The JSE All-share tried hard yesterday to have an up day. It opened in the green, then slumped into the red, only popping into the green around mid-afternoon for a brief period. Looking at the Top 40, it was almost an even split between companies in the green and red, showing the downward momentum slowing. Today should be a much better day on the local market.
The Hong Kong market opened this morning for the first time since Friday, where Tencent is up 0.8% in early trading. Hmm, that means Naspers overreacted on Monday and Tuesday, it will have some catching up to do today. News overnight is that the spread of the virus is slowing, meaning that preventative measures are working. The US market surged ahead yesterday, telling you that investors don’t see any long term threat from the coronavirus.
Yesterday the JSE All-share closed down 0.28%, the S&P 500 closed up 1.01%, and the Nasdaq closed up 1.43%.
Apple results are always very exciting. It is a polarising company when it comes to analysts. Fortunately, we have been on the long side of the argument. Since 2006 the share is up 3 000%, I would say that the longs have been right so far?
Q1 is Apple’s big quarter because it includes black Friday and Christmas. They smashed their revenue record by $7bn with $91.8bn in sales. Someone on Twitter pointed out that Apple made sales of over $1bn a day. Just incredible.
Tim Cook said that the iPhone 11 has been a smash hit. That has been a key driver of the recent share price surge. Services came in at a record $12.7bn and wearables (Watch and AirPods) have seen phenomenal growth. More importantly, their active installed base of devices has reached 1.5bn. That bodes very well for the future of their services business.
Net income of $22.2bn was also a record. In the quarter the company generated $30.5bn of free cash flow. That could pay off Eskom’s debt in one swoop. But no, they are rather returning it to shareholders (fair enough). In the quarter they bought back $20bn worth of shares and are paying $3.5bn in dividends.
It is very easy to write about such phenomenal results. But even with all this good news, the stock trades at 22 times next years earnings. That is cheaper than almost every other large tech business out there. This stock should be a heavy weighting in every portfolio whether you are 8 or 80 years old.
Our 10c Worth
One thing, from Paul
I love earnings season! Here is a quick update for you from French luxury giant LVMH. It’s a stock held by a handful of Vestact clients.
LVMH owns Louis Vuitton, Moet & Chandon and Christian Dior, and recently struck a deal to acquire American jeweller Tiffany & Co. LVMH reported annual sales of $60 billion (EUR53.7 billion) in 2019, a 15% jump from 2018. Their best business unit was fashion and leather goods.
Founder and CEO Bernard Arnault’s net worth rose by roughly $2.9 billion to $108.7 billion ahead of the results. He’s the world’s third richest person, after Jeff Bezos and Bill Gates.
The only reason to not own LVMH is that French companies are subject to very high dividend withholding taxes. Every time that they distribute a dividend, Macron and his gang grab 30% of your money, at source. Mind you, with a share price doing that well, perhaps the diminished dividend yield is less of a concern. If you want to own some, let us know.
Visa and Apple jostle for the title of biggest holding in Vestact portfolios, as such we keep a very close eye on emerging trends out of the money industry. There is a shift in the US where millennials prefer to have store credit, instead of using a credit card. The reasoning is that they would rather have fixed repayment terms, and not the more open ended repayments from a credit card.
It is an interesting new trend, and something that financial institutions need to focus on to make sure that they are not left behind. Millennials now make up 56% of the US labour force, meaning their spending habits will dominate trends going forward.
For this trend to take off, the store credit needs to be granted in real time. Imagine arriving at the till, saying you want store credit, then giving your ID number, and having your rate and repayment terms quoted back to you in a few minutes.
For Visa, this trend could mean people moving off of their card network. In the short run though, there is still huge growth potential in tapping the cash using market segment. In the US, 6% of people don’t have bank accounts, and a further 18% are underbanked. That means Visa still has those 25% as potential customers.
You can read more here – Do Credit Cards Have Staying Power?.
As you can see, both Paul and I are excited about the potential that LVMH holds. Adding to the list of brands mentioned by Paul above, Bernard Arnault’s French luxury conglomerate also owns cosmetic retailer Sephora, Italian jeweller Bulgari, and cognac maker Hennessy.
Revenues came in at a record high of EUR53.67 billion, up 15% while net profits came in at EUR7.17 billion up, 13% also a new record for the largest luxury company in the world. Louis Vuitton on the leather goods and fashion side was the big driver and their efforts to expand the Dior brand in order for it to appeal to males has been a genius move as we can see the fruits!
The biggest issue for luxury companies in 2019 was their dependence on Hong Kong, which is one of their main hubs for revenue. We know in 2019 there were relentless protests in Hong Kong which led to a lot of luxury goods makers like LVMH and our very own Richemont, to temporarily close some of their stores in the city. LVMH benefitted from being geographically diversified in this case.
LVMH has done a handful of acquisitions like the clothing division of Dior in 2017, the luxury hotel chain Belmond last year, jewellery maker Bulgari in 2011 and most recently their imminent acquisition of Tiffany & Co.. However, the majority of the organic growth came from Louis Vuitton which is as brand they’ve had for a very long time.
A company like LVMH sales does get affected by things like the coronavirus. However, as I was explaining to Paul in our discussion yesterday evening; the Lunar New Year red envelopes have been exchanged and all that money that didn’t get spent last weekend will have to be spent sometime in the future. So yes the sales outlook for 2020 might not be amazing for these companies but when this is all over, people will be spending on their favourite luxury goods and LVMH would be more than happy to supply them.
In the interim, if the LVMH share price misbehaves because of the coronavirus, this could provide for a great investment opportunity for the patient investor.
Linkfest, Lap it up
To our young readers wondering what to do after school, have a look at some top paying jobs in South Africa – 17 jobs paying more than R2 million in SA right now.
Here is some fun from our history books. How good are your sales skills? – The Man Who Tried to Sell the Eiffel Tower (Twice).
This morning Bloomberg reported that Moody’s says it is too early to assess South Africa’s progress. Said another way, a debt downgrade in March is not a foregone conclusion. A big factor in their decision will be the budget speech in February, will we see another VAT increase? It is another big day for earnings in the US, with Facebook, Microsoft, Illumina and Tesla reporting numbers. The JSE All-share is higher this morning and the Rand is at $/R 14.53.
Sent to you by Team Vestact.
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