How The Economic Machine Works by Ray Dalio
October 8, 2013 Leave a comment
Price charts don’t tell the whole story
September 17, 2013 3 Comments
Towards the end of calendar year 2007, the stock price of Australian rail & port operator, Asciano (AIO) was trading at $18 per share giving it a market cap of A$4.9 billion and it’s Enterprise Value (market cap plus debt and minus its cash) was A$8.97 billion. They were also near reporting a financial year EBITDA of A$626 million.
Six months earlier, the company had listed on the Australian Stock Exchange and was trading around $25 per share.
Today, the stock price is $5.80 and its market capitalisation is A$5.65 billion and the Enterprise Value is A$8.75 billion. Both figures are near or higher than the values seen at the end of 2007.
Incidentally, its 2013 Financial Year EBITDA was $911 million.
After seeing its stock price fall by more than 70%, how can this company’s worth be higher than its 2007 level?
Asciano now has a float of 975 million shares.
So, we take the 975 million shares and multiply it by $5.80 per share to equal $5.65 billion of Market Capitalisation.
Back in 2007, AIO has 273 million shares on issue which when multiplied by its $18 share price gave it a market cap of A$4.9 billion.
The difference being, Asciano has quadrupled the amount of shares on issue over the past 5 years.
This highlights one example of where you need to do your homework when understanding a company’s value rather than simply looking at a price chart.
Additionally, it’s a reminder to buy an asset that has scarce supply rather one than is plentiful.
Price Is A Problem In The Absence Of Value
August 16, 2013 Leave a comment
The CEO of AMP is resigning, so I had a look at how the stock price has performed under his tenure.
Since being CEO, AMP’s stock has fallen 7% compared to the ASX 200 Index, which has risen 168% over that same time.
Hmmm……
BHP’s recently retired CEO oversaw a total stock return of negative 17% while the benchmark index broke even.
Qantas’ current CEO can brag that his company’s stock price has declined 46% during his watch vs. the index return of + 55%.
Myer’s stock price has left shareholders 14% poorer (and I am counting dividends) under the current steward but the index has climbed 28% over the same time period.
But I can hear the cries already. They’re in a tough industry, it’s cyclical, they inherited a bad egg from the previous boss, it’s competitive and margins are tight.
Perhaps the board is equally to blame for poor stock price performance as much the management team that is charged to execute the strategy?
To contrast, the current ANZ’s boss has presided over a 42% total stock return whilst the index fell 3%, Westpac’s stock performance has been an impressive 90%, which handsomely beats the 15% return that the index managed and last of all, had you owned that boring old power utility, AGL when their present CEO took over, your total return is 55% versus the ASX 200’s negative 3%.
Some commentators talk about what legacy a departing CEO has left or the systems they put into place.
Whilst they are being rewarded handsomely (which I don’t object to), shareholders rewards should be somewhat aligned.
Don’t even get me started on their “golden handshake” severance pay.
Can Qantas stock take-off ?
August 11, 2013 Leave a comment
Qantas CEO, Alan Joyce’s recent address at an industry event didn’t give me any incentive to keep digging through the company’s numbers to determine whether the business was worthy of investment.
Mr Joyce’s used the upcoming Australian election as a reason for the conservatism in spending money on flights but once the election is over, he “hopes” confidence will be restored.
The industry in Australia has had extra capacity and this has slowly fallen, yet Mr Joyce says that they will not rule out adding capacity to the domestic market, basically in order to help them increase their market share. ???&$Y*@#$*@#!)
In a domestic market that is practically a duopoly and where international flights are inter-continental and wrapped up in code shares agreement together with the cost cutting measures conducted over the past few years such as self check-in and outsourcing of maintenance, Qantas still can’t post a net profit.
In fact, Qantas’ stock price has declined 46% since Mr Joyce took over in November 2008, compared to the ASX 200 Index rising 55% over the same time.
Maybe Qantas is a stock worth looking at, after all. Comparing its current valuations to other airlines isn’t inspiring but with a stock price nearing its all-time low, you may need to look at it from the perspective of where the company and it’s figures are going to be, rather than where it currently is.
To start with, imagine what the stock price would do, if Mr Joyce was replaced?
The Coming Slaughter of the Yield Pigs
August 7, 2013 Leave a comment
Major Australian banks have again raised billions of dollars by issuing debt.
In some instances, the issuer of the debt isn’t the parent company and in cases where it is, investors should wonder why do the most creditworthy banks in the world need to offer 300 basis points (or greater) above their benchmark rate, in order to attract investors?
Perhaps it’s because the debt is perpetual, its pays non-cumulative distributions, its unsecured and subordinated
Other questions to ask include; what is the credit rating of the debt, is if the credit rating of the debt is different to the issuer, when does the debt mature, can it be “called” or “converted”, are distributions franked, am I being paid fairly or enough for the risk I am taking or perhaps simply, does this investment benefit you or are the odds stacked towards the “house”.
I also question whether I should buy it at “par” rather than a discount.
Sadly, many Australian retail investors don’t possess the required skill and knowledge to analyse debt investments.
In turn, they often aren’t receiving objective advice,. Instead, they are often being “sold” the investment rather than being advised whether it’s appropriate for their portfolio.
There has been plenty of debt on offer, so I ask myself, why should I buy something that has ample supply?
The genius behind the banks decision is to raise capital when they don’t particularly need it and they do so when their costs (or the rates they offer) are cheap.
Australian interest rates are now at record lows with the current Reserve Bank rate sitting at 2.5%.
With the pendulum at an extreme, there is greater probability that interest rates triple in the next 10 years before they move to 1%.
Are these investors buying something at the wrong end of the cycle?
Corn on 3 year lows
August 5, 2013 Leave a comment
Very First Corn Flakes Package
Due to an expected record U.S. harvest, the price of corn has fallen to levels last seen in 2010 and at prices also seen in 2008.
What a contrast when compared to the spike in prices during the 2012 drought.
The price of corn has now fallen (on a weekly basis) at least 2 standard deviations below its mean on a weekly and monthly basis which covers the past 20 years.
When I look at its price on a quarterly basis, corn have reverted to its rolling mean over a 40 year period.
Supply must have increased significantly but our work suggests that demand remains steady, if not slightly higher, especially when accounting for animal feed usage.
The decline in price over the past 12 months has helped the share prices of companies such as Gruma (Mexican tortilla maker), Pepsi and Kellogg, while share prices of other beverage companies, namely Coca Cola have lagged their peers and index considerably.
Did you know that corn is used as a sweetening alternative to sugar in many drinks and many foods in the form of High Fructose Corn Syrup or HFCS.
If we look to buy some actual corn itself, its current price is $4.74 per (generic) contract renders it oversold, whilst support may be found 7-9% lower surrounding the $4.30 level but let’s not split husks over it.
Further reading: Litchfield, Ruth (2008). High Fructose Corn Syrup—How sweet it is. Ames, IA: Iowa State University Extension and Outreach. Retrieved 1 March 2013.
Buy a container of coffee beans
August 1, 2013 Leave a comment
The price of arabica coffee has fallen to 4 year lows. (Are you paying less for your coffee lately?)
While the demand for coffee has remained steady for the past decade, only recently has supply increase, thus explaining the fall in the price of the commodity.
Compare this to the 1,000 cups that each Norwegian or Finn drinks, each year, which is equivalent to about 10 kilograms (kgs) of coffee.
Although Scandinavians love their coffee, the largest coffee market in the world is the United States of America, where it’s averaged that each person consumes 4 kgs per person, each year.
So where is the upside?
The tea-loving Chinese only drink an average of four cups of coffee, per person, per year.
Just imagine if the Chinese taste buds change as Starbucks and Espresso bars start popping up around the place?
Or perhaps a wider group of Americans increase their coffee intake.
If that story doesn’t pan out, recent studies suggest that drinking coffee can halve the risk of suicide. As mental illness becomes prevalent and should the economy deteriorate again, it’s plausible that drinking more coffee could be added to a doctors prescriptions.
Although that advice won’t help the growing insomniac population, which is a future blog post topic.
So, with prices being low, it’s not a bad idea to go and buy a shipping container full of raw, green Arabica Coffee and keep them for a while.
“Green” coffee beans that are stored in a dry environment can last for up to 10 years.
Furthermore, stored beans are then considered “aged beans”, which over time lower their acidity and increase their body.
Just An Idea!
A Suez Crisis and higher Natural Gas
July 31, 2013 Leave a comment
In Egypt….
two Presidents have been removed from power,
human rights are being violated,
christians are being suppressed and
people are being killed whilst protesting
What if the Muslim Brotherhood (an Iranian proxy) takes power in the world’s most populous Arab nation which borders Israel and straddles the Suez Canal?
Will this make the world nervous?
It’s possible that we see Western intervention to correct matters and protect their billions of dollars spent on military aid over the decades.
Oil prices will probably rise further but I’ll speculate that Natural Gas prices will rise more so.
The price of Natural Gas have been falling for years but I think this will reverse.
When oil becomes more expensive, I think demand for cheaper alternatives such as Natural Gas will be sought and oil won’t be the only fuel source that buyers will settle for.
Furthermore, I expect gas projects (including American shale) will not come on-stream as quickly as expected, due to the rising cost of capital and overall cost overruns.
It is rare that when a commodity is in high demand that it stays cheap for too long.
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