Beware, The Future Is Already Here

This story features QBE INSURANCE GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: QBE

In this week’s Weekly Insights:

– Beware, The Future Is Already Here
– Metcash: Hard Lessons To Pay Heed To
– US Equities: The Quote, The Prospects
– Bye, Bye To Share Buybacks
– Rudi On TV
– Rudi On Tour

Beware, The Future Is Already Here

By Rudi Filapek-Vandyck, Editor FNArena

Australian companies are facing much bigger battles than Treasurer Joe Hockey or any other market commentator has thus far dared to bring to the Australian populace’s attention.

This is no longer about a lack of confidence (if it ever has been) but about tectonic plates shifting across all five oceans and seven continents.

In short: there are now more risks and changes falling upon corporate Australia than at any time prior in history.

Hyperbole? Not at all. These risks and changes are firmly on my radar. Two weeks ago, I spoke about them with a select gathering of French business leaders in Sydney. The week before that I locked myself up in Canberra for a whole week to read, think and write about them in my next work-in-progress eBooklet.

As these risks and changes (call them “threats and transformations” if you like) are going to impact on businesses, their models and viability, and on their credit ratings and share prices, it goes without saying that investors of all colours and tastes should pay attention too. Sooner rather than later.

Threats And Transformations

Low growth and barely any inflation are no Goldilocks ingredients for global corporations. It might seem like they are, given how financial markets have behaved over the past years, but there is at least one direct link to the tepid investment behaviour as displayed by global corporations even though money is cheap and governments are out to stimulate them into more investments.

It’s because low growth and low inflation depress traditional measurements for value creation such as Return on Equity, Return on Capital Invested and Return on Assets. Central bankers might have liked corporate boards to lower their financial hurdles and benchmarks, but instead they have opted for alternative approaches. Cheap money has funded share buybacks and Mergers and Acquisitions. That’s the corporate way for dealing with the new global framework for growth.

Making matters a little more complicated is that geographical barriers are disappearing while new technologies are opening up markets to new entrants, introducing more competition and disruption.

While these “threats and transformations” are taking place across the globe, Australia in particular is vulnerable because it has been operating as a distant island far way from just about everywhere else. But the tyranny of distance is no longer offering protection for domestic oligopolies. And what about the high costs and uncompetitive wages?

Australian Profits Under Fire

There’s much more to this story than US tech companies Netflix, Uber and Airbnb reaching Australian shores and disrupting the Federal Government’s tax collection abilities.

Have you noticed lately how APA Group’s latest acquisition occurred at a lower purchase price but it didn’t mean better returns for shareholders? Why is CommBank experimenting with bitcoin transactions between global branches? The recent entrance of Warren Buffett’s Berkshire Hathaway into the local insurance sector hasn’t generated many headlines as yet, but it will. (In case you wondered: QBE Insurance ((QBE)) is considered most at risk among local insurers).

From food and liquor outlets, to travel agents, to power grid utilities, to stockbrokers and wealth advisors, to producers of coal, to developers of accountancy software, to gaming and wagering operators, to providers of funding and loans… the list pretty much consists of all relevant sectors and companies that make up the share market in Australia.

Not exactly the desired environment for investors who can no longer rely on cash deposits to fund their retirement, but equally cannot afford to see their capital shrink because of tainted choices in the share market.

What to do?

Seek Superior Quality, Says Goldman Sachs

Analysts at Goldman Sachs have also done some analysis, thinking and writing on this subject, probably around the same time I was confronting low single digit temperatures in Canberra last month. They believe the answer lies in companies that either have a superior product or a superior market positioning. The logic here is that in both cases there should be a natural protection against disruption and a much more solid starting point to respond to the many changes coming upon these companies.

Applying their analysis to Goldman Sachs’ international database of covered companies has generated 39 international names that should be well-positioned to defend and adjust to the rapidly changing environment.

The list includes global leaders such as Delphi Automotive, Amazon, Nike, Colgate Palmolive, Intuit and Bristol-Myers Squibb. Three Australian household names have made it to the list: CSL ((CSL)), CommBank ((CBA)) and BHP Billiton ((BHP)). CSL because it has superior products, CommBank because it has a superior platform and BHP is simply the best operator in its sector (and the only resources stock selected).

To my (admittedly biased) eyes, their list for the local share market reads like an extension of my own selection of All-Weather Performers. Goldman Sachs has selected six Global Champions and twelve Local Champions for a total of 18 Australian Champion stocks that should be better placed than the 2000 or so other listed entities on the ASX.

FNArena subscribers who don’t have access to Goldman Sachs research can send an email to info@fnarena.com to receive the list of 18 names.

Metcash: Hard Lessons To Pay Heed To

It’s no secret that I am not a big fan of owning shares in any of the grocery and liquor competitors here in Australia. Woolworths ((WOW)) has for years featured high on my All-Weather Performers list, but management dropped the ball and that global record high profit margin is ripe for erosion, alongside continuous problems with fixing Masters, Big W and all else that desperately needs management’s full attention.

Wesfarmers ((WES)) is by far the stand-out performer in the sector, also because management seems to genuinely understand “retail” which means it’s not just about Coles supermarkets, but equally so about Office Works and Bunnings. Something Woolworths at this stage can only dream of. Wesfarmers has very much become the pretty one in a basket full of overripe fruit. How long before the bad apples start spreading contagion?

As we all know, put the pressure on and flaws and weaknesses will expose themselves and it is no secret Metcash ((MTS)) is the one carrying humongous question marks around the corporate logo. Or is that a hangman’s knot? Don’t forget it wasn’t that long ago when the number three in the sector was called Franklins and most of those shops are today inside the Metcash stable of non-competitive grocery shops.

If you are a regular reader of Weekly Insights, you should know by now, Metcash shares are simply no longer investment grade. A fact again proved by the fact the company had to announce last week it is suspending dividends to shareholders for the next 18 months. No surprise, the shares received an absolute shellacking.

The result of all of the above is that all three shares mentioned are now in negative territory for calendar 2015, with Wesfarmers only down a smidgen (interim div not included), Woolworths down double digits and Metcash, well, Metcash is down a whole lot. Between 2005 and late last year the share price never seemed to stay below $3 for long, but now it appears the $1 mark is beckoning.

Metcash shares traded above $5 in the lead-up to the GST and above $4 in early 2013. A lot of people have lost a lot of money since, not in the least because the stock used to be a reliable, sustainable provider of dividends.

Which is why I think this is as opportune as any other time to point out some valuable lessons from the Metcash yield + share price disaster experience:

– Never combine yield/dividends with weakness. If yield is the only reason to stay on board, get out

– A high yield does not make equities more attractive. It’s a sign from the market that risk is too high for comfort

– Never ever simply rely on the past to build confidence for the future. David Jones was once an excellent dividend stock, so was Fleetwood, and many others that fell into a heap in years past

– Dividend investing is NOT a defensive strategy. Lack of growth will ultimately force out the bad news, with nasty consequences

– It’s never too late to sell

All of this also raises questions about the investability of the local Free-to-Air TV sector. I have been responsible for rather optimistic commentary about Nine Entertainment ((NEC)) but on Friday that was swiftly countered by a good old fashioned profit warning from the broadcaster. I’ll take that one right on the chin.

US Equities: The Quote, The Prospects

At a time when just about every commentator gets worked up over bond yields in the US and whether labour market data are supporting the Federal Reserve’s intention to start raising interest rates this year, it’s good to keep a broader, longer term perspective on things, particularly because before too long we are all going to hear the “an improving US economy is good news” mantra yet again.

The quote below is taken from commentary about US labour market stats by the Conference Board in the US:

“The combination of weak productivity growth and a tightening labor market are likely to exert downward pressure on corporate profits in the coming years.”

Look beyond the short term noise and conflicting views and opinions, and what you’ll see is the dilemma that stems from the underlying trends as identified in that single sentence. To be continued.

Bye, Bye To Share Buybacks

Since last year, I have included a succinct list of companies buying back their own shares in Weekly Insights updates. From this week onwards this overview has become a weekly update on the FNArena website.

All comments and contributions are still welcome at info@fnarena.com

Rudi On TV

– on Wednesday, Sky Business, 5.30-6pm, Market Moves
– on Wednesday, Sky Business, 8-9pm, Your Money, Your Call – Equities (host)
– on Thursday, Sky Business, noon-12.45pm, Lunch Money

Rudi On Tour

I have accepted invitations to present:

– July 2, Invast, Sydney Clients and Contacts evening meeting
– August 2-5, AIA National Conference, Surfers Paradise Marriott Resort and Spa, Queensland – for more information about this event:

http://www.investors.asn.au/events/events-schedule/aia-national-investors-conference/

Note: FNArena subscribers can attend at similar discount as AIA members

(This story was written on Tuesday, 9 June 2015. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via Editor Direct on the website).

****

THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena’s bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.

****

MAKE RISK YOUR FRIEND – ALL-WEATHER PERFORMERS

Odd as it may seem, but today’s share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, is included in FNArena’s free bonus package for a paid subscription (excluding one month subscription).

If you haven’t received your copy as yet, send an email to info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of May available. Just send an email to the address above if you are interested.

Click to view our Glossary of Financial Terms