesterday, namely McDonald’s. For the quarter EPS came in at $1.38 which was above consensus of $1.33 while December same store sales were flat. Asia which is obviously a big growth region has stalled dramatically largely due to the big chicken scare they had a few months ago. It has had a larger impact on KFC but during what has already been a tough time for fast food restaurants in the region, McDonald’s also felt the pain.

    For the full year earnings came in at $5.36 which was up 2% from 2011. Remember that this has been a tough year for the company. They have heavy exposure to Europe which has been slow and China hit a big speed bump half way through the year. For the whole year same store sales increased 3.1%. 3.3% from the US, 2.4% from Europe while the developing world only grew 1.4%.

    Earnings for next year are expected to come in at around $5.78. Trading at $93.48 they are on 16 times next year’s earnings which compared to their competitors is actually quite cheap. The company has big ambitions for 2013. This from the CEO Don Thompson.

    “In 2013, we plan to invest about $3.2 billion of capital to open between 1,500 – 1,600 new McDonald’s restaurants and to reinvest in our existing locations, including reimaging more than 1,600 locations worldwide. We are confident that now is an opportune time to invest in our restaurant portfolio in ways that will yield value for all stakeholders in the future.”

    Talk of reimaging reminds me of a friend who just went to France for his end of year holiday. He told me that the McDonald’s he went to in Paris had completely ditched the service counter. Instead there were kiosks or swipe machines where you press a few buttons, swipe your card and then collect your food at the next point, much like a drive through. This makes getting your food easier and quicker while McDonald’s have less labour costs. I am not sure the Labour Unions here would accept that with open arms but it does show you how much room for innovation there still is.

    And remember my piece last week on Famous Brands which looked at the Yum! Brands comments about Africa? How KFC has become aspirational in these countries and how a couple even got married in a KFC in Lagos. Well, McDonald’s is the same and as the restaurants get built, developing market consumers will come flocking. We are still buyers of McDonald’s at these levels.

Crow’s nest. European PMI numbers look pretty poor, but some are near 12 month highs. The Rand has weakened a lot. Davos continues. Chatter continues about South Africa. Our football team won!!

Sasha Naryshkine and Byron Lotter

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