Wednesday 22 February 2012

Apple Inc. v. Proview Technology!

You may well have noted the newsflow around Apple and China's Proview Technology with the latter bringing a lawsuit against Apple to prevent the former selling products in China named iPad.
The enclosed link summarises some of the court discussion that has recently taken place between the 2 protagonists.

The company supposedly marketed a product in 2000 that failed to take-off which it called the iPad.
An affiliate of the company sold the name rights to Apple in 2009 which Apple argues included China but that Proview have subsequently reneged on the deal.
Proview also blames the Apple device's success as a reason for its own product failing..... even though the iPad wasn't launched for another 10 years, in 2010.


Its an interesting argument from a company that by all accounts is struggling and in need of a cash injection (but has no ulterior motive!) so it will be interesting to see how it pans out but it sounds like Proview are desperate for a settlement of any kind.
More interesting still, and potentially painful, for Apple stakeholders should Proview win its argument, and any ruling that keeps iPads off the shelves for any length of time in China which could open up an opportunity for competitors.

One to keep an eye on as it has the potential to inflict inertia on Apple in the near term should it be strung out for any length of time.

Article links:
- abcnews.go.com: Company Sues Apple Over iPad Name in Shanghai

Monday 20 February 2012

Long term horizons: Rolls-Royce Trent XWB engine makes first flight on Airbus's A380 test aircraft.

Further underlining the development and investment horizons for an aerospace program that I have referred to in previous posts, I see that Airbus and R-R began flight testing of the Trent XWB engine which will power the next Airbus aircraft in development, the A350.
This successful first flight marks the beginning of a 7 month phase of testing which itself is some 6 years after the reviewed/redesigned A350 - XWB project was launched in December 2006. 
The original A350 project, rushed out to compete with Boeing's 787, was officially launched in October 2005.

Following delays, the first A350 is planned to enter service in the first half of 2014 with the most recently conceived variant, the A350 - 1000 not expected to enter service before 2017.

So that will be close to 9 years from project launch to entry into service which is a sizeable timeframe before revenues start flowing and longer still to break-even point on the sale of the aircraft.
Thats also a significant investment in time, money, and resource capability. 
It must take a lot of foresight as well but the 20-30 years in service of a successful program can reap rewards.
As such the required resource and investment serves as a huge barrier to new entrants which leaves the outstanding question as being: do the dominant companies have the financial strength to make that kind of investment and the capability to make enough money out of it?

Looking at the A350 program, Rolls-Royce has an exclusive engine supply contract on the A350 - 1000, and currently, although subject to change, the company is still the only engine manufacturer selected by Airbus for the A350 - 800 and A350 - 900 variants.

As at 31st January 2012 , Airbus lists 555 orders for the A350 and with 2 engines per aircraft....

Related articles:

Previous related posts:
- Rolls-Royce Powers through the £1bn Profits barrier for the first time.

Friday 17 February 2012

Iceland returns to the fold following Fitch upgrade to investment class.

Interesting to read the following article: http://www.sharecast.com: Fitch upgrades Iceland to investment grade and that one of the credit rating agencies, in this case Fitch, has actually upgraded a country's credit rating.
Significantly it is Iceland, the last country to be bankrupted by its banks and the credit crunch. 
Still got a long way to go but the country's efforts have been rewarded with a reinstatement of its rating to BBB- which apparently is the first "investment" grade and once again gives the country access to international capital markets.

Related articles:
http://online.wsj.com: Fitch Upgrades Iceland Rating To First Step Of Investment Grade

Thursday 16 February 2012

BAE: 2011 Preliminary Results.

BAE @ 320.70p, -12.3p (-3.69%), as at 9:14am.

Expected but still baffled by the behaviour. 
What am I referring to? Well, BAE reported today and almost immediately fell to the levels shown above.
I guess I am not actually surprised by the fall as I have been fully led to expect preliminary results that would be at least 10% down on the previous year, or at least there has been enough concerns around defence sector spending cuts, BAE's struggle with recent Eurofighter contracts, and plentiful analyst and media segments in the run-up to the results outlining the tough market conditions as justification for an expected 10% fall in sales.
In light of that it has been hugely surprising to see BAE taking part in the markets rally and appreciating from the 280p's in January to yesterday's 333p.
Thats not to say that the company doesn't have financial strength to go with its significant position in a significant market but the current mindset of markets is to focus on growth which the company can't point to.

Looking at the preliminary statement:
- Sales were down 14% at 19.154bn (22.275bn) but,
- pre-tax profits were up 2.75% at £1.493bn (£1.453m)
- Full year divided increased to 18.8p (+7.4%) and dividend cover maintained at 2.42 times

Concerning that operational cashflow has halved which directly impacted the company's cash balances which have fallen from £2.813bn to £2.141bn. This might be due to the referenced delays in Saudi Typhoon contract changes?
It looks like the company has also restructured some of its debt as well with £1-1.5bn being restructured and reclassified from current to non-current liabilities. Although, this probably has much to do with net interest payments falling to £114m from £192m last year.
Shareholders percentage of profits has also increased, to 98.7% from 97.3%, so minority interests have reduced.
Dividend cover has been maintained at 2.42 times despite the increase of 7.4% which takes the full year dividend up to 18.8p per share.

So with flat sales being forecast for the next couple of years the company is consolidating at best. Which might not be a bad thing given the current economic climate and might indeed be a reality check to what can be expected in the wider market. 
Despite flat sales, the company suggests that earnings will increase again in 2012, if only modestly. Reading the company's statement this looks to be due to anticipated benefit in some margins, and reduced finance costs.

As ever I am really looking for cashflow per share to be higher than earnings per share so the cashflow position, or cashburn in this instance, is still concerning and requires trust in the company's management to look after the balance sheet, and working capital during a constrained market opportunity.
But, suffice to say I am concerned and need to keep a closer eye on BAE's financials, watching for any further deterioration or, hopefully, an upturn in its fortunes.

At 320.7p the investment has delivered an almost non-existent 0.46% gain in the share price but has yielded 10.84% in dividends, so it hasn't been the greatest investment. Steady at best.
On a single digit PE when I first invested I was hopeful of a 20% recovery in the share price but with hindsight the company has probably performed almost in line with the zero growth forecast over the 1-3 year horizon, hence the perceived discount.
Still disappointing though.
I wouldn't normally be too concerned but for the deterioration in cashflow.

Looking ahead then, to the 11.3p per share dividend, the shares go ex. dividend on the 18 April and the payment date is 1 June.

BAE 2011 Preliminary Announcements and Presentations:

Related articles:

Wednesday 15 February 2012

Greco Euro update.

Interesting and scary to read the updates on the following Guardian Business Blog: (http://www.guardian.co.uk: Eurozone crisis live: Greek president attacks Germany as bailout deadline moves to Monday
which is responding live to the Greek and Eurozone negotiations. Yet another put-off until Monday but there looks to be an increasing level of mistrust sprinkled with personal attacks (verbal) that unfortunately looks to be taking the Greco Euro debacle to the brink of a disorderly and possibly cataclysmic default.

Hold onto your hats!

BP ex. Dividend today.

BP @ 487.4p, -7.4p (-1.5%)

BP's shares went ex. dividend today following last weeks 4th quarter results.
The shares have bubbled up nicely in the weeks up to last weeks announcement in anticipation of an increase to the dividend.
And the company duly delivered in the form of a 14% hike to the 4th quarter dividend taking it up to 8c or around 5p per share.
Higher oil prices and lower tax charges proved to be the seasoning to the company's much healthier profit before tax of £15bn as opposed to last years loss of £2.3bn.

The company is starting to look forward as well now with new projects/investment coming on stream which it hopes will contribute to cashflow improvements of 50% by 2014. Quite a short term horizon so that would be very positive if they can achieve it.

But in the near term the company continues to be dogged by the Gulf of Mexico issues and resistance from its senior partners in the project to shoulder any "ethical" liability. Indemnity clauses built into contracts at the time have been upheld by US courts (shielding Haliburton and Transocean) for the mechanics of the disaster but have at least kept the door open for a wider distribution of liability for the actual clean up costs.

A court case is also due to kick-off in New Orleans on the 27th Feb which is likely to be lengthy but should determine the scale of fines and clean up costs that BP will be required to pay v. the estimated £23.5bn.
There are still planned asset sales, with $18bn still to raise to add to the $20bn already raised.

BP's CEO, Bob Dudley stressed that the company was preparing "vigorously" for the court case but also stated that the company would be prepared to settle under fair and reasonable terms.
Its noticeable how many pages of legal updates/previews back up the end of the results

Still feels like a long way back yet for BP, but at least the company's management are talking positively about the future and what the company's prospects might look like.
I have concerns about the court case and would prefer to see a settlement rather than a drawn out saga. 
Sadly I see the latter but at least it looks like the company is starting to see the corner coming if not quite yet turning into it.

Thursday 9 February 2012

Rolls-Royce Powers through the £1bn Profits barrier for the first time.

Rolls-Royce @ 770p, -15p (-1.91%).

So Rolls-Royce reported full year results today which seemed to disappoint markets despite:
- a record £1.157bn profit before tax, up 21% on the previous year and the first time the company has broken through the £1bn milestone.
- revenues of £11.277bn (2010: £10.866bn), up 4% on the previous year.
- Order book increased by 5% to a record £62.201bn
Behind this:
- after market revenues increased by 9% but new equipment sales fell by 1%.
- Margins increased slightly to 9.62% (9.35%)
- Dividend cover of 2.77 times (2.42 times)
- Dividend increase of 9% to the full year bringing the total payment to 17.5p

Investment has had an effect on these results with:
- an impact on Energy division profits following investment in Civil nuclear
- the £1.5bn acquisition of Tognum (with Daimler), which has had a visible effect on reduced cash balances but the company remains well on top of debt and retains a net cash position of £223m. Interestingly Tognum also made a contribution to profits of £30m
- Actual cash balance is £1.31bn (2010: £2.859bn), down a remarkably transparent £1.549bn (Tognum acquisition).

Looking forward, both Airbus and Boeing are delivering 787's and A380's thereby bringing in revenues from 2 recent development programs.
The proposed sale of the company's 32.5% stake in IAE is still on track to be divested in the first half of 2012.
2012 will also see the BR725 enter service on the Gulfstream G650.
Tognum will begin to make a contribution to revenues and profits with Daimlers 50% reported as a non-controlling interest.

2012 Summarised by division:
- Civil - good growth is expected in Civil revenues with greater growth in profits.
- Defence - modest growth in both revenues and profits
- Marine - modest increase in revenues but flat profits
- Energy - improvements in revenues and growth

Rolls-Royce is the largest holding in my portfolio and has performed handsomely, if erratically, over the last 12 months. 
And, even though I had begun to view them as a little frothy on historical valuations I must confess to being a little disappointed at them falling today.
The company announced a profit increase of 21% (despite recent well publicised problems in the Aerospace market: 787 delays; T900 oil leak), has an order book which broadly covers 6 years work (£62bn / £11bn = 5.64), a net cash position (even after it paid cash for Tognum), and occupies the number 2 position in a 3 company sector with huge barriers to entry covering regulatory, technological, capability, and credibility.

Rolls-Royce wasn't in my consideration when writing the previous post (Markets, Company Reporting and Analysts Expectations: Contradiction and Confusion.) but perhaps they are another example of a company increasing profits but having disappointing sales growth that drags the shares down.
At their lowest point today the share price was 750p, -35p (-4.46%).
This is a long term company though with a long term vision, long term investment horizons, and long term rewards. 
Increasing service revenues are a direct result of products in the field with 20 and 30 year life horizons which themselves are the result of multi-year research and development programs. 

The number and size of the company's installed engine base (approx. 54,000 gas turbines) is also the direct result of a 15 year strategy to compete on every new air frame (and apply its technology across applicable industrial sectors like marine and energy) with a portfolio of products that, in the case of the successful Trent family and derivatives, can trace their lineage back to the first 3 shaft engine, the RB211, which entered service in 1972 on the Lockheed Tristar.

The company is maximising its technological success, particularly in gas turbines, and looks set to for many more years to come. 
It is something that I have mentioned a number of times in posts but I like the long term cycles and horizons of Aerospace and they serve to educate and help me step back from the short term misdirection of markets.

Dividends have increased annually since 2004 despite the burdens of R & D and global recessions in what has traditionally been a capital intensive industry.

The current year's increase in profits also serves to bring the historic Price to Earnings down to a more amenable 15.86 times and with consensus forecasts currently looking for a 14% increase in earnings, the forward PE is a reasonably attractive 13.9 times. 
13% growth in earnings for 2013 brings the PE down to 12.3.

It may be my biggest holding but the shares are still very much a hold for my portfolio though and I can see 825p as the next milestone with the potential to hit 880p by the time the results come out next year.

Related articles:

Related posts:
- Rolls-Royce 2010 Final Results

Markets, Company Reporting and Analysts Expectations: Contradiction and Confusion.

So what is really happening out there?
It seems to be a very strange time and confusing contradictions seem to be gathering around us giving very little direction to "followers".
Markets have staged a belligerent strength in the first 5 weeks of 2012 seemingly in opposition to the same old, same old coming out of Greece and Europe. 

Even through the night I am reading the BBC News 24 ticker saying that the Greek PM has failed to negotiate agreement but the main headline for the presented news is Capello's resignation. 
Running into the breakfast section of the day, the news is that a draft agreement (less the unagreed reforms) has been passed (with the buck) to the Troika (IMF, ECB, and EC). 
Some of the unagreed points are around pensions reform which unfortunately means that a potentially bankrupt state of the European Union wants to continue to have pension conditions that better those in more budget conscious member states. 
If the Troika does agree to this, what does that say about fiscal union?

Elsewhere, on the company reporting front it is equally confusing with headlines leading with record, and estimate, beating profits on one hand, and missed sales estimates on the other with a resulting push me, pull you on the share price.

In a moment of clarity, it actually underlined to me how little analysts seem to really understand despite the raft of research, data, and access to management. 
Perhaps they have too much data at times which might result in a very blinded perspective. If so it is a learning point for us all to occasionally step back and see the bigger, or long term, picture.

There seems to be a bit of a crisis around us so if an analysts estimate of sales (not the company's) is missed by a whole 0.2% is it really an issue. Particularly, if in the next article I am reading that the same company has beaten expectations with increased profits and margins.
If this has been achieved through cost cutting and "understandable" efficiency/productivity measures then I can fully appreciate that management has been pro-active and taken the right actions to adjust capacity and protect margins in line with the market opportunity. 
If the company has also kept one eye on the future and prepared itself for the next upturn even better.

I have heard this contradiction many times over the last 5 weeks and it seems to be more often than not at the moment, but it has taken me this long to knit the clues together to the form the view that I now believe that there are opportunities forming again amidst the confusion and contradiction. 
It is still about having the right management in place, and the results coming through at present seem to demonstrate that the right decisions on investment v. opportunity / capacity v. opportunity, are being taken. 
Many of these companies also seem to be building up cash and balance sheet strength in readiness for the upturn whilst consolidating performance through this and any development to the downturn. 
In many cases the dividend is also being ratcheted up and, despite the recent history of banking aside (in the run up to the credit crunch) most of these companies have been conservative with dividend increases and payout ratios over the last few years preferring instead to strengthen balance sheets in turbulent times.

I also used the term "follower" at the beginning of this post as a reference to many of the expert views that it is the contrarian investors (not the followers) that seem to consistently beat the market and their peers sometimes by investing at a time when the weight of short term opinion is less enthusiastic about the company or in this case looking beyond short term disappointments to see the bigger picture on market share, scarcity of resource, constraints, barriers to entry etc. as long as they have the view that good management is in place.

In terms of missing an overegged analyst expectation on one measure (that could be in as short a time frame as 3 months), if the foundations continue to be solid then it is only a matter of time before actual performance catches up with opportunity.

The opportunities might all get swallowed up if the right noises come out of Greece and the Troika but, I think that the theme of the next few months will be this confusing contradiction in company reporting that might yet throw up more opportunities.
If nothing else then the "de-risking" of attitudes, should Greece step back into the circle, could result in an oversold situation on defensive sectors as investors look for more exciting sectors.

So following this new enlightenment, and all the company reporting, I need to retrawl my watchlist and see what comes up. 
Wish me luck.

Saturday 4 February 2012

Facebook IPO.

Interesting to read the increasing flow of news ahead of the Facebook IPO.

It is likely to be hype, hype, hype ahead of the launch and will provide significant rewards to the winners in last years auction which put a value of around $50bn on the company.
At the time, I recall new shareholders immediately talking up the valuations to match today's suggested $75-$100bn valuation and much like a pyramid or Ponzi scheme there will be a huge pay-off to these privileged first movers should they decide to cash in.
Now with 845 million subscribers, the question has always been how will the company leverage its huge membership base to make the profits that are now being expected of it.

The public offering will involve approx. 10% of the company's shares and, with the objective being to raise up to $10bn, suggests an internal valuation of up to $100bn.
Various estimates of 2011 earnings and revenues have been bandied about before Facebook's regulatory filing which stated $1.0bn ($606m) on $3.7bn sales ($1.97bn) which equates to just $1.10 per each of its 845m subscribers (http://www.guardian.co.uk: Facebook files for $5bn IPO).
$1.10 does seem to leave the way open for significant growth but I guess the downside is that it has managed to grow and supplant previously successful social networks such as Bebo, Myspace, and others probably by avoiding the onslaught of advertising until it had reached a certain critical mass.

The issue for Facebook then, is can it continue to be as popular with increasing amounts of targeted advertising based upon the information members are entering and sharing. 
Will members become disillusioned with such personal and potentially invasive advertising? Privacy issues will once again come to the fore I suspect if commercialisation is not managed sensitively.

The lack of success amongst rivals to date might also reflect the less mature and aggressive advertising in use on Facebook which further underlines the risk in commercialising its offering to a level meeting investors expectations. This has possibly been one of its selling points but is not likely to remain so in the future.

From a new investor perspective the earnings, valuation, and a speculated launch price of $38 puts the company on anywhere between 66 and 100 time earnings (http://online.barrons.com: At Long Last, Facebook) and like last years Linkedin IPO brings to mind the heady days of the dot.com boom particularly when discussions around prospects pulls in a sales multiple for the valuation i.e 27 times sales = $100bn. But at least Facebook is making a profit and that it is up 66% in the current year to $1bn ($606bn).
Dot.com speculators used this method to inflationary effect, as no historic profits were available and no immediate future profits were foreseeable.

The only reasonable comparison seems to be to Google's IPO hence the very similar initial sales multiple valuation but it again comes back to the question: can Facebook maximise its customer base through exposure to advertising and products in the way that Google has been doing. Google has attempted to control the portals to the world wide web through its search engine and integrated products like Gmail, Chrome OS, and Android OS. Facebook is going to be reliant on its creation of a stand alone environment with which to create a captive consumer audience for advertisers.
This could yet form a tipping point which is not to say that Facebook can't significantly increase that paltry $1.10 per member (customer!) spend.
As a result I suspect that Facebooks prospects are huge but, by the same token, probably someway short of current speculation and the blue sky valuation that it seems set to launch at.

There is also the unknown plans of existing shareholders who with such a large proportion of, and significant investment in, the company's shares may decide to cash in, or enjoy the fever pitched ride for a time. 
Control of the company still sits with Zuckerberg but it remains to be seen whether he can run the business and balance the needs of Facebook's 845m members, advertisers, and shareholders. 
Companies with shared fortunes, like game maker Zynga are already up some 65% following news of the Facebook IPO.

It is an interesting one to watch, and watching is all that I will be doing at this stage. 
There is still far too much to be concerned about than I can safely buy into on faith. 
It also doesn't fit my strategy at this time, but I also don't doubt that it will be a roller coaster over the next few years as reality kicks in.
Who's to say that a more opportunistic entry point might not present itself.

Related article links:
- http://www.guardian.co.uk: Facebook's investors - who owns what

Thursday 2 February 2012

January 2012: Portfolio Update.

Where did January go?
Post Christmas, its all been a bit of a blur and it still seems like only yesterday that I was reviewing December and 2011.
Good start to the year for the FTSE though, and my portfolio which, despite Tesco's fall from grace after disappointing with its Christmas quarter update (subsequently dragging Morrisons et al into the potential fallout with a looming price war), managed to match the markets 1.96% gain with a 2.11% gain.

Elsewhere, Apple was back on the up, astounding markets with its record busting numbers, which included 37m Iphone sales (see: Apple blows away Q1 Forecasts with Record Quarterly Sales and Profits.), and Microsoft also managed to please with its own quarterly update.
A couple of chunky dividends hitting the doormat from National Grid and R-R also helped extend the good feeling and accounted for 0.7% of the portfolio's gain in January.

All helped me to a hit another new high!

Merchant Adventurer's Index







Forecast 1 month YTD 25 mnth

Price % holding Div. yield % gain % gain % gain
R-R 735.50p 30.93% 2.49% -1.47% -1.47% 52.12%
National Grid 632.00p 17.69% 6.22% 1.12% 1.12% 16.44%
Aviva 349.40p 8.10% 7.66% 16.16% 16.16% -0.20%
Inv. Perp. High Inc. *** 514.74p 6.68% 3.73% 0.19% 0.19% 21.83%
Apple ** $456.48 4.73% 0.00% 11.69% 11.69% 140.25%
BP 470.85p 4.39% 3.84% 2.25% 2.25% 8.17%
IG Group 473.70p 3.19% 4.70% -0.67% -0.67% 57.44%
William Hill 224.70p 2.66% 4.17% 10.80% 10.80% 31.41%
BG Group 1425.00p 2.65% 1.01% 3.52% 3.52% 30.73%
General Electric ** $18.71 2.47% 2.69% 3.52% 3.52% 22.01%
Microsoft ** $29.53 2.46% 2.20% 12.72% 12.72% 22.03%
Centrica 293.40p 2.34% 5.20% 1.42% 1.42% -7.10%
Morrisons 286.00p 2.29% 3.76% -12.32% -12.32% 13.03%
SSE 1223.00p 2.15% 6.51% -5.27% -5.27% 6.26%
Vodafone 170.80p 2.11% 7.41% -4.53% -4.53% 6.00%
BAE Systems 307.80p 1.95% 6.09% 7.96% 7.96% -3.58%
Tesco 319.60p 1.62% 4.74% -20.78% -20.78% -19.88%
Cash
1.59% 0.00%











100.00% 4.02%






1 Month YTD 25 Mnth
Virtual Portfolio gain (incl. Divs)

2.11% 2.11% 43.95%
FTSE gain (excl. Dividends)

1.96% 1.96% 4.96%
- 1 month gain   5572.28 - 5681.61




- YTD gain         5572.28 - 5681.61




- 25 month gain 5412.88 - 5681.61











Transactions:





05/01/2012 Div Rolls-Royce @ 6.9p per share


19/01/2012 Div Nat Grid @ 13.93p per share


30/01/2012 Div GE @ 14.41c per share









Notes: 





*     US Dividends are adjusted for exchange rate and 15% withholding tax
**   Sterling : Dollar exchange rate = £1: $1.57 as at 31/01/12

***  Invesco Perpetual Accumulation units (Dividends re-invested). Yield shown is based upon most recent payments.


In just over 2 years then, with dividends re-invested, my portfolio is now showing a gain of 43.95% v. the FTSE100's 6.4% (excl. dividends).
And, although only part of the story, I continue to believe in the contribution that re-investing dividends is making to the portfolio's growth, even helping to stabilise things whilst media sensationalism picks out the triple digit falls for their headlines.

Click to enlarge, back to return

Looking ahead though, I can see the ongoing drama (not drachma) that is Greece being staved off yet again which, if it is confirmed soon, will probably be enough to see the FTSE100 make an assault on 6000 but this might just form the "summit" of its ambitions until the final quarter of 2012 unless the EU/ECB can convince markets that they will defend the Euro and "all" its members with an all for one and one for all approach.
Without this it seems inevitable that Portugal, Spain, Italy, and Greece (again), will continue to experience finance raising issues and bring the Euro crisis back into focus.

If the EU can't stir itself from its torpor, then we will have to hope they manage to at least limp through 2012, by which time the US might just manage to kick-start a new phase of global growth in election year, notwithstanding its own debt concerns of course. 



- May 2011: Portfolio Update
- April 2011: Portfolio Update