IT and Healthcare

 

“I want to copy and paste an important paragraph from the last published annual report, that underscores why we want to continue to own this business: “Size matters because health care is the largest sector in almost all worldwide economies. It has tremendous complexities, breadth and reach. Our size alone is of no value without vision, agility and real skills.” Deteriorating individual health does not know creed, race, colour or economic background. Obviously the more resources you have, the greater the ability to deal with healthcare problems.”


 

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To market to market to buy a fat pig We started up and away, stocks however slipped during the course of the day and we slid to the worst levels of the day at the close. Do you want to know why the rand is strong? Is it as a result of some politician saying something here or there? No. Whilst ordinary people think that this is the case, see the Dollar index -> U.S. Dollar Index (DXY), trading near the weakest levels in three months. Ahhh …. Please don’t be the person that associates whatever someone does in parliament or what the president says about the state of the nation as being reflected in the level of the Rand.

Bernie Sanders and Donald Trump (god help him) are the polarised left and right of the US, do you see the Dollar plunging? Apparently Donald Trump makes people nervous, that is what Bright’s hero Howard Marks of Oaktree Capital said on Bloomberg yesterday. President Obama said he had faith in the US people to not elect him. The Pope and Trump are saying things about each other. It is all happening. Only in a modern world. Do you see the Euro falling or the gold price spiking, or Dollar tanking as the Pope, Donald Trump, Barrack Obama, Bernie Sanders speak openly about “stuff”? When our president speaks in parliament, the Rand isn’t going to do this or that, ok?

Our currency (and all other currencies) will trade as a function of global markets view of emerging markets (and all other markets), and their ability to grow (or in this case, stave off contraction). Commodity prices are set by supply and demand. And the latest CPI data, outside of the range, suggests another rate hike looming. Which may be another reason that the Rand is catching a bid. Equally, commodity prices have ticked up a little recently.

If your main customer and consumer of commodities (China) is needing volumes that are not growing at the pace before, then that is not necessarily your “fault”. All commodity producers could have done better to diversify their economies. We are not Brazil. Or Russia. Or Venezuela for that case -> Venezuela Devalues Currency As Economic Crisis Deepens.

The Bus driver (the president’s job in a past life) has driven this economy off the cliff, you could argue that the oil price falling wasn’t his fault, ironically as a result of the Americans pumping greater volumes led to that. Sorry chaps, the capitalists won again. A client of ours here at Vestact told me that their ex husband remembers a family member in the Weimar Republic in Germany burning bank notes to stay warm. Try fool the market with your idiotic economic policies, people eventually reject you. The low oil price may be a curse for modern day Venezuela, it may well be the catalyst for reform. Caracas is the most violent city in the world. For the people of course. Well done Hugo Chavez, your version of extreme socialism didn’t work, neither will future versions work. Of course not everyone agrees, that is why many states still exists with the word “people” in their long name and a single leader at the top.

Away from politics, as they say, never discuss that and religion and I have committed writing harakiri by doing both. Sigh. Back to Mr. Market. There has a great deal of sentiment and equally strange views about the world (it is always ending for some people), the earnings season which just passed was OK, there are obvious problems. Not insurmountable though. We will be fine. Take advantage of the same companies at a weaker price.

Markets in New York, New York last evening closed down, the nerds of NASDAQ fell over a percent, the broader market around half a percent and the blue chip index, the Dow Industrials sank around one quarter of a percent. That is weird, it is not too often that you see that, normally the indices are closer to one another. IBM was the difference, that stock was up 5 percent higher on the day. The one year return has been minus 17 and a half percent, the five year return has been minus 19.65 percent. Wow. Stretch that out some more, and the 10 year return is 64 percent, a positive at least. Believe it or not, whilst IBM might seem to be flopping all over the show, the company has a better ten year return than the S&P 500. Which is only up 49 percent. So sometimes a longer perspective is needed.

In the background, Walmart, as per the FT article suffers worst sales performance in 35 years. Without the impact of the stronger Dollar, sales would have increased by nearly 3 percent, rather than contracting. I guess people are starting to ask questions about how it all works, what is the future of the retail environment. They have the distribution network to adapt is my sense, it will just take some careful engineering on their part. They should get it right, in the mean time, Amazon has gone from an outside competitor to a real threat.


 

Company corner

Health care is too important to stay the same. That is the payoff line for the company Cerner, founded in 1979 by three Arthur Andersen employees. The company is the largest standalone healthcare IT business in the world, essentially they operate where medical care and information technology collide. Two of those founders are still there, the CEO (and Chairman), Neal Patterson and Vice Chairman Clifford Illig.

Recently Neal Patterson has started treatment for Cancer, which has been described as both treatable and curable. As you would expect, the founder and CEO is quoted as saying: “It’s not often I’m forced to slow down, but the silver lining will be having some extra ‘think’ time to reflect on all the extraordinary opportunities we have in health IT. After years of studying health care systems around the world, this unique opportunity already has my gears turning.” I guess that is the nature of an entrepreneur, always thinking and always looking for new angles. He plans to stay active in the business, fewer meetings and less travel being the order of the day. So whilst Patterson is in therapy, he still remains operational.

He went through therapies with his wife, who herself had cancer towards the end of 2014, and knew that there is plenty of work for his business to do, he remembers lugging vast amounts of physical records when visiting specialists. The story is personal to him and the millions of other people who want specialists and health professionals all around the world to make sure that their records are readily available.

I want to copy and paste an important paragraph from the last published annual report, that underscores why we want to continue to own this business: “Size matters because health care is the largest sector in almost all worldwide economies. It has tremendous complexities, breadth and reach. Our size alone is of no value without vision, agility and real skills.” Deteriorating individual health does not know creed, race, colour or economic background. Obviously the more resources you have, the greater the ability to deal with healthcare problems.

The results for the full year were by most metrics very good, the only issues were that bookings were weak. And this was on top of the fact that revenue backlogs increased to 14.2 billion Dollars from 10.6 billion Dollars the year prior, there certainly is a lot of demand for their products! Making healthcare electronic is a top priority. It is becoming an increasingly competitive space, loyalty for new business is often at pricing point. The company obviously has long standing relationships.

So why did the share price swoon by as much as 13-14 percent pre market? The stock ended down 4.8 percent down by the end of the session Wednesday, recovering a lot off the worst, ending the session at 52.79 Dollars. It was trading at a 52 week low, at the beginning of the session, 49.89 Dollars at one stage. The 52 week high is 75.72 Dollars. The share price is down 30 percent from the highs from last April. Why? I suspect that when your stock trades on a very high multiple, you have to deliver earnings in the high twenties, percentage wise. It is not that they haven’t grown earnings aggressively, the market has cooled towards healthcare and technology, their peer grouping, Athena Health particularly as an example, is equally off as much.

Current year estimates suggest a 20 percent rise in HEPS to just shy of 2.40 Dollars, which is around a 23 multiple, the estimates for next year of 2.70 Dollars of earnings, means that the stock trades on a 20 multiple two years out. I think that for the growth prospects, this represents a really good opportunity to buy a quality business that sits squarely inside of two industries that have serious growth potential, healthcare and information technology. And they represent the glue in-between. Buy.


 

MTN released a really ugly looking trading statement yesterday after the market closed. Earnings are likely to be more than 20 percent lower for the full year to end 31 December 2015. HEPS in 2014 was 1536, it is likely that HEPS will be 307 cents lower than that. In other words, from 1229 cents per share or lower than that. Which means that at the TOP end of the range, the stock will trade (after the results on March the 3rd) on an earnings multiple of at least 12.5, possibly much higher if the earnings are likely to be much worse than that. And this excludes the pending Nigerian fine.

What does it look so bad? “The negative earnings performance has been impacted by a number of factors with the operational underperformance in Nigeria, resulting from the subscriber disconnections and the withholding of regulatory services, being a key contributor to this.” How do you say, not good in Igbo and Hausa? Those of course are some of the regional languages spoken in Nigeria, bearing in mind that English is the official language.

We continue to evaluate the business, this may be a once off, wrestling with the regulator, or it may be part of an ongoing trend across the continent, governments under pressure to raise revenues looking at softer targets. The dividend will certainly matter here, there are undoubtably many institutions that hold the business for there cash flows. If the dividend is pruned back to the stem, you may see aggressive selling. Expect the stock to take some heat today.


 

Linkfest, lap it up

One of the advantages of Elon Musk being involved with two renewable energy companies is that they can leverage off each others experience. The Tesla gigafactory will use solar panels from Solar City and now SolarCity to Use Tesla Batteries for Project in Hawaii.

Markets still are trying to find the most effective way to broadcast over social media. Despite this they are doubling their allocation towards social media which is great for the likes of Facebook and Twitter – Marketers Keep Spending on Social Despite Lack of Results.

I think that this is a great way to empower peopleAn Indian company is launching a $4 smartphone. There is an added benefit that the manufacturing of the phone will also create jobs on the ground in India.


 

Home again, home again, jiggety-jog. Stocks are mostly lower, Shanghai not as much as Hong Kong. Japanese stocks are off around one and a half percent, US futures are marginally better, we should open a little lower again. The Rand is stronger, perhaps the president had eggs for breakfast that was easy over and just right?


 

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

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