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Yum! not so tasty

February 5, 2013 in Uncategorized

“It has been a very tough quarter for Yum! Brands who saw fourth quarter earnings slip 5.3%. It dampened what was going to be a fantastic year for the company. Well it still was a very good year. Full year earnings grew 13%. But were it not for the government report in China which questioned the quality of their chicken, it would have been a lot stronger.”


To market, to market to buy a fat pig. Global markets sold off yesterday, the bears finally had their day in the sun. Punxsutawney Phil over the weekend suggested that it wouldn’t stay that cold for much longer. Perhaps that was enough to make the bears emerge from their hibernation. I suspect however that the root cause of the selling was actually not market related as such, but rather led to selling of Spanish bonds. And aggressively at that, the worst day since September last year. This does not look good for Spanish Prime Minister, from the FT: Rajoy storm blasts Spanish bonds. Pfff….. a slush fund, a politician, abuse of public funds, well I never! Sorry, I forgot to include sarcastic alert. Many in a position of power in public service have the inability to separate what is ours from mine. Public funds are not “mine” OK? Along with that, and Paul mentioned it yesterday was the news that Silvio Berlusconi’s party is polling better. He invited everyone to his infamous shindigs suggested that austerity under him was bound to be a thing of the past. Sadly people respond a whole lot better to something that affects your back pocket rather than the long term reality.

So, weakening Spanish and Italian bonds, as well as the French finance minister suggesting that the Euro was too strong led to a pretty broad sell off in European markets. No, correction, a big sell off in European markets. I guess the short termers have had an itchy selling finger, looking for an event. France’s CAC40 ended the session down three percent, Germany’s DAX sold off two point five percent. Italian markets down 4 and a half percent and lastly Spain kicked in the chops too, down three and three quarters of a percent. Political shenanigans derailing a fragile European equity market recovery.

I took a medium term look at markets in Europe and the results were not that surprising. The healthiest market in Europe, the DAX is up around only 13.5 percent over the last five years. From the lows in March of 2009, it has doubled however, so sometimes it depends where you draw your line in the sand. The CAC40 in Paris is down nearly 24 percent over five years. The Spanish index has been hammered, the five year performance unfortunately points to a 38 percent fall from grace. But it gets worse. The Italian market is down a whopping 50 percent over the last 5 years. Err…. Forza Italia? So, as ever it depends what you look at and from where. If you have decided to be a European equity investor from the time that the ECB president, Mario Draghi brought out “the Mask” bazooka, markets have improved substantially. Six months ago. I guess that this is a series of speed bumps along the way in the great European integration project. The list of Europeans conflicts on Wiki is a long and sorry one, here is hoping that over time, because of economic ties the list becomes history.


Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E At the beginning of the session we touched an all time high, but from there it was slip sliding away. For the reasons mentioned above of course, Spanish and Italian anxiety of a different kind. Which is much more difficult to predict, with uncertain outcomes post such an event having taken place. Our president suggested closure of mines in South Africa, Amplats specifically, that is tantamount to blackmail. I am not too sure what he means, but Amplats is not SAA. The taxpayer does not backstop Amplats. When the company is in financial trouble because of unprofitable mines, there are difficult decisions to be made, and unfortunately shareholders suck those up. Those shafts were sunk with shareholder funds. I can assure you that shareholders want those to work just as much as all stakeholders, if not more. For it is shareholders that entrusted the company with their savings to grow them, this is as big a disaster.

If shareholders decide that their capital is better allocated elsewhere, then I suspect there will be fewer projects going ahead. That is in fact already the case, Amplats have cut back their capex plans for the short and long term. This means fewer jobs, which means lower government revenues in the long run. If I were to force any business to continue to operate unprofitable shafts to benefit labourers at the expense of capital, that is not a sustainable model. What is the definition of a shareholder? “Shareholders are the owners of a company. They have the potential to profit if the company does well, but that comes with the potential to lose if the company does poorly.” The balance of course for governments is to make companies profitable enough to contribute taxes to the government coffers, as well as provide gainful employment for folks in society. Who in turn are being taxed themselves.

Investopedia have a really good explanation of what it means to be a shareholder. “Shareholders’ equity comes from two main sources. The first and original source is the money that was originally invested in the company, along with any additional investments made thereafter. The second comes from retained earnings which the company is able to accumulate over time through its operations. In most cases, the retained earnings portion is the largest component.” Of course, the folks who originally invested in Anglo American, I doubt many of them would still be shareholders. The risks that shareholders assume are high, and if they are not willing to continue to commit their capital to a specific company then I suspect the selling will push the equity value lower over time. And investors will be fewer. This great anxiety of attracting outside investors when there are perfectly capable investors here at home perplexes me. This time last year, corporate cash deposits were sitting at a record. And we have multi decade low interest rates. In short, companies are and continue to be paralysed by mixed messages around investment in South Africa.

Let me challenge you a little. If your business is in the fortunate place of sitting on a whole lot of cash, that you are at a wits end of what to do with it, why are you not either expanding your business or hiring more staffers? What is the simple number one reason that you are doing nothing? Please write in and we can publish your comments either anonymously or if you want to include your name. Many thanks and be absolutely sure to include your suggestions to change these things.


New York, New York. 40o 43′ 0″ N, 74o 0′ 0″
W
Stocks registered their worst session of the year so far, after having in recent days threatened to have got closer to the all time highs. The news again resurfaced around Dell going private, hey, whatever happens Dell has been an awful investment over the last one, five and ten years. In fact, the last good year for the stock was 1998 and 1999 which were heroic. And the price from the crazy NASDAQ highs is down nearly 75 percent. It depends for how long you have been holding the stock of course. If you have held it since they listed your gains have been enormous. Huge. Your return from the late eighties is, as per Google finance, 1206263.64 percent. In life, timing is almost everything. At these levels Dell trades on less than ten times historic earnings, perhaps the cheapest the stock has been since their listing around 25 years ago. Michael Dell himself has around 243 million shares of the 1.74 billion odd shares outstanding. The effective listing price (adjusting for all share splits) is 1 cent. He, Michael Dell that is, has definitely been winning.


    Byron beats the streets. It has been a very tough quarter for Yum! Brands who saw fourth quarter earnings slip 5.3%. It dampened what was going to be a fantastic year for the company. Well it still was a very good year. Full year earnings grew 13%. But were it not for the government report in China which questioned the quality of their chicken, it would have been a lot stronger. This announcement turned sales sharply in the last two weeks of December.

    Earnings for the full year came in at $3.25. Management reckon that same store sales in China will drop as much as 25% in the first quarter of 2013. That means that earnings for 2013 could come in lower, around $3.10. Trading at $60.48 (down 5% from the announcement) the stock trades at around 20 times.

    Most analysts feel this is a comfortable rating for a company like Yum! and when this China issues fades away earnings growth in 2014 will come off a lower base due to a once off. That is of course assuming the issue does go away. Our experience with this kind of news shows that these issues pass and the lure of KFC coming from the “trusted” Western World will prevail.

    Because it is an important issue I will copy paste what Yum! had to say about the issue in the release.

    “KFC sales in the last two weeks of the fourth quarter were significantly impacted by the intense media attention surrounding an investigation by the Shanghai FDA (SFDA) into poultry supply management at Yum! China. The investigation was prompted by a report broadcast on China’s national television (CCTV), which aired on December 18, 2012. The report showed that a few poultry farmers were ignoring laws and regulations by using excessive levels of antibiotics in chicken. Regrettably, some of this product was purchased by two poultry suppliers of KFC China. The investigation caused further media attention, including social media commentary, and this negatively affected consumer perceptions of poultry safety, and KFC in particular.

    On January 25, 2013, the SFDA concluded its investigation and released its recommendations. We appreciate their thorough and diligent review. The SFDA identified issues and provided “Supervisory Recommendations” to Yum! China to strengthen our poultry supply chain practices including refined voluntary self testing procedures, improved reporting and communications and enhanced supplier management. Our team in China has taken a comprehensive review of our current system and is in the process of incorporating all of the SFDA’s recommendations. We have always recognized the importance of building a world-class supply chain in China, which is why we have implemented a wide range of quality assurance and testing practices over the years above legal and regulatory standards. The SFDA’s recommendations will further strengthen those practices. The SFDA did not bring a case against Yum! China and no fine was assessed.”

    To put things into perspective of how important China is to Yum! let’s look at some stats. China is responsible for nearly 50% of profits for the company (not sales, margins in China are better than most regions). Of the 1976 new stores opened last year, 889 were in China. It is a huge part of their growth strategy because its return per store in China is fantastic. It is why they have outperformed the likes of McDonalds but also creates a risk of being too exposed to one region, and that risk unfortunately has resulted in a big drop.

    The share price has dropped dramatically. From $75 to $60 today. We feel the negativity is already priced in and probably oversold. We will add during this weakness.


Crow’s nest. We are slightly flat here to begin with, can you believe it. A whole lot of European Services PMI numbers look like a solid beat to me this morning, but retail sales across the region look like a miss. There is a US services number later, that should be interesting!


Sasha Naryshkine and Byron Lotter

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