An earnings release: organized crime in Italy

The Hands of Crime on Business

I read about this the other day in the Financial Times.  (You can see the original press release here.  The income statement, which, like me, you’ll be able to puzzle out with the help of an online dictionary, is especially interesting.)

The Mafia, consisting of five crime families, had a banner year in 2009 despite the financial crisis, according to the report–the twelfth annual– released last week by the Confesercenti, an association of Italian businessmen.

high revenues

Organized crime, which generated an estimated €135.22 billion in gross profits (7% of Italian GDP), has four main lines of business:

illegal trafficking, mostly drugs, which accounts for half of gross

“taxes” on usury and rackets, 18% of the total

“commercial” operations, like gambling and forgery, which amount to 19%, and

“ecoMafie,” which is things like trash hauling and makes up almost all the rest.

low expenses

Expenses are relatively low.

money-laundering costs, at  €19.6 billion, are by far the largest outlays

expense reimbursement, €6.5 billion, comes next

bribes, at €2.75 billion,  are the third-largest expense, and

salaries, €1.17 billion, are the final significant item listed in the report.

Profits before investments for the Mafia rose last year to €104 billion from €100 billion the year prior.  The gain comes mostly from increases on profits from usury, with smaller gains from drug trafficking.  Crime also kept a tight lid on expenses, with salaries falling by about a third and bribes paid by over a quarter.

looks a lot like banking

As I was reading about this, it crossed my mind that if we replaced “illegal trafficking” with “proprietary trading” and “bribery” with “lobbying” we might end up with a story about  the major financial institutions in the US and Europe.

two differences, though

Both have to do with compensation.

The Mafia has had the wit not to pay large bonuses to its executives.  Salaries of “capi” are flat, year on year.  Also, within overall compensation, pay for associates has fallen sharply, while compensation paid to “prisoners” and “fugitives” has risen markedly.  This is presumably the result of the Italian government’s efforts to crack down on organized crime.

For bankers, on the first count there’s probably nothing we can do.  On the second, we can only hope.

My take on the Apple iPad

The spectacle…

I haven’t really paid attention to AAPL product launches, even though I’ve been an owner of the stock (not now) for many years.  To my mind, this one broke the hypemeter.  Maybe that’s just the way AAPL does things, but I now know that the iPad is “real,” “natural,” “awesome,” “rad,” and “intimate.”

It does look great, though.  Reviewers have also said the screen is spectacular and the software is up the AAPL’s usual high standards.

…the specs…

The iPad (Fujitsu apparently owns the rights to this name in the US) has:

–a 1GHz Apple-designed microprocessor

–a 9.7″ (diag) backlit LED color touchscreen with 1040 x 768 pixel resolution

–solid-state (flash memory) storage

–10 hour battery life

–9.6″x7.5″x.5″ dimensions, weighing 1.5lb (wifi only) or 1.6 lb (wifi + 3G)

The iPad comes in two versions:  wifi only starting at $499, and

wifi + 3G starting at $629.

The basic units come with 16Gb of storage.  For $100 extra, you can up that to 32Gb and for $200 extra, to 64Gb.

In the US, ATT is offering a 3G connection for either $15 or $30 a month.

A plug-in keyboard is available for users who don’t want to use the touchscreen virtual keyboard.

The iPad also runs iWorks (–does anyone actually use it?).

Engadget has a good review of the iPad, including video from the press conference.

…and the (non) specs. Continue reading

Stock markets in developing countries (lll): “invisible” issues

Every market has issues that are often well understood by local investors but not to foreigners.  China found this out a few years ago when a government-related company bid for Unocal, a US oil and gas company whose Pacific Basin reserves it found attractive.  The same for Dubai, when it bought a UK company that held US port operations.  In both cases, Washington vetoed the transactions.

The US isn’t alone in this practice.  Foreigners will find it hard to buy companies in Continental Europe–even EU members may be unable to make acquisitions in neighboring countries.   And Japan has enacted laws over the past ten years that make foreign takeovers all but impossible–as if the informal barriers already in place weren’t enough.

Stock markets in developing countries have these issues, too–but they also have others that are orders of magnitude greater.  They include: Continue reading

Stock markets in developing countries (ll): basic questions

Anyone who wants to actively select individual country funds or individual stocks in the markets of less developed nations has to consider a number of basic issues, the answers to which investors in developed markets take for granted.  These include:

political stability, or the lay of the land. In most developed countries, politics makes for interesting discussion, but ultimately is not a crucial element in investment success.

Russia, in contrast, jumps out to me as a country where reading the political runes is more important than analyzing the assets or profit growth potential of any particular company and where the government’s attitude to foreign investors can change overnight.  But there are lots of other examples, as well, like: Continue reading

AAPL’s December 2009 earnings: another very strong quarter

AAPL profits were up sharply in the December quarter

AAPL reported December quarter results after the close of the New York market yesterday.  At $15.7 billion, sales were up 32% year on year.  Earnings per share, based on the company’s new method of accounting for iPhone profits, were $3.67, or 47% more than the $2.50 AAPL tallied in the prior-year period (as actually reported, the 2008 eps number was $1.78, about 30% lower than the revised figure).

Unit sales of Mac computers were up 33%–an AAPL record and 2x the market growth;

iPhones doubled–again a record and 3x the smartphone market growth (though apparently the consensus was looking for more);

and iPods were down 8%–here AAPL really is the market.  iPod Touch was up 55%, though, allowing music player revenue to rise by 1%.

What was the accounting change?

It affects the way AAPL accounts for sales of the iPhone and Apple TV (the later doesn’t make much difference to eps).  In the simplest terms, AAPL sells an iPhone to a network operator in exchange for a cash payment + a share of the revenue the phone’s user generates for the network over a two-year contract.  AAPL used to use subscription (project) accounting to report its earnings from a given phone (see my post on project accounting).  More or less, AAPL recognized the revenue as income as it came in and subtracted a proportionate amount of its costs.  Now AAPL reports the entire two-year revenue, minus costs, as soon as the phone is sold.  In the December quarter, it looks to me as if the change added $1.15 to eps.

Why do it?

For one thing, the Financial Accounting Standards Board said it was okay.  For another, professional investors were doubtless using the new eps already, which were disclosed in footnotes to prior earnings releases–meaning individual investors a very important AAPL constituency, were the only ones potentially in the dark.

Also, in my experience, companies using project accounting never get full credit for their earning power.  While unit sales are growing, larger and larger amounts of deferred revenue build up on the balance sheet (over $8 billion in AAPL’s case when it officially made the change).  That only shows in income as sales begin to roll over and decline.  At that point, investor attention is no longer focused on how much the company is taking in.  All eyes are on the slowing of sales momentum instead.  So a company that uses project accounting is penalized twice.

Two results of the change

Under the new method, AAPL’s fiscal 2009 earnings were $9.08/fully diluted share.  If we pluck a number out of the air and say fiscal 2010 will produce eps up 27% year on year to $11.80–probably a conservative number–then the company’s pe is about 17, much lower than what I think is the common perception.

On the other hand, the change emphasized exactly how much the iPhone means to AAPL.  We know that the change in accounting added $2.83/share to AAPL’s (old method) reported earnings of $6.25 last fiscal year.  Assume that 20% of the reported number came from iPhone, which would roughly be its share of revenues.  That would amount to $1.25.  The total iPhone contribution would then be $4.08 out of $9.08, or 45%.  As we enter the new fiscal year, the iPhone contribution percentage would be rising.

What happens to AAPL if iPhone growth slows down?   The half –  of AAPL’s profits that now come from iPhone had to grow at 100% year on year for the entire company to grow by 50%.  This implies iPhone supplied something like three-quarters of the extra profit the company reported.

Suppose the iPhone slows to “only” 40%?   Can the other half–Macs +iPods–boost its contribution enough for AAPL as a whole to grow at 30%?  Maybe, maybe not.  So this worry is now out on the table.

Can the much-anticipated tablet being presumably introduced on Wednesday be another area of strong growth for AAPL?  Probably.  Will it be big enough to matter, that is, can it grow to the size of the iPod or the Mac, if not the iPhone?  My guess is no, that APPL as a growth stock is a smartphone company, but I’ll be listening carefully on Wednesday.

Addendum:  I’ve started to think more seriously about AAPL, indirectly, really, in trying to figure how the e-reader/video player market will evolve.

In one way of looking at what APPL has done, it has created forums for buying content–iTunes and the iPhone apps store–where it says it makes no money, but where the forums drive hardware sales.  At the same time, it built music players into a market that doubled the size of the company.  Then it built its smartphone business into one that doubled the size of the company again.

So–the two questions for APPL as a stock are: can it built another content forum that will be either first to market or exclusive enough to drive consumers to its tablet offering? and  will (its share of) the tablet market be big enough to double the size of the company again?

Stock markets in developing countries(l): terminology

This is the first in a series of posts about the characteristics of stock markets in developing countries.  The term “emerging markets” is used very often in casual talk on this topic, but can mean any of several things, referring either to the characteristics of the economies, or of the securities markets in these countries, or of the companies whose stocks are traded in these markets.  These are all different things.

Where the terms come from


During the Cold War conflict between the US and the Soviet Union, commentators began to speak of the First World (the US and its allies), the Second World (the USSR and its allies) and the Third World (unallied nations, many of which were developing countries).

At around the same time, the UN began using a four-part terminology that divided the world’s countries according to wealth/income levels.  For the UN, the First World ends up being the US and its Cold War allies, the Second World is the USSR and its allies, the Third World was everyone else who did not belong to the Fourth World, that is, countries with annual per capita incomes of US$100 or less.  Still, the UN division corresponds very closely to the political division that was the more popular way of speaking during that time.


After the fall of the Berlin Wall, the terms shifted to ones with a more economic, less political, basis:  developed and developing.  The term emerging also came into vogue, meaning countries with rapidly growing economies that are quickly bridging the gap between the developing and developed world.

The term developing quickly became a controversial one, for two reasons.  Many of the countries so designated found the term to be condescending.  Multi-national economic and political agencies pointed out that since this was a catch-all term, it also was also used to describe countries that were stagnating or declining economically and which therefore were in no sense developing.  As a result, these organizations have begun to refer to this set of countries as either less developed countries (LDCs) or least economically developed countries (LEDCs).  They generally correspond to the Fourth World countries mentioned above, but the income threshhold has been raised to around $1000.

Stock markets

Investors have generally taken the political or economic terminology to use for talking about various stock markets outside the developed world.  Today the two terms most popular are emerging, which refer to the largest and longest-standing stock markets and frontier, which refers to the markets in LEDCs.

These distinctions aren’t completely adequate, however.  Emerging or frontier countries can have markets that vary considerably in liquidity conditions, rules of operation and attitude toward foreigners.

This will be one of the topics in later posts in this series.