Earnings! Earnings! Read all about it

“The company employs over 300 thousand “partners”, Schultz in the chairmans letter from last year refers to them as the cornerstone of the company who don the green apron daily. It is true to say that the experience at a Starbucks is one that you take with you. Whilst you need not have any previous experience in order to be a barista at Starbucks, it is recommended that you are a quick learner.”


To market to market to buy a fat pig. What? Am I delusional or did someone talk about spiralling inflation here in South Africa and the need to tighten rates now. I get it, rates in the US are going up and that cash rates become more attractive meaning that emerging market assets are less lucrative, meaning we have to be proactive. Meanwhile the first country to adopt inflation targeting, the New Zealand Central Bank (Haka compulsory before the FOMC meet) has been cutting rates as the outlook is a little more cloudy. You know, the land of the long white cloud. Byron saw some of the All Blacks here at Tasha’s at Melrose Arch, he was going to Woolies at lunch time and there was Kieran Read, Brodie Retallick (last 2 IRB players of the year!) and a couple of others. All dressed in shorts and t-shirts, this is obviously beach weather when compared to the winters of Wellington, Auckland and then obviously South Island. I suppose with temperatures of -1 and 7 today in Queenstown that sounds about right, cold and wet, just like you George the town.

We are getting distracted here with giant sized men from the land of the white cloud, hopefully the green and gold can pull one over them tomorrow. That would be *nice*. What is not nice is the fact that we are pre-empting the Fed’s next move, Mr. Market and all the participants have had a really poor track record of trying to get that right over the last half a decade. It seems that finally the interest rate cycle has turned in the US, the best weekly jobless claims numbers yesterday since 1973 (only one person in this office was born back then) hit the screens yesterday, again underscoring the strength of the US economy. This morning sadly we have a 15 month low on Chinese PMI. I suspect that European growth will continue to surprise to the upside, business is just fine in that part of the world. Greece and their money problems are hardly going anywhere, not that it seems to stop the 22 million tourists from visiting, that is 2 tourists per citizen. More of that please, I wish we had that.

We shouldn’t beat up on the central bank, they are doing what they think is in the best interest of price stability, after all that is their one and only mandate. They know the impact of higher inflation and how that erodes the income of the poor. There are of course, as a result of our relative youth as a nation (average age around here is 26-ish), more folks borrowing money than saving it. People with cash have NOT been rewarded in this last half a decade, the elusive search for yield has been a fixed income managers nightmare. Currencies being volatile have made it even harder. I suspect that SARB has the same problem.

Anyhow, tighten your belts consumers, things are about to get progressively harder in the coming cycle, let us hope that many repaired their personal balance sheets along the way. If you are interested, read the Statement by the MPC, and then have a look at the assumptions. Commodity prices, ex oil, the SARB see flat for the next two years. It is too hard, almost all of the commodities outlooks I have read set themselves up for failure. What I find quite interesting is the assumption that consumers won’t react to higher electricity prices. Everyone I speak to is considering spending money on alternative energies, the quicker that we get there i.e. when it makes economic sense, the better. Obviously not for Eskom, who are expecting revenue to keep pace with their higher price projections. Talking spirals, I see revenue ones for them, they had be on strong cost cutting exercises whilst asking consumers for more.

Let us finish this part off. Local Mr. Market, the Jozi all share closed up shop half a percent higher, bouncing in early US trade in the last part of our session. Resources stocks lagging the broader market again. And that is set to continue today, commodity prices on the slide again. Over the seas and far away, stocks in New York slid through the session, lower and lower, closing at the bottom end of the range. The broader market down over half a percent, blue chips down over two thirds. Heavy machinery manufacturer Caterpillar, formerly a recommended stock, not for the last two years or so, had a gloomy outlook. Brazil and China, currency headwinds, “uncertainty” in Europe (yes, really) has meant guidance has had to be revised lower. The stock was grinding lower, registering a 52 week low. Dogs of the Dow indeed. Fear not, earnings after-hours have lifted the mood, time to look at that.


Company corner

Visa takes you more than places. Some Visas are harder to get than others. Some have reams and reams of documentation. This Visa however requires that you pay your bank back, they will facilitate the payment. I have heard the theory that the winners in the electronic payment systems will be newer systems. The fact of the matter is that the capital controls imposed on Greeks shows how reliant people are on cash. The machines in the shops worked, it was the way of life, paying for everything cash all the time that is pretty old and outdated.

In other words, perhaps it is time for the Greeks to update their reality on cash, and start carrying electronic wallets. In that way, the 20 minutes spent in front of the ATM queuing can be used for something else. If all the Greek people had signed up for M-Pesa, they would never have needed to draw cash out, you could send your friends, your baker, your tobacco shop owner, the newspaper shop owners some Euros over your mobile phones. This technology exists, use it. They do in East Africa!

Visa reported stronger than anticipated numbers post the bell, sending the stock up over 5 percent in after market trade. It was not all about results, on the conference call, Charlie Scharf the CEO implied that FIFA chief Sepp Blatter should leave now if the football (There is no soccer in FIFA) organisers wanted to keep their relationship with the company. Elections at FIFA are next year. That is a separate matter. This piece will deal with the results. Reported from Foster City, California, it is right there in terms of proximity to Silicon Valley, where I am pretty sure all sorts of payment systems are being currently thought up and engineered.

Visa Inc. Reports Fiscal Third Quarter 2015 Earnings Results

Remember that Visa Europe is not owned by Visa inc., rather by the banks of Europe. Visa have an option to buy it. Which is good, as far as I understand it more than 4 out of 5 transactions in Western Europe are still cash based. That needs to change. Governments want more paper trails and not fewer. Cards with the Visa emblazoned across it have increased from 2 billion in 2012 to 2.42 billion now. That is a 20 percent increase in the ability to follow each and every transaction, if you want of course.

This is a company that will continue to benefit across all parts of the globe as older technologies, cash and checks are replaced in the developed world. In the emerging world people are getting access to credit for the first time, getting access to card based technologies. Better and easier payment technologies like Apple pay will leave consumers feeling that the trust has been cemented, remembering that the person processing the payment never once sees the card, Apple encrypts the payment message. Visa will still switch the transaction. We continue to believe that there are plenty of growth opportunities for Visa, we continue to recommend the stock as a strong buy. The market agrees.


Starbucks. Coffee. Love it. Everyone started somewhere, as we pointed out, the company started with one store in Seattle, Washington State all the way across on the West Coast of the US in 1971, by the time they listed 21 years later in 1992, they had only 165 odd stores. Currently there were 22,519 stores as at the end of the last quarter, a total of 431 net store openings in the last quarter.

Howard Schultz, a Brooklyn native who grew up in a very much middle class neighbourhood, bought Starbucks for 3.8 million Dollars in 1986, having captured the brand he had worked for. I must read the biography, it is from 2011. I am a firm believer that a company of this nature needs someone who is tough as nails and never strays from that path, that desire to succeed and deliver the best product and service. In this case the same quality cup of joe day in and day out. Schultz has made more than one comeback, and has written two books about it too, one called Onward (2011) and another called Pour Your Heart Into It (1999).

The company employs over 300 thousand “partners”, Schultz in the chairmans letter from last year refers to them as the cornerstone of the company who don the green apron daily. It is true to say that the experience at a Starbucks is one that you take with you. Whilst you need not have any previous experience in order to be a barista at Starbucks, it is recommended that you are a quick learner.

I found this old BusinessInsider piece: Why Working At Starbucks For Three Weeks Was The Toughest Job I’ve Ever Had. The difference between ordering a burger at McDonalds or Burger King and a coffee at Starbucks is possibly in the careers segment explanation: “Their work goes beyond handcrafting a perfectly made beverage; it’s about creating a human connection with every customer.” Coffee is more personal than food, seemingly.

Enough of that. I for one am excited that Taste are bringing the company to our shores. Here are the results in brief, as per the company release: Starbucks Delivers Record Quarterly Revenue of $4.9 Billion and Record Q3 EPS. I guess the headline tells it all. Whilst the stock is expensive, it trades on a 33 multiple, the market seems to be OK with the revenue growth rates and more importantly outlook.

This was hands down, as per Schultz’s comments “Starbucks Q3 fiscal 2015 stands as among the strongest and most remarkable quarters in our over 23 years as a public company .. .. having served an additional 23 million customer occasions in Q3 of this year over last year, clearly evidencing a continuation of the strong momentum we have seen across our business and around the world this fiscal year.”

We continue to expect double digit revenue growth, earnings could top 2 Dollars next year. At 59 Dollars (more or less where the stock is going to open), this means that the market is always expecting big things from this company. 30 times forward. We continue to own this stock, and whilst the upside is not as much as before inside of the next 12 odd months, we continue to accumulate this company on weakness.


Last night after the market closed Amazon released their second quarter results. The stock in after hours trade is up 17% which gives Amazon a bigger market cap than Walmart! Walmart has revenues of $486 billion compared to Amazon with revenues of $89 billion. South Africa has a GDP of around $350 billion. This article gives a good comparison of the two companies – Amazon is now bigger than Walmart.

Why the big move up? It is because Amazon made a profit this quarter of $92 million or 19 cents a share, where analysts were expecting a loss of 14 cents a share. Amazons profit number has never been the core focus of results due to them ploughing all the money that they make back into the business with the result that some quarters they make a small profit or a small loss. Given the speed that the internet is changing the world, it is very necessary that they reinvest all the profits to put space between them and their competitors. They are spending money on building their distribution network which allows them to deliver parcels quicker and cheaper than their competitors which at the end of the day is all the consumer wants. In some parts of the US you can get your delivery in a couple of hours, in 9 cities you can get your delivery within an hour! The only company that I can see having a big enough balance sheet to be able to properly compete with Amazon is Walmart. Last year Walmart only had online sales of $12.2 billion so they have big catchup to do to be in the same league as Amazon.

Onto the numbers: Revenue is up 20% to $23.19 billion (up 27% without the negative currency impact); North American sales up 25% to $13.8 billion. Third quarter guidance is for growth of between 13% and 24% to revenue of between $23.3 and $25.5 billion. The service that most people forget Amazon has is their Amazon Web Services (AWS) business which provides cloud storage and server farms. This business is one of their main profit drivers and provides the funding for the rest of the business. AWS had revenue growth of 81.5% to $1.82 billion and they managed to grow margins in the division. Don’t forget that Amazon also has a streaming, on demand TV service (similar to Netflix). Their flagship show is called Transparent and received 11 Emmy nominations.

Jeff Bezos’s goal for Amazon is to turn it into the “everything store”, a one stop shop for consumers. Given that they started out only selling books 20 years ago, he is well on his way to doing that. The market sees this company as the future with its market cap being bigger than the ‘old’ brick and mortar business of Walmart. We still like this stock, and if you are prepared for a bumpy ride, then buy.


Don’t forget that we have a New York investment option where you can own the likes of Visa, Starbucks, Amazon, Apple, Nike, Facebook, GE and, and, and. These shares trade on the NYSE and you are able to own them in US dollars. The SARB and SARS allow you to invest R 1 million a year offshore without clearance and then a further R 10 million a year with clearance. If you want more info, email us or give us a call (details at the bottom).


Linkfest, lap it up

How accurate is it saying that the market will probably return 5 – 10%? Turns out that it is not very accurate, the market is a lot more volatile than the ‘average’ – The average return doesn’t exist!

Who says that we need to grow up? Here is a tree house for adults – Japan’s Largest Treehouse is a Sprawling Structure Built Around a 300-year Old Tree

Some are saying that it is a good time to buy gold because it is at a 5 year low. Here is another view – Gold vs Interest Rates. Gold doesn’t pay dividends and doesn’t innovate and grow, so not a fan of it as an ‘investment’. Remember what goes down, can go down lower!


Home again, home again, jiggety-jog. Anglo American have also released their interim numbers this morning. They will of course maintain the dividend, that is possibly the best news out of a report that sees production cuts (necessary), unfortunately that comes along with a whole lot of job cuts too. Lonmin are set to be laying off over 4000 workers. Gold and Platinum stocks are plumbing new multi year lows, the copper price is down at levels last seen in 2009. Phew. As a result of the commodities complex falling short and some PMI numbers from Europe falling short of expectations (and China, added to that), the market is selling off across the board. With regards to Anglo, I suspect that the D:Ream song from 1993 applies “Things Can Only Get Better”!


Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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