Weekend: Tous pour un, un pour tous + A Fad of Things, Property, Retail and Wines!

There's no good in the actions of those in France! So it’s limited to - Evening, rather than ‘good evening’.

Tous pour un, un pour tous! Sympathy and thoughts go out to the families and friends of all those affected by the senselessness that occurred in France.

We are losing count of the profits warnings and revisions in guidance on a global scale – especially industrials. The trade this week was Rolls Royce (RR.) where the interimmanagement statement echoed the woes of Fenner et al. A general theme about earnings and outlook that will continue for the foreseeable future (over to Caterpillar after the JCB layoffs).

Themes from the previous week continued all the way through and are now the reality (Weekend's EMC - NFP & Weaklings) - deflation is hurting earnings and causing a nervousness in guidance. Those companies that are leveraged whether in oil & gas, manufacturing, services and support are all starting to acknowledge "the world's largest customer(s) are changing / have changed their appetite." 

In the US the likes of FitBit (NYSE: FIT) is beating the trend (currently), with what we here consider a gimmick formulae. FitBit need to overcome a common theme of fad utilisation with their products, which are often used for not much longer than that of a gym membership - circa 3 months (EMC research) there after being destined for a drawer. 

We have to acknowledge one reader’s wife’s commitment to use her for an eternity! Although if you’re stuck for a present for your beloved, you too can do your thing for wearable revenues! Wearable tech undoubtedly has mileage across the sector, but with competition, what’s in it for shareholders? Those reliant on one arm (scuse the pun) of the sporting sector are limited in their traction, where they’ll have to compete with the likes of Nike+ etc.…

For some investors, they have been rewarded with the Fossilacquisition of MisFit, but for others it’ll be a cycle of confetti issuance for equityraisings a la FitBit.  There is perhaps a hope of being acquired rather than having to justify being a viable business that warrants a decent valuation.

FitBit’s placing (and discount) was expected and the price is understandable when one has a quick look at the accounts. Innovation costs money, especially where there’s a theme of a “fad of things” emerging. The EMC considers FitBit to have an over reliance on novelty and gimmickry that drives sales – Christmas is upon them where they should do well. We will not comment on Fitbit inventories levels, receivables and trade payables, they appear to be insignificant to investors – but not those that bought into the equity issue.

Rocket Internet (ETR: RKET) call these “proven winners” (Rocket Internet terminology from the lengthy CMD) - but we have HelloFreshbeing withdrawn (FT). Bringing into question the valuation of Rocket’s “proven winners.” The market is getting wise to the actions of companies, especially those that issue discount vouchers like confetti pre-IPO.

Within the commodities space we have the Icahn’tseries of Freeport McMorran (NYSE: FCX). When a major investor tries to bet against the global outlook; one should pay attention. The market is changing, oil will stabilise as will copper, but significant bets against a global trend are often unwise (in the short-to-mid-term). We note the two brokers that criticised our approach - being 40% down from our commentary, are we not validated?

We also have trends occurring in retail space in the US that have yet to present themselves fully in the UK - albeit consumption has been brought forward by Help to Buy (H2B) scheme. This is propelling the results of the house builders, but with a muted response from the market Inc. BarrattDevelopments Trading Update (BDEV), RedrowAGM Statement (RDW) and GreatPortland Estates (GPOR). This Tuesday (17 Nov 2015) sees British land (BLND) reporting half yearly, a stalwart that shouldn’t be ignored.

US retail space are admitting the need to entice consumers with discounts and showing the price-sensitivity in the market – evidenced in part by Macy’s and NordstromQ3 Results. Big ticket items impacting on retail - Walmart, Nordstrom and Macy's all showing a similar story. By big ticket, we mean houses, cars, home refurbishments and extensions, electronics and smartphones – yes this is a retail driver in China as well (missed by most!) and will have consequences to this.

In the UK these themes have already hit the likes of Kingfisher, Travis Perkins, Speedy Hire, HSS and as a wildcard Halfords. Two companies in that list haven't helped themselves either (Speedy & HSS), but we'll save that for those accounting gurus with more time on their hands. 

Retail will also be hurt by the rise in student debt, where there is a suspicion that student registrations rose because of the recession rather than a yearning trend to improve oneself. The student leverage and consequences mean that a few generations are going to skip a housing purchase until later in life.

If society loads a student with debt the consequences will impact an entire generation, especially where wage growth is slowing or deflationary. Student Fees on the increase, student loans on the increase…remind yourself of the purpose of education?

Pearsons (PSON) education is showing the realities of the market place. See PSON interimresults graph for a trade plan courtesy of Bloomberg ™® and one shrewd trader.

We have Majestic Wines (MJW) reporting tomorrow - with the trading update from Conviviality(CVR) – have they cannibalised MJW’s margins? Majestics have erased their economic moat of six bottle minimum purchase – we will start to see the implications of this tomorrow and average spend.

Some poignant questions for Majestic Wine’s – if the removal of the 6 bottle limit didn’t impact on revenue, will it maintain them longer-term? What is the customer acquisition costs of Naked Wines? Are Majestic’s in a declining space where novelty type drinks are on the increase? We have insufficient data for a conviction trade. We won’t comment on their limited response from IR either and will maybe comment further tomorrow. …

Atb Fraser

In trading or taking a view, the impact of being laid off, made redundant or hurt by the actions of some idiots may appear to be ignored. These are never forgotten, including the implications for the families. 

PM Bolt-On: Non Farm Payrolls & Weaklings - Freeport & Valeant wth some hindsight on IMIC (International Mining & Infrastructure Corporation)

Good Afternoon,

The UK wasn’t the only place with fireworks this with week. What with the Non-Farm Payrolls (NFP 271,000) increasing the probability of a rate rise – now the odds are looking at 85/15 in favour.

The NFP fanfare has forced investors to consider the risks of heavily leveraged companies and those made vulnerable by the liquidity contraction across emerging markets and/or commodities space.

In the longer-term there may be some reward by investing in restructuring plays like Freeport-McMoRan, but not for the faint hearted. The recovery in leveraged companies isn’t clear cut either, so expect some reality/stresses in the short-term.

Commodities producers reacted this week (selling) –

1. China’s focus on innovation and a limited response to an infrastructure stimulus. (Hopes of higher PE - long the SHCOMP on hopes and/or China 300 only on momentum).
2. Standard Chartered’s (STAN) prudence sticking the knife into the commodity sector and a realisation of avoiding a light in a tunnel or two (Qingdao). We hope for STAN’s sake it’s not a train coming towards them - Currently no reason to hold the stock.
3. Fears being realised of a credit bubble/liquidity contracting in emerging markets.
4. German Manufacturing Data (negative for copper) – answers on a post card.

& Friday’s…

5.  Boom busting NFP figure that was a wildcard and above expectations.  

Companies will need to bolster their balances sheets if they operate in a deflationary market, especially those with significant debt and limited operational free cash flow. Remind you of anyone? Not just Anglo, but the market will now belatedly start focusing on rightful candidates. We had the analogy in the morning call that “certain traders are like a bunch of hyenas!!” As if!

The open secret of “debt to revenue service costs” is finally acknowledged as a risk. Not that the writing hasn’t been on the wall for some time. Admittedly, It’s difficult to find a reason to hold US equities with the dollar strengthening. Those goliaths are going to take a haircut to earnings.

With fears of larger scale corporate default and financial bubbles, the market is now factoring in restructurings whether it be fundraising, equity issues, convertible notes or debt for equity a k a dilution for the weak.

Shareholders should be prudent to the possibilities of losing control via the back door or worse, there being limited equity left for shareholders. Freeport-McMoRan (FCX) are not immune to these woes either, but with Icahn on board at least there’s some form of hope signal for the shareholders.

Valeant - without repeating the woes of Valeant (VRX) verbatim (See Citron Research) – it is the pharmaceutical equivalent of VW as it has so many unquantifiable liabilities. With three + warnings out now, it’s likely a case of the die-hards hugging the stock. "Value seekers" will no doubt be sifting the wreckage and be tempted to trade. 

From a psychological model, with such a nuclear fallout and one suspects more to come, is there any reason to hold Valeant? What is the value? What are the risks? With the market perversely needing to be told of the value or limit the slow motion car wreck, what is the likely outcome? With such a wide range of variables, what pricing methodology does one use for Valeant? The price range here up until Thursday was $56-$103 and now, we suspect there’s more potential liabilities, so have narrowed this to $38-$44 a share.

The damage within the pharmacy/dispensary industry cannot be ignored. Pharmacists may now follow the cost conscious route across all prescriptions, not just related to Valeant medications.

In coming to a price, we’ve considered Valeant’s responses and what we assume Pershing Square may be ignoring. Of course Pershing may be selling/have sold, but in the absence of a notification, we’ll assume they’re holding.

For consideration:

1.       Was Philidor using pharmacy codes for pharmacies it had not (yet) acquired e.g. R&O?  

a.     Did they have permission to use them?

b.   What are the implications for Valeant if they are considered to a shadow director/owner of Philidor? Do the rights that Valeant acquired in Philidor mean they have also liabilities?

2.      Its been suggested that dermatology products sold through Philidor were of average profitability -  if we assume that at least some revenues comprised of generics costing $5 or less, but when combined by Valeant and branded it enabled a charge of $400 plus++. If this is correct, then it becomes very difficult to buy into the average profitability claims suggested as the ‘worst case downside.’

3.   It’s been inferred that Philidor filled/dispensed prescriptions even when they were not required / requested. If Valeant’s revenues were reliant on the revenues of 3 units when only one was needed - what are the real implications on Philidor closing/departing company? Repeat prescription business will in essence be torched?  

4.       There’s been vague disclosures as to what other 'specialty pharmacy' networks Valeant has. Will this have further implications?

In making a few assumptions from the above, it’s easy to come to conclusion that the impact on Valeant profits is likely to be double digit. As a reminder, Valeant in October 2015 disclosed they had $1,420M cash and debt of $30,883.3M. What will earnings be and the outlook? If one conducted a simple calculation, deducting net debt from the market capitalisation, what equity would left for shareholders?

In the small caps it would appear there's a sense of déjà vu. Those that remember the views expressed here EMC: International Mining & Infrastructure Corporation (IMIC). To quote yours truly:

International Mining & Infrastructure Corporation plc (IMIC) loan conversion shows the faith in the company, a mere 30% discount to the SP. One hopes you've sense my irony with the mere...the 1 year chart must surely look like the cellar steps! Next stop 10 pence? 

It would be wise to think how the terms are fair and reasonable as Strand Hanson Limited, the Company's Nominated Adviser (NOMAD), consider that the terms of this transaction are fair and reasonable insofar as the shareholders of IMIC are concerned. Its not something I shall be complaining about having rated this as a sell since they acquired Afferro Mining Inc.

IMIC was suspended after the resignation of their NOMAD Strand Hanson in October.  As a positive those holding the Afferro Mining Inc. bonds of yesteryear get a few more shares (whether they’re tradable is another issue), with the conversion notice yesterday.  Is IMIC now extinct? Or can they pull off the unthinkable in the current mining space? Perhaps even find a NOMAD?

So whether it’s goodbye or see you in another form? Who knows…It’s wise to keep an eye on the assets of the micro craps, perhaps not the companies that trade them left and right, but follow the assets.

In other news, the South African and Australian “anti-EMC fan club appears to have gone silent!” Surely it’s not the Zumba Iron Ore share price? Atlas or perhaps Slater & Gordon?

The final thoughts go to Anglo American (AAL) having a rights issue?? The odds are getting higher! BHP Billiton (BLT) tailings damn could be a significant liability...what are the implications and costs? We have varying ranges and estimates as high as $2B excluding losts dividends and as low as $450M, 

Atb Fraser