JNJ Handling the Pressure

“JNJ suggests that this will add 35 to 40 cents EPS immediately. And it will “use” a lot of external US cash, this company is in Switzerland. The expectations are for growth rates to be 1.5 to 2 percent above the long term consensus. I think that this is good for JNJ, which is the only reason we really “care” to pay attention here, even though they paid a lot.”


To market to market to buy a fat pig Stocks locally were sold off as a Bloomberg story permeated through the market, a cabinet reshuffle was on the cards again. Although little evidence, other than a strained relationship between the head of state (and cabinet) and some ministers who have not backed the head of the land, the market liked this news like a hole in the head. Sell it was the answer, and by it I mean mostly financials. The top five down in the ALSI 40 were Barclays Africa, FirstRand, RMI Holdings, RMB and Capitec. So what to do in times of uncertainty? The same thing as always I guess, nothing. We always tell you that you cannot change politics, the level of the exchange rate and nor can you change the central banks processes. So worry about the one thing that you can change, what you own and for how long. I plan to own stocks long after multiple dispensations have come and gone and have put their political stamp on matters.

At the bell, the all share index had fallen by four-fifths of a percent, resources were up nearly half a percent, benefitting from a weaker currency, as a result of the political rumour mill turning. Banks as a collective lost over three percent on the day. Liberty Holdings. Ooofff. That was a pretty bad trading update, and unfortunately the advantage of shareholders knowing would have been a better outcome. We were actually having a look at the shareholder base of Liberty Holdings, and around 90 percent is owned by institutions, the anchor shareholder of over 50 percent is Standard Bank of course. Individuals own a mere 2 percent according to my reading of it.

The stock closed the day down nearly 11 percent, and based on the big hit to earnings, looks marginally expensive at these levels. The market as ever is trying to factor in future earnings after this cupboard sweep and may well be thinking that at this time next year (with an improving outlook), that “things” may be on a more steady keel. That light looks a little dimmer. See the BusinessDay take – Liberty update leaves sector reeling.


Over the hills and across the giant seas, stocks were mixed again, the nerds of NASDAQ marginally higher by one-tenth of a percent, with the other two majors, the broader market S&P 500 and the Dow Jones marginally lower. Energy stocks took some heat, I noticed that the weekly rig count saw accelerated additions, meaning that more of the frackers are really comfortable at these price levels. Government pieced together organisations (you know what I am talking about) have very little sway over private institutions.

Starbucks took some heat after their guidance disappointed, the stock was around 4 percent lower on the session. Alphabet (the holding company for Google) lost over a percent on the dat, at the opposite end of the spectrum JNJ and Microsoft enjoyed a day of gains. Amgen also had a good day, their numbers are expected a little later this week, on the second of February. Of course there is the small matter of Apple’s numbers after market tomorrow, those are always highly anticipated. Expectations are for around 76 million units (iPhones) to be sold in the last quarter. Jeepers, that is roughly 826 thousand units a day, or 34.4 thousand phones an hour. Wow.


Company Corner

JNJ shelled out a sizeable amount of money last week to acquire a business called Actelion, the presentation casts it as a Unique & Compelling Value Proposition. In short, JNJ are buying the Actelion business for 30 billion Dollars, to “Expands and complement (the) Janssen portfolio with leading, differentiated in-market medicines for pulmonary arterial hypertension.”

PAH (pulmonary arterial hypertension) should be read simply as a type of high blood pressure that occurs on the right side of the heart. In the arteries that supply blood to your lungs. As my readings reveal, this is very different from having “normal” high blood pressure. To read more about it, check the piece: Pulmonary hypertension (PH) or pulmonary arterial hypertension (PAH).

As the presentation puts forward, 65 thousand patients are currently being treated with these Actelion therapies, and those generated 2 billion Dollars of annual sales in 2015. Quite quickly you can see at 15 times annual revenues that this isn’t a cheap acquisition, and in fact, since the news of the potential acquisition broke (last year October), the stock has been lit. Actelion is up (in Switzerland) 103 percent over the last 12 months. And the founder of the business (Jean-Paul Clozel), has hit serious money, 1.5 billion Dollars to be exact.

Even 6th grade math will tell you that he owned 5 percent of the business. Wait, there is more, however. Clozel is going to run an R&D business that will be spun out from the acquisition, a business that could be worth 1 to 2 billion Dollars. That business, call it “Actelion risky” will hold all the experimental treatments (not yet approved) of the existing business. That business, the riskier one will have an initial 16 percent shareholder ship by JNJ, with an option to acquire another 16 percent (to lift it to 32) through a convertible note. i.e. they are going to fund the business in different manners. The former Actelion shareholders will hold 84 percent of the R&D business, which is why it is compelling for them. I have seen others suggest that the pipeline of the R&D business is pretty pedestrian at best, which is why it was good not to tag that whole lot along. Everyone gets want they want?

JNJ suggests that this will add 35 to 40 cents EPS immediately. And it will “use” a lot of external US cash, this company is in Switzerland. The expectations are for growth rates to be 1.5 to 2 percent above the long term consensus. I think that this is good for JNJ, which is the only reason we really “care” to pay attention here, even though they paid a lot. Expectations are for this year that earnings are likely to be 7 Dollars a share, at 16x forward earnings, the stock is well priced and we continue to accumulate on weakness.


Linkfest, lap it up

As the spectre of a trade war looms due to countries becoming more nationalistic and pushing back against globalisation, Josh puts certain job losses into perspective – The truth about trade. As Sasha points out, putting up a wall and charging Mexico 20% import tax isn’t charging Mexico for the wall, it is charging the US consumer for the wall. i.e. The consumer will pay the elevated costs as we do for instance with the motor vehicle industry here (and chicken). Clothes and shoes too.

When Gates and Buffett talk it is normally worth listening to. They are some of the smartest people around, so if you have an hour to spare here they are on the stage together talking about the future – Bill Gates and Warren Buffet at Columbia University.

Would you eat a plastic bag? Of course not you say. Wait, there has been a breakthrough, so much so that you can “drink” the plastic bag after having dissolved it in water – Finally! A Plastic Bag That’s Safe to Eat.

This is quite “enlightening”. The chap in the picture is Art Cashin wearing the Dow 20000 cap. The story points to what we often say, the S&P 500 is the “most important” of all the indices, the Dow has had 133 constituents in 120 years, and is “slow to change” with the times. Nonetheless, it is important – Wow 20,000?


Home again, home again, jiggety-jog. Happy new year of the Chinese kind, the year of the monkey is now a thing of history. Being the year of the monkey explains a lot. We are now into the year of the rooster, in fact it is the fire rooster.


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

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