Stock Broking
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Current State of Dividends for Shares
Smart Money - Part 2
As reported in Bloomberg, Goodman’s second-largest shareholder through David Herro, Chief Investment Officer at Chicago- based Harris Associates LP,“At this price, we think Goodman remains substantially undervalued”.
The bid is “opportunistic”, Goodman Fielder spokesman Ian Greenshields said by telephone from Auckland when interviewed by Bloomberg. “Value lies well north of 60 cents,” he said. Goodman Fielder, whose brands also include Helga’s and Wonder White bakery, is trading at 6.63 times estimated full-year EBITDA.
When Business Are Cheap – Smart Money is Buying
This means that the underlying assets or business become cheaper.
As with all investing the decision to invest needs to reconcile what the value of the asset is “worth” to what it is actually trading at.
Invariably over its lifetime a business will have periods where it is struggling with certain factors or indeed dealing with undesirable issues the question invariably becomes when investors start selling the company when has it gone too far? The value as measured by the share market (price we can buy for) has gone beyond a “reasonable price” for that business notwithstanding the matters it may be faced with. This means opportunity.
At the moment a real life scenario is playing out with Billabong who has been looking at options for its balance sheet amid a collapse in earnings caused by stalling consumer spending in Europe and Australia and a surge in the Australian dollar.
Billabong reported a 72 percent slump in earnings, with net profit dropping to $16.1 million in the six months ended Dec. 31. Billabong have announced a wave of store closures for its global network which plans to cut $30 million from costs. This has seen Billabongs share price fall off a cliff from over $11 some 2 years ago to just below $2 at its low and dividends cut over this period. Just 2 years ago the business was valued at over $2.3 Billion and now about $500 million.
TPG Capital, the buyout company run by David Bonderman, offered to buy Billabong International Ltd. for $765 million or $3 per share on 17th Feb. This offer was some 68% premium to the previous day’s closing price. Naturally, after hearing the news the share price for BBG jumped quite quickly. “The TPG offer at $3 is quite opportunistic when you consider the value of the business and the value of its brands,” said Tim Montague-Jones, an analyst at Morningstar Inc. in Sydney speaking with Bloomberg. “I don’t think they would sell at $3 and it would have to be a lot higher than that.”
Markets Unsteady – Again
More than US$2 Trillion has been wiped out of global stock markets values from the high reached in May. The US stock market has declined for the last 5 weeks as a result of economic news that manufacturing weakened and that unemployment rose.
What does all this mean?
Well according to Bloomberg the S&P 500 is trading at 12.2 times earnings. So what does this mean?
This means that for every dollar of profit you need to pay 12.2 times that amount to buy the business on the stock exchange based on current prices. The long term average is anywhere between 16 and 17 times for this index which means that we are acquiring the assets on historically cheap terms. That means that there is already consideration for some “bad” events in regards to the current prices. Naturally shares can always get cheaper but if you are a long term investor there is an opportunity to take a longer term position and reap the rewards.
Commodities – Opportunity or Trap?
The Australian economy sailed through the GFC with not so much as a glitch. Many believe that our commodities industry who had revenues of $187 Billion last financial year is who to thank. Australia’s mining industry contributes 8% of our nation’s wealth as measured by GDP but a staggering 47% of our exports.
Having had a number of conversations at the pub recently with people on the exciting long term prospects of these companies as investments it is probably time to step back and assess.
With all sectors more capacity is coming on stream due to the high prices currently on offer. A perfect example of this in Australia is Fortescue Metals, iron ore producer, who was born in this commodity boom. As well as new players existing players are increasing their investment in other projects and increasing supply. In their last report the CEO of BHP spoke about the difficulty in finding projects at the right price.
In any case Australia is a low cost producer and its proximity to Asia will always mean that it is a competitive force to help sustain pricing. Regardless, it would be a brave call to say that prices will not be impacted downwards at some point and the thing that does vary among such bears is the magnitude of any decline.
To show the difficulty in such factors world renowned investment manager Jeremy Grantham, who correctly forecast the tech wreck and the subsequent decade of US equity declines as well as the large bankruptcy of global banks in GFC, says that long term Asia demand for energy, metals and crops will outpace supply. However he also goes onto say that there is a 25% chance of China slowing considerably due to bank losses and the unwinding of a property bubble which would have a large impact on commodity prices. Hedge Fund Manager, Jim Chanos, who correctly forecast the collapse of Enron said that the property bubble in China is “as big or bigger than we saw in the west” after considering the size of the economy.
The question becomes how do you balance these risks as we assess the world economy going forward? As investors we need to ask what are the opportunities and traps we need to be looking for?
If you have any queries please call me on 1300 132 214.
Energy Mix – The Final Word
As a roundup to my blog's series on our current mix of energy sources and the future problems this will bring there were some interesting releases over the last few weeks on this matter.
The International Energy Agency said that we were over reliant on coal and need to boost incentives for clean coal. Coal whilst being “dirty” produces about 47% of new worldwide electricity in the last decade. They propose energy efficiencies and subsidies to promote new development in renewable energy and concepts such as electric cars. They also addressed recent trouble in Japan with the nuclear reactor saying that nuclear power is still part of our energy mix and needs to increase output by about 30% before 2020.
The IMF this week released a report citing the impact on global growth if a timely alternative is not found to oil. The risk is obvious. As they note some savings will be found in efficiencies others will be found in the development of alternatives such as bio fuels and electric cars. Interestingly, they also talked of taxes on oil which the revenue could be used to research the answers for this conundrum. Interestingly, in Australia we already have a lot of taxes and levies on fuel I wonder what proportion of this revenue going to the government is being spent on the development of efficiencies or alternatives?
Our Addiction To Energy – First Step Acknowledge the Problem
Lifestyle and location is dependent on the amount of energy used per capita. In the US every person uses the equivalent amount of energy to continually burn 110 light bulbs. Europeans use 55, Asians 16 and Africans 8 however, as the world develops the demand for energy is rising rapidly.
As China and other countries such as India and African nations urbanise and become middle class they will demand and consume more energy.
Where does our energy come from?
Fossil fuels account for the most Oil 33%, Coal 25% and Natural Gas 20%. The remainder is made up of other sources such as nuclear 9%, Hydro electric, solar, wind and Geo thermal.
We are addicted to oil and it is getting harder to get which makes it more costly. 100 years ago it took 1 barrel of oil to get 20 Barrels of oil whilst currently in Saudi Arabia it takes 1 barrel of oil to get 20 Barrels of oil. Scarily , it takes 1 barrel to produce only 5 barrels of oil from the Canadian Tar Sands. Furthermore, many believe that we have pulled out more than half of the oil reserves we have. Given the dramatic increase in demand how long will the rest last? Other fossil fuels such as coal and gas are more plentiful but they release a lot of carbon dioxide into the atmosphere which most scientist agrees causes climate problems.
Importantly, there are ways we can as individuals decrease our demand for energy. Also, there is a way that we can produce the amount of energy that we require now and in the future but by implementing a portfolio of energy sources it is a challenge that needs to be and can be met.
A very good documentary in lay terms talking about these issues can be located below.
Episode 1/3
Episode 2/3
Episode 3/3
What Can You Do?
What is Currently Good Value?
Assessing the valuation means we look at the amount of profit they are making relative to what we have to pay to own a stake in that business. Valuation is a different concept to that of the financial strength or appeal of a business. For example you can have a pretty poorly run business but if it is really cheap it may be a great investment. Alternatively, you can buy the best run company in the world but if you pay too much for it you will be waiting a long time to get a suitable return on your investment.
Speaking of valuations our favourite asset class or investment, residential property, is displaying some worrying signs in regards to valuation.
The Demographia International Housing Affordability Survey for 2011 found Sydney was the second most expensive city in a survey which included countries such as US, China, Australia and Canada. When using the measurement of median property price divided by Median household income a multiple of 9.6 times is the result. It should be noted that the long term average for this measure is closer to 3 times. A similar survey conducted by HIA puts Australia’s ratio of house prices to household income at 4.1 times. When they started the survey in 1995 this measure was only 2.5.
For those looking to buy their first home or an investment property how does this fit into their thinking?
BHP Announces Record First Half Profit
BHP has just announced a record first half profit of US $10 Billion.
Interestingly, the CEO said that they were not looking at major acquisitions given that they were having to pay “top dollar” for assets. They also said they were going to pump Billions into developing the assets they already own as way of keeping the supply of their product flowing.
There is no doubt that the emerging economies are growing and as the Western World continues to recover from the GFC we will no doubt see further demand for oil, coal and other commodities. However, the question becomes how is the demand and supply equation balanced, especially in light of the very high prices these commodities are now trading at? Where is the potential risk? Is it to “surprising” the market with good news or indeed disappointing news?
I would argue the latter so, ceteris paribus (buyer beware) for investors that blindly following the commodities train. Remember, it is the amount of profit over the long term that will ultimately determine a company’s value, hence share price.
Centre Capital Securities are stockbrokers and member participants of the National Stock Exchange, have over 50 years combined experience in stockbroking and are contactable on 1300 132 214.
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