Sunday, September 25

Week 273 - The “Great Game” Will Be Won (or Lost) in Africa

Situation: The “Great Game” is a 19th Century term that refers to competition between the British Empire and Russia for dominance of Central Asia. Now, a similar diplomatic game is being played in Africa between the US and China. Much more capital (and diplomacy) is being invested by China, which is sending workers to execute ambitious infrastructure projects. Given that large sub-Saharan countries are among the fastest-growing emerging markets, investors need to stay abreast of Foreign Direct Investment. Much of that FDI is done at the corporate level, aided perhaps by loans from the US Export-Import Bank. But the China-Africa Industrial Cooperation Fund has been loaning far larger sums to Chinese companies. 

Mission: The population of Africa is growing 3.3%/yr and is on track to double by 2040, reaching two billion. Investors need to know which publicly-traded companies are making a strong push in Africa, what their strategies are, and whether or not ROIC exceeds WACC. We will confine our attention to international companies on the 2015 list of the top 500 companies in Africa, which is an article that is supplemented by a discussion of recent developments

US companies on the Top 500 list include Newmont Mining (NEM), Wal-Mart Stores (WMT) and Exxon Mobil (XOM). Major International companies include Orange (ORAN, a French telecommunications company), Total SA (TOT), AngloGold Ashanti (AU), Unilever plc (UL), Harmony Gold (HMY), Nissan Motors (NSANY), Diageo plc (DEO), ArcelorMittal (MT) and British American Tobacco (BTI).

Execution: see Table.

Administration: US companies face a number of problems that deter investment. The near-absence of shopping malls in even the largest country (Nigeria) has made it difficult for Wal-Mart Stores, and its partner in South Africa (Massmart), to expand operations beyond South Africa. McDonald’s has restaurants in only 3 African countries (Morocco, Egypt, South Africa) but will soon open one in Tunis (Tunisia) and one in Lagos (Nigeria). The problems that prevent McDonald’s from opening restaurants in the other 49 African countries include: 1) difficulty maintaining the security of its food supply chain to be certain that its meals are safe for consumption; 2) unreliable electric power grids that make it necessary to install back-up generators; 3) low average caloric intake because the country's population has insufficient disposable income. Nike has not opened any retail outlets in Africa, even though wholesale and Internet sales are strong and growing. Procter & Gamble derives 40% of its sales from emerging markets and has built a new plant in South Africa to support sales that are growing there, as well as in Kenya and Nigeria. Microsoft is also pushing into Africa. Newmont Mining has two large gold mines in Ghana, and Coca-Cola operates across an extensive distribution network

You get the picture: Africa is full of developing countries, yet none outside of South Africa are developed. The overriding theme remains one of resource extraction, mainly gold and oil. Shopping centers are beginning to appear but power grids support only 40% of demand. So, diesel generators are widely used in even the largest country (Nigeria). Companies in the Health Care industry are only beginning to find a foothold. Nonetheless, Unilever plc (UL) has built a strong market in consumer staples and Nissan Motors’ (NSANY) Renault cars have sold well for over 50 years. 

Bottom Line: Except for South Africa, infrastructure remains too limited to attract Foreign Direct Investment beyond that needed to extract, and sometimes process, natural resources (including agricultural products). Business is not booming. Direct commercial flights on US carriers to Africa have not been profitable; Delta is the only remaining carrier, and it continues to reduce available seat-miles. But major US corporations continue to expand operations in Africa, and China is making a big push.


Risk Rating: 7

Full Disclosure: I dollar-average into XOM and also own shares of WMT.

NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 18 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = moving average for stock price over past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H in the Table. Price Growth Rate is the current 16-Yr CAGR found at Column L in the Table (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% is based on returns from a stock index of similar risk to a portfolio of individual stocks, i.e., the S&P 400 MidCap Index.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com

Sunday, September 18

Week 272 - Ten Commodity Producers with Improving Fundamentals

Situation: There are only a few ways that a retail investor can buffer her stock portfolio against losses during a Bear Market. To build that buffer, we suggest including stocks from 4 different types of companies:

1) those that are “shareholder-friendly” in that the company pays a good and growing dividend, e.g. Johnson & Johnson (JNJ); 

2) those that have Tangible Book Value and maintain a clean Balance Sheet in that long-term debt is less than 30% of total assets and the company is able to fund its dividends from Free Cash Flow, e.g. Wal-Mart Stores (WMT);

3) those that sell products having strong Brand Recognition worldwide, based on value-pricing and utility, e.g. Microsoft (MSFT); 

4) those that produce commodities and have a stock price history that roughly tracks the commodity “supercycle” rather than the S&P 500 Index. This week we look more closely at that group of companies, to uncover stocks likely to track the next commodity supercycle.

This is a timely endeavor because there is reasonable evidence that the next supercycle is just now starting. In other words, the Dow Jones Commodity Index has recently “tested” the low set in late 1998, and is now rising. Yes, the last commodity supercycle began following a recession in Asia and was launched by a massive build-out of infrastructure in China that didn't stabilize until 2014. The trigger for the next supercycle will only become clear in retrospect, but Creative Destruction can be counted on to co-produce the event. Brexit may be the herald for what’s coming. 

Mission: Using the 2016 Barron’s 500 List, we’ll select commodity producers that have shown improvement based on these metrics that Barron’s editor uses to rank companies with sufficient revenues to be included on the Barron’s 500 list: 1) median 3-yr cash-flow based ROIC; 2) 2015 ROIC vs. 3-yr median; 3) 2015 sales growth. Then we’ll analyze those companies by using our standard spread-sheet (see Table).

Bottom Line: Some commodities track (or even predict) market cycles. For example, the American Chemistry Council’s “Chemical Activity Barometer” tracks the economy and is helpful in predicting recessions. But we’re looking for a way to track (or even predict) the rise and fall of a Commodity Supercycle that spans 2 or 3 market cycles. Those cycles are long because large amounts of capital have to be deployed upfront to get things out of the ground in scalable quantities, whether those things are in liquid, solid, or plant form. We’re looking for a company whose stock was moderately impacted by recessions in 2001 and 2008 but mainly tracked the infrastructure buildout in China. Mosaic (MOS), a fertilizer producer, is one example; another is Caterpillar (CAT), which makes heavy equipment used in construction, mining, drilling and farming.

Risk Rating: 8 (where Treasuries = 1 and gold = 10)

Full Disclosure: I dollar-average into XOM, and own shares of CAT and ADM.

NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 16 in the Table. Purple highlights denote Balance Sheet issues and shortfalls in TBV growth. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = moving average for stock price over past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H in the Table. Price Growth Rate is current 16-Yr CAGR found at Column K in the Table (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com