Forget please and thank-you, lets talk ABC’s

“Alphabet (Google) has enormous resources, the little over 5 billion Dollars (actually the real number is 5,099,019,513.59 Dollars, which is the square root of 26, which is how many letter there are in the Alphabet) is a dip into the nearly 73 billion Dollar cash pile. Mr. Market is cheering the Alphabet results, as easy as ABC and not XYZ. Zee and See rhyme in American English, not so much in South African english. Pre market the stock is trading at 742.8 Dollars, which represents a jump of over nine percent on the closing price (which itself was 1.39 percent higher). Mr. Market approves, that clearly was not the case 18 months ago, when people were calling the company mature and slowing.”

To market to market to buy a fat pig. Whoa! Markets across the seas and far away in New York, New York soared last evening. Remember August, when it was so terrible that we were busting apart at the seams? Remember? I recall someone suggesting that his friends said you should go one-third to cash, that was the right thing to do. And now, you would be 15 percent out of pocket and sitting on an asset yielding you next to nothing. A mere 2 months later. It is a reminder that if you are going to own equities, you must roll with the punches, remembering that only the quality of what you own matters in the end.

Why was there a broad based rally yesterday across Wall Street? It was as a result of the most important “thing” that matters in equity markets, company earnings. With a little bit of a hint of more stimulus from the ECB, they were meeting in Valetta in Malta. Earnings set the level of the prices ultimately that the balance of the market is willing to pay for a specific company. First, there was McDonald’s, up over 8 percent after reporting results that comfortably trumped estimates. Even after the sharp move the dividend yield is still over three percent. In the prior session after the bell (i.e. Wednesday evening), eBay reported numbers that topped estimates, that stock rose nearly 14 percent. And then an old favourite of Buffett (it used to be), Dow Chemicals beat the street and served up gains of over five percent. After the bell last evening there were some spectacular numbers from some Vestact favourites, we will sink our teeth into those in a bit.

The earnings cheer saw the broader market S&P 500 close up one and two-thirds of a percent to 2052, the Dow Jones industrials added 1.87 percent whilst the nerds of NASDAQ came away with the same gains as the broader market. Dragging back the market, to some extent, were the healthcare stocks, Valeant had another wild session, down nearly 20 percent at one point, closing the session out down 7 in the end. AbbVie stock fell sharply, ending down over ten percent as the company received a warning letter from the FDA specifically around their Hepatitis C therapies. Yikes, it is about serious liver damage caused in patients using two of their therapies. The Biopharma and Biotech space has had a really tough time against the rest of the market roaring ahead since middle August.

On the local front at home in Jozi, Jozi stocks collectively added over half a percent, the Clicks Group soared nearly 8 percent after their numbers were well received. Glencore stood at the top of the pile of the ALSI 40, there is more zig zagging in that share price than there is on the Alpe d’Huez. Our cycling friends will appreciate that one! Anglo American on the other hand was near the top of the losers board, a poorly received production report not helping their cause, more acute when compared to BHP Billiton’s one, which looked decent enough. At the same time Kumba Iron Ore (essentially an Anglo company) released a production update and it was not pretty, double digit fall in production against the backdrop of prices that have plummeted. The stock sank nearly 6 percent and is close to a 52 week low of 71 (currently 75.28). The 52 week high is nearly 300 Rand. Astonishing, not so?

Company corner

Righto, loads to get into, let us try and keep it brief and most importantly, let us try and make it informative. Firstly, MTN released a quarterly trading update, which at face value was a little disappointing at first glance. Subscriber growth of 0.9 percent quarter on quarter is not exactly the growth we are looking for. On further inspection, in Nigeria there were 5.1 million disconnections as a result of registration processes (the RICA headaches we had here), 3.4 million of those have subsequently been reconnected. Is there anything more irritating than not being able to use your cell phone? No, there isn’t.

The overall South African base experienced good growth (It is now 29 million strong), 2 percent QoQ (quarter on quarter), Nigeria fell hard a percent on the same metric, as explained above. Nigeria, remember has 62.4 million of the overall group subscriber base of 233 million. In Iran the subscriber base grew 3 percent to 45 million. Wow! There are only two other territories with more than 10 million subscribers, namely Ghana (nearly 15.5 million) and Uganda with 11.5 million. What was perhaps the most pleasing for me was the pick up in ARPU’s (Average Revenue per User), up 8.8 percent here in South Africa. What we are starting to see is smarter handsets consuming more data.

Data revenue locally (South Africa) increased 40 percent and now represents 31.5 percent of total local revenue! Meanwhile in Nigeria, it is only 21.3 percent of total revenue. In short, the story remains intact, and whilst the share price has been trading more as a proxy for the oil price (having large operations in Nigeria and Iran), we continue to hold and be patient here. At the close the stock had ended 2.32 percent higher, at 186 Rand. That is a long way away from the 52 week high of 250 Rand, we are acutely aware that investors lately have not enjoyed the gains of yesteryear. Stay the course.

Famous Brands released their interim results to end August 2015 yesterday, the market embraced the higher dividend and better revenues, the stock was up 3 percent by the close of trade. Revenues for the half increased a very healthy 27 percent to just shy of 2 billion Rand. Operating profits and Headline Earnings (241 cents) increased by “only” 14 percent. The dividend as we mentioned increased 23 percent to 190 cents, payable Monday 7 December. Famous Brands boosts your Xmas budget!

So why were revenues so much higher than profits? They explain in the release, if you read on, having followed the link: “this pleasing top-line turnover growth failed to translate into corresponding growth in operating profit, largely due to the sub-optimal integration of the new Supply Chain projects into the business. In addition, the final phase of the Group’s Fit-4-Purpose initiative, a programme aimed at bringing the business closer to its customers (franchisees) and consumers, incurred further costs.” There were significant costs in setting up the new Crown Mines Distribution Centre, expectations are that the logistics division margins should normalise and improve.

The brands and company is well positioned, we continue to like all in the space. At the same time we do appreciate that consumption patterns in rich people are changing, less quick service foods and more emphasis on healthier alternatives. All of the brands globally will give customers what they want, some will struggle as a result of their product (i.e. fried chicken is fried chicken, how do you change that?), other will adapt more easily. We continue to stay long this company, it represents a changing middle class in South Africa (and indeed across the continent) for all the right reasons.

I am an Alphabet, not a Googler. Surely not at the headquarters, people who work for Google, will still work for Google and are by extension Googlers. Not Alphabeters. The reason for the renaming and reorganisation of the business was essentially to take focus away from the business being a one pony trick, purely advertising and to focus on all of their other businesses including robotics, life sciences business, just a separation and reporting differently, that is all.

Doing the same, only more transparent on spend in those other businesses. The new reporting entity, Alphabet reported in the same old way Third Quarter 2015 Results after the market. The company included the first step towards maturity (some may not think so), a 5 billion Dollar share buy back. Commencing in this quarter. Also commencing this quarter will be the segregation and more insight into the business as a whole, the true Alphabet.

Constant currency revenue growth of 21 percent was registered, in Dollars a less (still very pleasing) 13 percent growth year-over-year to 18.7 billion Dollars. GAAP diluted EPS clocked 5.73 Dollars, non-GAAP diluted EPS was a buck and a dime higher to 7.35 Dollars. Advertising revenues still represent 16.781 billion of the groups 18.675 billion Dollars, with paid clicks increasing 7 percent quoter-on-quarter and 35 percent year-on-year across the Google Websites. Cost control was also something that investors had gotten a little irritated with (well done to new CFO Ruth Porat), as a percentage of operating revenues costs were steady year-on-year at 37 percent. It is not as if the company has stopped hiring, they added nearly 8500 employees over the year, to be an organisation that employs just less than 60 thousand people. So whilst farm jobs have been decimated over 150 years, no worries, there are new companies doing new things!

The group has enormous resources, the buyback represents a little over 5 billion Dollars (actually the real number is 5,099,019,513.59 Dollars, which is the square root of 26, which is how many letter there are in the Alphabet) and is a dip into the nearly 73 billion Dollar cash pile. Mr. Market is cheering the Alphabet results, as easy as ABC and not XYZ. Zee and See rhyme in American English, not so much in South African English. Pre (and post) market the stock is trading at 742.8 Dollars, which represents a jump of over nine percent on the closing price (which itself was 1.39 percent higher). Mr. Market approves, remembering that clearly was not the case 18 months ago, when people were calling the company mature and slowing. And to think that the stock traded below 500 Dollar earlier in the year. We continue to accumulate.

In other corporate related news, Announces Third Quarter Sales up 23% to $25.4 Billion, which included in that is a rare profit, 17 whole cents per share for the quarter. Mr. Market had expected the fast growing company, that invests heavily in their business to not report such a profit, at best a really modest one. And whilst it is pretty insignificant in the short term (406 million Dollars operating income on revenues of 25.4 billion Dollars), it is a shift in the right direction. Comfortably above consensus and their own guidance.

Strange projects that earlier had attracted large sums of capital, have been shelved for more prudent capital allocations. Having said that however, CEO and founder Jeff Bezos is punting the Amazon Fire hard, suggesting that families pick up a 6 pack (at reduced prices) for the festive season. The Amazon Fire tablet is a hot seller, it is really cheap for the quality of screen that you get. Sales are expected to be between 33.5 to 36.75 billion Dollars, or be 14 to 25 percent higher than the comparable quarter that includes the all important festive season sales. i.e. the coming quarter. And operating income, the range is so incredibly wide, 80 million to 1.28 billion Dollars.

It is important to remember when analysing this business that Jeff Bezos is a dreamer who executes, someone who thinks really, really long term. There are many people who are not going to own the business on the basis that it is always unprofitable. Bezos is in the LOOOOONG business of building a global empire. And as such Amazon price action will be wild, the earnings will be volatile and Wall Street will continually be disappointed or overjoyed. Their time frames are 12 months, if you are owning this business (and you must), your time frame must be years, if not decades. The company is building the finest retail giant on the planet, the retailer of the future that delivers you products at the lowest possible price. That demands massive infrastructure investment, the balancing act of why it must be the trickiest job to be Amazon’s CFO and have to sigh at entrepreneur and conquerer Jeff Bezos.

The stock is up nearly 10 percent pre market, and will, like Alphabet (Google) open at a record high. We continue to accumulate, I suggest that you do it in many different pieces, for all the above mentioned reasons. The future is here, two days after the day Doc and Marty arrived Wednesday, to find hover boards and augmented reality.

Linkfest, lap it up

There are not many things that cannot be done if you have the will power to push through and get it done – How an F student became America’s most prolific inventor. I can’t say that I am surprised at how much the guy reads. One thing he also does is not to make to-do lists and doesn’t make shopping lists, he has trained himself to remember those things.

This highlights the problem of having all your eggs in one basketSaudis Risk Draining Financial Assets in 5 Years, IMF Says. Oil will not be around forever which is why the Saudi Arabia is trying to diversify their economy, one of the things that are focusing on is developing a tourism industry.

Over the last year there have been big shifts in the international tax arena, where governments are closing loop holes and trying to standardise tax policies across the globe. Pressure will be put on companies like AB InBev – Anheuser-Busch InBev Aims Its Tax-Trimming Skills at SABMiller. There have already been “shots fired” so to speak, E.U. Orders 2 Nations to Recover Taxes From Starbucks and Fiat.

Over the short term the market is more noise and emotion than anything else. Even over a period of a year or two, emotions and not much else can drive a stock price. If your holding period is forever, then the share price at “forever” is the one that matters or in this case, the dividend matters more – One Year Returns Don’t Tell You Anything

Home again, home again, jiggety-jog. The students are forming an alliance across the country, today marches to the Union buildings will be a key moment in the history of this country, I think that these will be remembered for a long time. They are peaceful now, and are as such attracting the support of civil society. Political leaders do not seem to be attracting popular support on their handling of the matter, which is in itself interesting. Stay safe if you are out there, observe and give people the space to voice their concerns, that is what a democracy is all about. We (the Amajimbos) may have drawn 1-1 to North Korea (strangely called the Democratic People’s Republic of Korea) at the u17 World Cup football, in democracy terms we beat them 100-nil. Remember that students have no stable jobs, no families (mostly), no assets to wipe out and in large part have the youth to energise their processes, they are more likely to take these risks. Who will pay for free education, that is another pressing question altogether?

Market across Asia are sharply higher, following excellent EARNINGS from Amazon and Alphabet (Google) after the bell, as well as Microsoft. Markets going up for the right reasons, many will tell you that it is a more accommodative ECB, all I care about in the end is how the Vestact recommended companies do, and how they are making progress with their core products and services. If they are gaining market share, new customers enjoying their experience and so on. That is all that matters in the end! And winning the Rugby tomorrow, we will certainly have our hands full!

Sent to you by Sasha and Michael on behalf of team Vestact.

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