Monthly Archives: March 2012

TIF’s 4Q11: supply your own adjective

March 23, 2012 By in earnings conference calls, Stock ideas Tags: , , , , , , , , Leave a comment

the results

Just before the open on Tuesday March 18th, TIF reported earnings results for fiscal 4Q11 (TIF’s accounting year ends in January of the following calendar year). Sales came in at $1.19 billion, up 8% year on year. Profits were $178 million, or $1.39 per share, a drop of 2% from 2010.

For the full year, sales were $3.64 billion, a yoy advance of 18%. Eps were $3.60, or + 23% yoy.

In a lackluster market, the stock was up more than 6% on the news.

details

Sales for 4Q in the Americas were up 5% yoy; in Asia-Pacific they were up 19%, up 13% in Japan and 3% in Europe.

In early January, TIF had warned that its business had slowed significantly from the torrid pace of the first three quarters of 2011 (see my post). Overall, the results TIF actually reported were slightly better than it signaled at that time. Thanks to a small rebound in January, sales in the Americas were 1 percentage point higher than TIF was figuring, and Europe—of all places—was 2% better.  No change in trend elsewhere.

It doesn’t make a whole lot of difference, but 4Q11 eps would probably have been at least flat with 4Q10 and maybe up a penny, were it not for a year-end upward adjustment of the company’s tax rate. Without going into all the details,  a greater proportion of TIF’s sales than anticipated came from high-tax areas like the US and EU. Put another way, the tax rate adjustment is a consequence of the fact that sales in Asia-Pacific fell off more in 4Q11 than the rest of the world did.

TIF also gave its initial guidance for fiscal 2012—sales growth of 10%, earnings per share growth of 10%-13%–resulting in eps of about $4 for the year. The company thinks the bulk of the advance will come in 4Q12.

During the first half of 1Q12, results are tracking in line with TIF’s expectations.

During the quarter TIF spent $35 million buying back stock, at an average price of $67.26. That’s about 30% less than TIF averaged over the first nine months of the year. To me, it looks like all the buying came before the company’s profit warning. If so, I certainly can’t be too critical since I had no enthusiasm for buying, either.

Arguably, continuing to buy below $60 at the same time the company knew its sales shortfall would mean a lot of money tied up in unsold inventory would be too risky. But it certainly implies to me that TIF is not shrugging off the current sales slowdown as something that will soon be behind it.

my thoughts

TIF’s 4Q11 has played out pretty much as I thought it would in January. The only new news from the company announcement is that the situation appears to be stabilizing at the lower rate of sales growth TIF experienced in 4Q11. All in all, I don’t get the market reaction of aggressively bidding up the stock on this information.

Contrary to what I would have expected, TIF shares have also recovered all they had lost vs.the S&P after their January swoon.  And that’s before this week’s earnings report.

The stock now trades at around 18x this year’s earnings. That’s not wildly expensive for a company like TIF. But it’s not cheap, either, especially with perhaps three quarters of lackluster earnings comparisons in prospect.

There’s certainly a risk that my incorrectly lukewarm attitude to the stock at $59 will color my opinion now. Nonetheless, I’m happier on the sidelines now than buying. And I’ve got to at least consider the idea of selling some of what I own into any strength.

playing the Japanese stock market today is harder than it seems

March 22, 2012 By in Current Market Thoughts, Japanese development, Recent Market Action, Strategy Tags: , , , , , , , Leave a comment

how so?

No, it isn’t the frequent market holidays.

It isn’t the semi-visible, semi-not, zaibatsu/keiretsu business links that tie firms together with amazingly strong (to me, anyway) emotional bonds that foreigners find difficult to assess.

It isn’t the fact that for many Japanese company managements–to say nothing of institutional investors–one foot remains in the samurai world.

None of this helps a foreign investor.  But learning a market’s quirks is arguably part of the price of entry a newbie pays everywhere he goes.

the market structure…

No, the biggest problem for a foreigner today is the structure of the market–the selection of stocks available on the Tokyo Exchange.  Despite the fact that Japan is a wealthy nation and the second-largest advanced economy in the world, its market is dominated by the export-oriented manufacturers, plus the suppliers and distributors that support them, whose heyday (ex the autos) was thirty years ago.

…makes Japan look like an emerging country

The market structure is more like what you’d expect from China or India.  It’s also a little like the US circa 1980.  In the US since then, however, junk bond and private equity barons have taken many older, low growth firms private.  Conglomerates have broken up, or spun off their more glamorous parts, in strategies calculated to maximize their value.  Venture capital has brought a host of new firms into the public arena.  Not so Japan.  There are counterculture exceptions:  Uniqlo and the social networking firms come to mind.  But still…

None of this is exactly news.  But it’s the genesis of the dilemma foreigners now face in the Japanese stock market.

today’s problem:  a weakening yen

Newly initiated quantitative easing in Japan is weakening the yen.  That’s making life more difficult for domestic firms that use imported materials.  And it’s also a lifeline for exporters, who use yen-denominated inputs and sell their products abroad.  So Japanese institutions have been selling the former to buy the latter.  Again, no surprise.  It’s what they always do.

The issue for a foreigner is this:

Ex the autos, the exporters are not a particularly attractive picture.  Historically, they’re a pretty sorry lot in terms of making money.  They face intensifying competition from lower-cost rivals in emerging economies.  By and large, managements are hide-bound and unable to commercialize higher tech products they have.  Law and custom defend dysfunctional incumbents against any shareholder attempts at change .  (Think:  Olympus …or Sharp  …or Pioneer  …or Sanyo   …or Casio   …or Sony).

In addition, for a dollar-oriented investor, at least a part–and probably most–of any yen-denominated gains will be offset by currency losses.  Although my general rule is not to get involved in forex hedging, this is an exception.  Whether you like or not, you probably won’t make much money on your Japanese stocks unless you sell the yen.

…which brings up another potential worry.  Exporters usually run substantial currency hedging operations.  In my experience, they’re pretty good at it.  Nevertheless, it’s always possible that exporters have zigged when they should have zagged.

my bottom line

For a long time, I’ve regarded Japan as a special situations market.  Find an outstanding company; buy and hold.  Enduring the current flight from quality is just a cost of doing business.  I have no desire to chase export-oriented names, although while the yen is softening I think exporters will continue to be market stars.  If I were managing dedicated Japanese money, however, I’m sure I’d find myself under performance pressure to do just that.

AAPL’s dividend: implications

March 20, 2012 By in earnings conference calls, Recent Market Action, Stock ideas Tags: , , , , , , 3 Comments

the AAPL announcement

Yesterday morning, AAPL announced that it will initiate a $2.65/ share quarterly dividend, starting during the July accounting period.  The company says it will also repurchase $10 billion in stock over the coming three fiscal years.  Together, the two moves will absorb $45 billion in domestic cash.

my thoughts:

the stock buyback

The dividend is a more important signal about future earnings.  But the description of the stock buyback also says something important, and admirable, about the company’s management.

Most firms try to describe stock buybacks an altruistic move on their part, as “returning cash to shareholders.”  They argue that dividend payments create a tax liability for recipients while stock buybacks do not, and intimate that this is the main reason for their action.

The tax stuff is true. But the rest is, at best, nonsense.

Companies pay their employees, and particularly their executives, in two ways:  with cash; and with stock options.  The latter gradually transfer ownership of the firm from portfolio investors to employees.  In fact, many companies in the tech world have target percentages for this transfer in mind when they issue stock options.  The main–unspoken–purpose of stock repurchases is to keep the total number of shares outstanding stable, and thereby disguise the change in ownership that is taking place.

APPL is the first company I’ve seen that’s completely honest with shareholders.  AAPL says its share repurchases have “the primary objective of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs.”  The asset transfer effect, by the way, is a miniscule .5% or so per year in AAPL’s case.

the dividend

The initial payment level of $10.60/year implies to me that AAPL management thinks profits will be a lot better than the market now expects.  Here’s why:

Two basic rules about dividends are:

–they’re supposed to be paid out of profits, and

–they should be set at a level that’s easily sustainable, and that can rise.  Very little is worse for a company than having to cut, or eliminate, a dividend.  A prudent firm–and AAPL is one–would have already thought carefully about a pattern of future dividend increases when setting the initial payment amount.

AAPL’s situation

At the end of the December 2011 quarter, AAPL had 932 million shares outstanding.  Let’s say that rises to 940 million by the time it begins paying dividends.  $2.65/quarter x 4 quarters x 940 million shares = $9.96 billion in annual dividend payments.

AAPL will most likely have chosen the current dividend payment based solely on its estimate of  sustainable US earnings.  Why?  Dividend payments from a US corporation have to use US-domiciled cash.   Yes, AAPL has $33 billion in the bank in the US already–enough to pay the current dividend for over three years or supplement a payout that exceeds US-generated funds for far longer than that.  But what would AAPL do after the US cash runs out?  …cut the payout?  No way.  …repatriate funds from abroad, losing 35%  to federal taxes?  Probably not.

Therefore, it’s a reasonable assumption that AAPL considers a recurring $10.60 a share from the US each year as “in the bag.”  If it were me making the decision, I wouldn’t want to set the payout at 100% of US earnings.  I’d like a cushion.  Arguably, the US cash on the balance sheet is enough of a safety margin, but why take the risk?  I’m thinking the payout is being set at more like 75% of US earnings–which also leaves room for a dividend increase next year.

doing some arithmetic

Let’s try to use the $10.60 a year to calculate what AAPL must be thinking about its total earnings.

AAPL presently earns a little more than a third of its revenues in the US.  As Asia increases in importance to the company, the domestic percentage will likely fall. Assume that the US is 30% of the AAPL total for fiscal 2012 and 28% in fiscal 2013, with overall earnings growing, say, by 15%.

Case 1:  low-balling      AAPL has decided to pay out 100% of its current US earnings in dividends.

That would imply AAPL earns $35.33 this fiscal year and $43.50 next.

I think this is would be, in AAPL’s view, for all practical purposes the worst possible case.

Case 2: realistic     AAPL has decided to pay out 75% of its current US earnings.

That would mean $47 in eps for this fiscal year and $58 next.

This compares with the current analyst consensus eps of $43.14 for fiscal 2012 and $48.44 for fiscal 2013.

AAPL insiders more bullish than Wall Street?  I think so

Case 1 yields no useful information, since consensus estimates are already substantially higher.  Case 2, which I think is considerably more probable, would imply that AAPL’s board and management are both noticeably more bullish on company prospects than Wall Street.  AAPL insiders can be as wrong as anyone else.  In this case, however, they have a ton more pertinent information to work with than you and I do.

emerging markets: political risk in India

March 19, 2012 By in Asian economic development, emerging markets, Wireless Tags: , , , , , , Leave a comment

the home field advantage

No company ever goes into a foreign country expecting a level playing field.  There are always going to be rules–written and unwritten–that favor the home team.  This is the flip side of the belief that you’re always going to have at least a slight advantage over a foreign company in your domestic market.

One exception–if you’re hoping that the foreigner will buy your domestic business.  Chances are he’d be willing to pay over the odds.  But it’s equally likely the government will force a sale to a domestic competitor.  Around the world, that’s just the way it is.

in sports

We see this all the time in sports.

Olympic judging.

Your favorite baseball team plays an away game.  You can be sure the field will be manicured to minimize the home team’s weaknesses and your strengths. The visitor’s dugout in San Francisco is, unusually, on the first-base side of the field?  Why?  It faces right into the frigid wind off the bay.

The home town timekeeper will make the game clock in basketball or hockey run fast or slow, as the home team requires.

Even the referees will exhibit a home-town bias, perhaps influenced by crowd noise.

what’s not cricket

Some actions are beyond the pale, however.  One such appears to be happening right now in India.

In 2004, when Vodafone was still intent on ruling the world, it entered the Indian cellphone market by buying an interest in an existing player from Hutchison Whampoa.  Aware that if the transaction were done in India it would trigger a capital gains tax of around $2.9 billion, the parties did the deal offshore.

The Indian Tax Department ruled that the tax was still due.  Vodafone refused to pay and lengthy litigation ensued.

Two months ago, the Indian Supreme Court ruled in Vodafone’s favor–that no tax was due.

proposed retroactive tax law change

On Saturday, the Financial Times reported that in its annual budget the Indian government proposes to change the tax law, retroactive to April 1962, to make offshore transactions involving multinationals and Indian subsidiaries subject to domestic capital gains tax.

Although the proposed change, if implemented, will have much wider implications than for Vodafone alone, it is being widely seen as aimed directly at the UK telecoms company.

The issue of course, is that Vodafone has played on the home field and won–but the losing side is trying to change the basic ground rules five years after the fact, in a way that turns victory into defeat.

I think it’s ironic that this situation is arising just as the Indian government has decided to try to woo foreign portfolio investors for the first time.  If the budget documents are not just bluster and parliament makes the retroactive tax law change, that would seem to me to dim substantially the appeal to foreign investors of India’s large domestic population.  The negative effect could last for many years.  For emerging markets investors, then, I think the Vodafone situation bears close watching.