Trying to hear what's not being said
September 19, 2013 Leave a comment
A recent article in The Australian newspaper (see link below) highlighted more than the buying power exhibited by Australia’s dominant supermarkets has over wine producers. It talked about how the supermarket duopoly is selling its own branded wine too.
A report from Australia’s Bureau of Statistics says that beer consumption amongst Aussies has hit a 66 year low, while wine sales have risen. News agencies have tried to spin their feeble creative minds to develop a story based around our growing sophistication towards finer tastes. Interestingly the report doesn’t tell us at which price point most of the wine was bought at, but I can confidently predict it wasn’t at the middle nor higher end of the price range.The reason that wine sales are growing is because wine is cheap. It is being sold cheaply by the supermarkets who account for 77% of the domestic wine sales. The reason beer sales are falling is because its expensive.
Mainstream consumers are looking for a cheap way to get drunk at the behest of drinking a quality artisan product.
The price of beer has risen over the past 30 or so years, yet we still think you can buy a glass of beer for $1 at the local bowls club.
Some fancy pubs & restaurants charge $9-$10 for a pint of beer and many happily pay for it, because it’s “craft beer”.
Wine producers at the medium to premium end of the market need to continue to focus on improving their brand, the quality of their product & the “love & care” that they put into making their wine. This is their differentiation, just like craft beer makers are doing it.
One benefit of living in “wine country” is that I have friends who are wine makers and mine happen to all be a part of boutique, independent enterprises. They do not try to be volume based manufacturers. They do not create “cookie cutter” batches of wine.
A $9 bottle of wine tastes like a $9 bottle of wine.
If you choose to enter the lower end of the market, you then compete against those who can be the lowest cost producer and have pricing power. This shouldn’t be a surprise.
We drink a $28 bottle of wine because the quality, love & taste shows.
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.
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.
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.
August 27, 2013 Leave a comment
During a recent supermarket trip, I was buying some ingredients for homemade pizza and a few extra things. By sheer co-incidence, I bought Danish feta cheese, Danish ham and Danish Butter (Lurpak – Yum).
This got me thinking about Denmark and its business influence. Various things that were “Danish” started running through mind ranging from furniture design, consumer brands and companies.
Names such Bang & Olufsen, Carlsberg, AP Moller Maersk (shipping), Lego, Vestas (wind turbines), Georg Jensen & Pandora (jewellery) & Novo Nordisk which is a pharmaceutical company boasting a market cap of $76 billion and employing 36,000 people.
Furthermore, when various publications list their most livable cities of the world Copenhagen continues to rank highly in the various judging criterium.
It’s quite amazing how well Denmark punches above its weight in terms of economic activity and business brands.
According to the IMF, it has an annual GDP of $313 billion (ranking it 32nd in the world, while its GDP per capita is an impressive $56,200 per annum, which is 8th highest in the world.
It has a low crime rate, open labour laws, a corporate tax rate of 25%, low unemployment and although part of the EU, it maintains it’s own currency.
Not bad for a small nation of 5.6 million people with a land area which is 30% smaller than Tasmania or a little more than the U.S. state of Maryland.
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.
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?
August 11, 2013 2 Comments
The Tour de France turned 100 years old and the past 3 years hasn’t seen a continental European winner.
There are cycling shops everywhere now selling accessories that cover your toes. And since when should bikes cost $6,000?
Too many middle aged men are wearing lycra and hobbling around coffee shops in cleats.
A plethora of local cycling events have popped up.
Heck, everyone knows what peloton means !
Newspapers feature cameos with business executives asking them about their favourite weekend routes.
The stock price of Shimano has nearly tripled and Giant’s has quadrupled over the past few years.
And there is no shortage of cycling touring holidays and charitable events involving the riding of bicycles.
I’m not saying that people will stop riding their bikes or that the sport will cease to exist but popularity usually wanes once its reaches a plausible saturation peak but especially when the hoard of “late adopters” embrace it.
I nearly bought an expensive bike and lycra yesterday, but I stopped myself. If I was an owner of a specialist bicycle store I would probably sell and look for the next trend.
Do you remember how marathon running, tennis, golf & yoga all become very popular aided by technical improvement in the equipment used?
Maybe it’s golf’s turn again?
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?
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.
rob zdravevski's blog 