Great article on hardcorevalue quoting David Einhorn on GM.
http://www.hardcorevalue.com/2011/12/einhorn-likes-gm.html
Friday, 3 February 2012
France Telecom
FCF decreased in 2010 to 12.5 bln from being 14 bln in the last few years. Capex remains similar at between 6 to 7 bln. FCF is therefore 5 to 6 bln. Dividend was increased in 2010 from 3.7 to 4.3 bln.
Depreciation and capex is similar.
EBITDA margin relatively steady at 33% over the last 6 years. Slight decrease from 36%.
RoE is slightly decreasing over the years. Currently at 16% as 5Y average. Now currenly trading at book.
Dividend yield is 12%. Can be reduced to 8%. But otherwise at that level seems sustainable to me.
Derbi price target of 14.50 with a hold. Trading at 11.48.
Note that Deutsche Telekom has EBITDA margins of 26%. I believe this is because they generally have lower market share than FT in foreign markets (Telefonica is the best in having largest market share in the regions they do business in, hence there better margins and RoE), hence enjoy less economies of scale. Having a sub par network in a region means they dont get access to blockbuster handsets, which means there is a large market sector that will never join them! This requires large investment to offset.
DT is already slightly more leveraged than FT. Otherwise in terms of FCF they are similar, and so are dividend payments. FT is worth 30 bln, DT is worth 38 bln. Fear of new market entrant in its home market likely to be weighing heavily on FT.
Note in Europe the telecom sector has not been its usual defensive play. At current pricing I believe they are likely to better qualify for that role during future macro headwinds.
Depreciation and capex is similar.
EBITDA margin relatively steady at 33% over the last 6 years. Slight decrease from 36%.
RoE is slightly decreasing over the years. Currently at 16% as 5Y average. Now currenly trading at book.
Dividend yield is 12%. Can be reduced to 8%. But otherwise at that level seems sustainable to me.
Derbi price target of 14.50 with a hold. Trading at 11.48.
Note that Deutsche Telekom has EBITDA margins of 26%. I believe this is because they generally have lower market share than FT in foreign markets (Telefonica is the best in having largest market share in the regions they do business in, hence there better margins and RoE), hence enjoy less economies of scale. Having a sub par network in a region means they dont get access to blockbuster handsets, which means there is a large market sector that will never join them! This requires large investment to offset.
DT is already slightly more leveraged than FT. Otherwise in terms of FCF they are similar, and so are dividend payments. FT is worth 30 bln, DT is worth 38 bln. Fear of new market entrant in its home market likely to be weighing heavily on FT.
Note in Europe the telecom sector has not been its usual defensive play. At current pricing I believe they are likely to better qualify for that role during future macro headwinds.
Wednesday, 1 February 2012
Oracle: growth by M&A
Oracle had a major increase in operating cash flow in 2010, from 8.6 to 11.2 bln. Capex fairly similar at 450 mln. Lots of M&A in the last 6 years (apparently 36 bln).
Currently trading at 141 bln market cap with stock price at 28.21 USD per share. Dont touch unless at 25 (pre crisis peak, a large support here). GMO, Fisher have large positions. Morningstar buy at 28.70.
With FCF no growth estimate of 10 bln, this is a 7% FCF yield. Not bad. Growth is for free with current 30Y US Govt bond yields at 3%. (Note Bestinver FCF mutlipe is x15, i.e. 6.66% FCF yield). Hence will not buy without at least a 7.5% yield.
Now currently trading at much more than pre crisis. Clearly the market believes the M&A it has done is value adding.
Using the database solution as an entry to offer enterprise solutions for software and hardware (bought Sun).
Licence updates are 42% of sales. Hence stable recurring cash flow.
Cloud computing, software as a service solution, such as salesforce.com, and open source software models are all threats. Oracle is taking a wait and see approach. However have bought mySQL, which was an open source solution. Big on M&A in teh future as well.
Like large healthcare companies. Many opportunities come from buying smaller companies and allowing them to grow via using your distribution network. Happening in consumer staples, healthcare, technology. I suppose in industry as well. Buying a new product and putting it through your system. Paying for growth, not being internally generated.
Currently trading at 141 bln market cap with stock price at 28.21 USD per share. Dont touch unless at 25 (pre crisis peak, a large support here). GMO, Fisher have large positions. Morningstar buy at 28.70.
With FCF no growth estimate of 10 bln, this is a 7% FCF yield. Not bad. Growth is for free with current 30Y US Govt bond yields at 3%. (Note Bestinver FCF mutlipe is x15, i.e. 6.66% FCF yield). Hence will not buy without at least a 7.5% yield.
Now currently trading at much more than pre crisis. Clearly the market believes the M&A it has done is value adding.
Using the database solution as an entry to offer enterprise solutions for software and hardware (bought Sun).
Licence updates are 42% of sales. Hence stable recurring cash flow.
Cloud computing, software as a service solution, such as salesforce.com, and open source software models are all threats. Oracle is taking a wait and see approach. However have bought mySQL, which was an open source solution. Big on M&A in teh future as well.
Like large healthcare companies. Many opportunities come from buying smaller companies and allowing them to grow via using your distribution network. Happening in consumer staples, healthcare, technology. I suppose in industry as well. Buying a new product and putting it through your system. Paying for growth, not being internally generated.
Macro influences on companies
Revenue decreases from less demand in volume (more savings, stronger ccy, less investment in the economy as little growth, less govt contribution, higher taxes, better alternative product, product not relevant anymore, increasing interest rates) or competition on prices (more intl competitors)
Margins decrease because more competition on prices (market structure changes from regulation, changing technology, other sectors more badly effected so move into this sector) or increasing commodity costs (inflation from money printing, more demand as other countries are growing, supply issues because little investment) or less demand (more savings, stronger ccy, less investment in the economy as little growth, less govt contribution, better alternative product, not relevant anymore, increasing interest rates)
Multiple decreases as expectations of more stimulus make investors fear the value of cash will decrease, hence future FCF will be worth less inflation
Interest rates can increase, reducing free cash flow
Taxes increase hence reduce free cash flow
Margins decrease because more competition on prices (market structure changes from regulation, changing technology, other sectors more badly effected so move into this sector) or increasing commodity costs (inflation from money printing, more demand as other countries are growing, supply issues because little investment) or less demand (more savings, stronger ccy, less investment in the economy as little growth, less govt contribution, better alternative product, not relevant anymore, increasing interest rates)
Multiple decreases as expectations of more stimulus make investors fear the value of cash will decrease, hence future FCF will be worth less inflation
Interest rates can increase, reducing free cash flow
Taxes increase hence reduce free cash flow
Wednesday 01 February 2012
Unicredit are tendering for their perpetuals. Where does the cash come from? The ECB? Pay 1% to reduce the payment of 10%! Also Unicredit made a large rights offering.
The question is whether there is any point selling back to them? The bank is now in a better position (hence price moved from 50 to 72), but is there now only a small chance of it not paying the perpetual? Fewer investors may hold the product, hence less income payments need to be made. Bank better capitalised. Depends also what other banks do - if it becomes socially acceptable to not pay your perpetuals! There can be a cascade effect.
Chris also suggests that banks have been using ECB funding to buy their soverign debt. Hence another yield pick up. Good credit exhibits almost a flat yield curve, hence the old borrow short lend long is not profitable. Sovereigns almost MUST be used to generate profit on cheap credit by the ECB. Banks capitalise themselves via their security purchases, governments receive funding, the ECB gets paid back. Confidence is returned to the system. Austerity takes place to reduce the deficits so debt does not increase. But where will the growth come from to reduce the current debt level?
That will have to be achieved via inflation. International banks are achieving this by lending to emerging markets. Loans going bad in DM replaced by high interest loans in EM. We hope Citigroup, Santander etc don't loss the plot and reduce underwriting standards in those areas focusing only on the growth. Then same problem in a different region! Many corporates are getting access to the growth via EM. But how does a country achieve that? How does it attract the profits from their home corporates? TAX THEM MORE! CAPITAL CONTROLS! PROTECTIONISM?
US GDP Q4 2011 strong contribution from inventories. Gavekal say because lots of imports. But may have the effect of having lower Q1 2012 GDP as the inventory gets reduced, hence less buying, less activity in general. Construction spending increased 10%. Not much investment in equipment. USA needs an investment led boom, hence this would need to change. The consumer was quite strong. But note saving rates are falling again. Better GDP results when remove govt. Hence provate sector taking up the slack from reducing govt footprint. This is excellent news for the USA.
When reduce govt spending and provate sector is not growing, then reduce tax receipts as well as growth from less govt spending. Hence increasing the budget deficit. This can create a debt trap, whereby the cost of borrowing can increase. This is a problem if have a large debt load and large re financing tranches coming due. All this because not competitive. Need to reduce the cost of labour, then can create jobs from foreign capital coming in. Or be a more efficient user of capital if govt receives capital. But cost of borrowing increasing, so the return needed must increase if to profit from the capital. Need to restructure the economy as capital went to the wrong sectors. Either because interest rates were too low, or new laws gave incentives to move into new areas/sectors, or the economy simply was not innovative enough.
Telecom not being displaying defensive characteristics in Europe. Competition and regulatory price pressure. US has been a little better. Europe is opening up now. US done many years ago I believe. We may see such bahaviour in a number of sectors in Europe as sectors open up Europe wide. Especially those that were government protected: telecoms, utilities. In Asia low penetration and the resulting strong growth has helped their telecom sector.
The question is whether there is any point selling back to them? The bank is now in a better position (hence price moved from 50 to 72), but is there now only a small chance of it not paying the perpetual? Fewer investors may hold the product, hence less income payments need to be made. Bank better capitalised. Depends also what other banks do - if it becomes socially acceptable to not pay your perpetuals! There can be a cascade effect.
Chris also suggests that banks have been using ECB funding to buy their soverign debt. Hence another yield pick up. Good credit exhibits almost a flat yield curve, hence the old borrow short lend long is not profitable. Sovereigns almost MUST be used to generate profit on cheap credit by the ECB. Banks capitalise themselves via their security purchases, governments receive funding, the ECB gets paid back. Confidence is returned to the system. Austerity takes place to reduce the deficits so debt does not increase. But where will the growth come from to reduce the current debt level?
That will have to be achieved via inflation. International banks are achieving this by lending to emerging markets. Loans going bad in DM replaced by high interest loans in EM. We hope Citigroup, Santander etc don't loss the plot and reduce underwriting standards in those areas focusing only on the growth. Then same problem in a different region! Many corporates are getting access to the growth via EM. But how does a country achieve that? How does it attract the profits from their home corporates? TAX THEM MORE! CAPITAL CONTROLS! PROTECTIONISM?
US GDP Q4 2011 strong contribution from inventories. Gavekal say because lots of imports. But may have the effect of having lower Q1 2012 GDP as the inventory gets reduced, hence less buying, less activity in general. Construction spending increased 10%. Not much investment in equipment. USA needs an investment led boom, hence this would need to change. The consumer was quite strong. But note saving rates are falling again. Better GDP results when remove govt. Hence provate sector taking up the slack from reducing govt footprint. This is excellent news for the USA.
When reduce govt spending and provate sector is not growing, then reduce tax receipts as well as growth from less govt spending. Hence increasing the budget deficit. This can create a debt trap, whereby the cost of borrowing can increase. This is a problem if have a large debt load and large re financing tranches coming due. All this because not competitive. Need to reduce the cost of labour, then can create jobs from foreign capital coming in. Or be a more efficient user of capital if govt receives capital. But cost of borrowing increasing, so the return needed must increase if to profit from the capital. Need to restructure the economy as capital went to the wrong sectors. Either because interest rates were too low, or new laws gave incentives to move into new areas/sectors, or the economy simply was not innovative enough.
Telecom not being displaying defensive characteristics in Europe. Competition and regulatory price pressure. US has been a little better. Europe is opening up now. US done many years ago I believe. We may see such bahaviour in a number of sectors in Europe as sectors open up Europe wide. Especially those that were government protected: telecoms, utilities. In Asia low penetration and the resulting strong growth has helped their telecom sector.
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