Del Vecchio, the old man of sunnies

“controls the company through a Luxembourg business, Delfin, which has 61.42 percent of the issued share capital. Believe it or not, the next biggest shareholder is Giorgio Armani with 4.955 percent (of which 2.947 percent is held through the ADR program), 5.73 percent of the stock are ADR’s, the balance is held on the Milan stock exchange. There is another Del Vecchio on the board, Claudio, one of the founders 6 children. Claudio is the first son, he is also the CEO of Brooks Brothers, the company that has outfitted 39 out of the 44 US presidents. Ralph Lauren was in a previous life a salesman there, Wiki tells me. So, the point I am trying to make is that while Leonardo is large and in charge, and at 80 he looks fit and healthy, there is a succession plan even if his interventions are currently too much.”


To market to market to buy a fat pig. Stocks slid into the close yesterday, down over a percent by the end of the days trade. Industrials led the downside. What the hell, this sounds like a market report, I thought we were here to educate the readers and not tell them what already happened. If you want to see what happened, look on the screens. It must be hard for people writing daily market reports to be looking for reasons why the market went up or down, trying to pinpoint sentiment one way or another.

We made a conscious decision to not do that with these newsletters, our sole aim is to get across something different and explain why it is that you should be saving more, and what companies we recommend and how they are doing specifically. And by “doing” we are referring to their business. At the end of the day, a good business that is more and more profitable in time will have a share price that responds accordingly. When you see that number on the screen in front of you, remember one thing, you own a piece of a company and not a share price. The fact that the company you own has a traded share price and is liquid, that is the reason why you own stocks. If you are in the interest of owning coins, or having cash on deposit, or a fixed income product, then that is an investment choice that people make. In case you missed the letter from Paul a few weeks ago, here goes, it is simply titled Why Save?

Across the seas and far away stocks hit the rally button after more than a week of selling, Fed chair Janet Yellen and the FOMC will deliver their 45 daily meeting conclusion. This is apparently very important. There have been 16 Federal Reserve Governor Chairs since the Federal Reserve Board was formed, we are onto the 8th since the second world war. Longest serving? William McChesney Martin Jr. pips Alan Greenspan by a few months, collectively they served under 9 presidents. That is continuity, right? Ben Bernanke was around for 8 years, succeeding Alan Greenspan. Janet Yellen’s current term (14 year term!) as a member of Board of Governors of the Federal Reserve System expires on the 31st of January 2024. She will be 78, perhaps that is a good time to shift to the speaking circuit, where the real money is made. Yes. As share investors you should care about companies, not the Fed, not the ECB, not Greece, not anything else. Just the companies you own. That is energy better spent.


Company corner

MTN had a very patchy trading statement yesterday. It was one of the biggest fallers yesterday after the Trading Statement For The Six-month Period Ended 30 June 2015. They expect HEPS and EPS to be down 10% and 15% due to negative currency swings. The full details will be released in their results on the 5 August but don’t worry about the share price. The company is still well positioned to take advantage of the huge demand for data and the lifting of sanctions in Iran will be a nice boost to business going forward. We think that the stock price reaction is reminiscent of Vodacom, somewhat. There is short term margin compression, massive data growth and in MTN’s case, massive currency swings.


Luxoticca is a business that is interested in looking after your eyes, with sunglasses, yet they also have a very significant normal eyewear (glasses) business, you may be familiar with LensCrafters. Glasses manufacturing used to take a week or two, nowadays you can have them in no time, an hour! Their North American business is 56 percent of their total business, Europe is 20 percent of their business. Asia is only 14 percent of their business, that is all.

You will know Luxoticca from their flagship brands, Oakley, Ray-Ban and their front end retail offering, the Sunglass Hut. They manufacture sunglasses and spectacles (I bet you have not heard that word for a while) for almost every single iconic fashion brand that you could think of, from Tory Burch to Bulgari, Giorgio Armani to Dolce & Gabbana, Persol, Prada, Michael Kors, Ralph Lauren, Tiffany & Co., Vogue and Arnette. The list goes on and on. The very first licensing deal was struck with Armani in 1988.

Not only are sunglasses designed to give you a smidgen of coolness and let us face it, we could all do with a little more of that, they are designed to protect one of your most important senses. A LensCrafters exec is quoted on the website as saying: “Our eyes process 150 million pieces of information a year on average”, that is 410 thousand pieces of information a day. Your normal specs are no longer just functional, for the last two odd decades they have been designed to be lightweight, scratch resistant, no longer made from glass, they are quite simply more than that. After all, if you are wearing something on the bridge of your nose for more than half the day you should have extreme comfort. Statistics suggest that more people should use spectacles, or contact lenses, this is big, really big business.

There is only one “problem” that you have as a shareholder of this business. The founder and main shareholder (and chairman), Leonardo Del Vecchio is back “running” the business, there seems a little too much overreach in that regard. Andrea Guerra resigned back in September last year, after holding the top job for over ten years. The management structure is currently two CEO’s below a chief figure, one to oversee the operational part of the business (Massimo Vian), manufacturing, quality assurance, style and design, whilst the other CEO (Adil Mehboob-Khan) is in charge of the retail and wholesale front end. I guess being a business of two halves makes sense, there is one CEO a level up to manage the whole thing, Enrico Cavatorta.

Leonardo Del Vecchio controls the company through a Luxembourg business, Delfin, which has 61.42 percent of the issued share capital. Believe it or not, the next biggest shareholder is Giorgio Armani with 4.955 percent (of which 2.947 percent is held through the ADR program), 5.73 percent of the stock are ADR’s, the balance is held on the Milan stock exchange. There is another Del Vecchio on the board, Claudio, one of the founders 6 children. Claudio is the first son, he is also the CEO of Brooks Brothers, the company that has outfitted 39 out of the 44 US presidents. Ralph Lauren was in a previous life a salesman there, Wiki tells me. So, the point I am trying to make is that while Leonardo is large and in charge, and at 80 he looks fit and healthy, there is a succession plan even if his interventions are currently too much. Too much for some shareholders, I suppose he has their best intentions at heart, he built the business brick by brick.

Quickly to the half year and quarterly numbers. At a quarterly level this was a record. The group recorded a whopping 21.4 percent growth in net sales for the second quarter, the weak Euro has been helpful. At constant currency exchange rates, revenue growth was 6.6 percent. Obviously you can see the benefits of having a large US business and reporting in Euros, for now that is. Earnings per share, US, clocked 0.72 Dollars. Remember that the ADR trades at 72.65, you can quickly (if you annualise that number) get to a price to earnings multiple of 25 times. The yield is a paltry 1.1 percent, the dividend has increased tenfold over a decade and a half, that is what you want to see as a shareholder. We continue to recommend this business as a buy, great brands, growing market.


Last night our favourite little bird, Twitter released their second quarter numbers. The numbers were mixed but after market felt the numbers disappointed with the stock currently down 11% after market. The drop in the share price highlights the very high growth expectations that are attached to the company, where a small miss results in a negative knock on effect on the forecasted numbers.

Revenues beat estimates though, up 61% YoY to $502 million where estimates were for $481.3 million. The strong increase in revenues shows the success that the company is having in growing their advertiser base and getting adverts to the the current users.

So why did the stock drop? It is due to the slow growth of core users, where they only added 2 million core users this quarter bringing the number to 304 million core users. On a YoY basis the core user base grew 12%. A core user is someone who accesses Twitter at least once a month. If your core user base is not growing, it means that your revenue growth will hit a ceiling very quickly; you can only sell so many things to users.

All the revenue growth resulted in a loss of $136.7 million from a loss of $144.6 million last year. All the loss and more can be attributed to stock-based compensation of $175 million for the quarter! That is a very big number considering that they only have revenue of $500 million. The argument is that they are using stock options as a way to keep and attract top talent, which for a small loss making company is a good way of going about things.

Having large stock options means that the employees have the same incentives as the share holders and in the case of Twitter, there is a big incentive to make the company profitable and viable over the long run. The problem for shareholders though is that there are 2.4% more shares in issue now compared to the last quarter and a whopping 10% more shares now compared to last year this time.

The big thing for Twitter is to become more user friendly for users who don’t regularly use the service. If they do become more user friendly will that mean that more people will come to the site? I am not sure. Does it matter? Maybe in the short run but I don’t think for the long run. If you are a regular user of Twitter, it becomes a key part of your daily activity and a key place to find up to date information. If user base growth slows they would be able to switch to a subscription based service and charge 1 or 2 dollars a month for the service. Maybe one of the big players like Facebook or Google like the size of the user base and decide to buy the company out.

I still see Twitter being around in years to come and still a big part of people interacting with each other. What form does it take, I am not sure. I would consider buying this stock if I already owned the likes of Facebook, Google and Apple. As a shareholder it will be a very bumpy ride and there is huge upside if they get the user growth back on track.


Linkfest, lap it up

How much luck is involved in short term performance? Only long term consistent results can show how much luck was involved. Make no mistake though there is a large amount of luck when it comes to the timing of investments. The trick is to keep adding to good companies to remove the luck factor as much as possible – Luck vs. Skill in Active Management


Home again, home again, jiggety-jog. Our market is up 0.8% today, the Chinese market bounced back today and is up 3.5%. I am glad that I am not a retail investor in that market, even professional investors can lose their nerve on the huge volatility. Gold is still below the $1 100 level, currently at $1 097; Brent Crude is sitting at $52.65 and Rand/ Dollar is R/$ 12.56. Expect a shift in the Dollar and markets after comments from the FED tonight and home sale numbers out of the US.


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

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