Predictions Are Like Noses

This story features DOMINO'S PIZZA ENTERPRISES LIMITED, and other companies. For more info SHARE ANALYSIS: DMP

In this week’s Weekly Insights:

– August Reporting Season: The Verdict
– China In Charts
– More Charts (All Ords in 1990s)
– Hansen Technologies: Under-Researched (And That’s A Pity)
– Blackmores: Still Under-Appreciated?
– Predictions Are Like Noses
– Rudi On TV

August Reporting Season: The Verdict

By Rudi Filapek-Vandyck, Editor FNArena

The local August reporting season was mostly dominated by an outburst of volatility on the back of a swift return of risk aversion as global growth concerns combined with the prospect of the first Fed rate hike decision in, how long has it been exactly, nine years?

But there was a lot more happening than yet more upgrades for Domino’s Pizza ((DMP)) and a shock disappointment from Ansell ((ANN)), or further confirmation from Woolworths ((WOW)).

Earlier on Monday, my personal analysis and observations from the sidelines of the August reporting season were published on the FNArena website. The story is packed with lots of tell-all graphs and charts.

Make sure you don’t miss out. Or even better: make a print out so you can highlight items and add notes. To go straight to the story, click HERE.

China In Charts

Two charts that didn’t make it into the reporting season analysis were published on the weekend by Glushkin Sheff’s David Rosenberg and I think they both strikingly show how a different angle can create a vastly different impression.

For good measure: I am leaning towards more caution than rejection when it comes to assessing the negative trends and potential impacts from a slowing Chinese economy. Authorities in Beijing are currently juggling ever more balls and it is not inconceivable they will drop one or two in order to keep the others up. Let’s hope they don’t drop too many.

My research into China this year has taken me to the point where I believe China is best viewed through the lens of “too much debt”. Once you start looking from this perspective, a whole lot starts to make an awful lot more sense.

And that transformation from infrastructure investment into a consumer-led economy, that is a gradual, small step-by-small step, long term prospect, not something that’s going to occur this year or next. The latest report I saw on this subject predicts 2020, at the earliest.

More Charts (All Ords in 1990s)

My flash back last week to the 1990s as a broad framework for what may well lay ahead now that the Federal Reserve is readying itself and the world for that first official rate hike has triggered a response from subscriber Wing.

FNArena and certainly myself are always in favour of feedback and active participation from readers and subscribers. So if anyone else feels the urge, don’t hold back!

The first chart clearly shows the decoupling between the Australian share market and the tech boom-bust cycle in the US. The second chart shows how volatile the Australian market became through the period with the index in 2003 not far off from where it was at the three peaks in 1999.

Hansen Technologies: Under-Researched (And That’s A Pity)

Those familiar with my post-GFC analysis of the Australian share market are no stranger to Hansen Technologies ((HSN)), which has been part of my selection of All-Weather Performers (see also further below) since my early writings on the subject.

At face value, this company has many factors working in its favour. Consistent stable cash flows. Some 75-80% of annual revenues are recurring. A stable, international client base in (predominantly) telecommunication and utility sectors (gas, electricity and water). Solid, reliable dividends. Plus management does acquisitions really, really well.

If I had to choose one dislike it is that annual dividends seem to be stuck at 6c, which means the yield on offer declines as the share price rises, with no catch-up in sight. Trading volumes can be a little thin during times of risk aversion, which is one major additional barrier (but nothing for most SMSF operators to worry about). Market cap is circa $0.5bn, which is neither here nor there in terms of small cap/large cap distinction.

One thing that is seriously lacking for this company is stockbroker research.

On my knowledge, only BaillieuHolst and Patersons Securities officially cover Hansen, and that truly is a pity as many an investment portfolio would have benefited greatly had it included some Hansen Technologies shares instead of, say, Santos, Atlas Iron, Woodside Petroleum, BHP Billiton or Myer, to name but a few.

Now Ord Minnett has initiated coverage, with a Buy rating, of course, setting a maiden price target of $3.20, representing a big premium vis-a-vis the stockbroker’s base valuation for the stock. On Monday, as I write these lines, the shares are trading around $2.67. Hansen shares are up some 46% since the start of the year, but this is not a short term, fly-by-night phenomenon and I am happy to see Ord Minnett analysts fully agreeing with me.

Following years of double-digit growth numbers, Ord Minnett’s projections imply that, post FY16, the pace of growth will decelerate to low single digit % only. Which is why acquisitions will be front and centre of management’s attention, the stockbroker suggests.

Ord Minnett analysts are so convinced about the timing and quality of upcoming acquisitions, it underpins their reasoning for putting a premium valuation on the stock. Which brings me to one of my favourite rejections when it comes to investing in the share market: a seemingly high Price-Earnings (PE) ratio does not mean a stock is “expensive” (and vice versa).

On Ord Minnett’s forecasts, Hansen Technologies shares are trading on FY16 PE of 30, which, common perception tells us, is rather expensive with the broader share market around 14.9x and the likes of Fortescue and Santos on low single digits. But assuming projected growth will be achieved, the PE declines rapidly into the low 20s and that’s without incorporating any of the future acquisitions.

The same principle applies to stocks like Bellamy’s ((BAL)) and Blackmores ((BKL)), see further below for the latter.

Ord Minnett estimates management is going to spend $100m on new purchases over the next four years, to be financed out of operational cash flow plus bank facilities. Assuming management executes well, Hansen Technologies should enjoy EBITDA growth of 20-23% CAGR through FY15-19, on the stockbroker’s projections. Compare this to the rather tepid forecasts that dominate the outlook for most ASX-listed stocks, and it is not difficult to see why Ord Minnett believes this stock deserves a premium valuation.

Hansen Technologies offers its clients customer care and billing software solutions, including intelligent customer services, hosting, technical support, software-as-a-service, cloud and security. Annual sales are now firmly above $100m and should be steadily climbing towards $150m in the years ahead.

Blackmores: Still Under-Appreciated?

The recent share price performance for producer of vitamins and food supplements, Blackmores ((BKL)), head office not far from where I am writing this story, can be summarised by two of my recent messages on Twitter:

1. JP Morgan this morning lifted its target to $98 but at this pace Blackmores (BKL) shares will be there in 35 mins or so #ausbiz #stocks

2. @GoldmanSachs has upgraded Blackmores (BKL) to Buy with revised price target of $143 as market yet to properly account for growth potential

In between these two messages (“tweets”), Blackmores has grabbed the number one spot for most talked about stock in the Australian share market, pushing former holders of the crown Sirtex Medical ((SRX)), Slater & Gordon ((SGH)), CSL Ltd ((CSL)) and Santos ((STO)) firmly into the background.

One number that has been mentioned by fund managers earlier with regards to how far this journey can lead Blackmores shares is $150. So far, the price has been as high as $118. Analysts at Goldman Sachs updated on Monday and their new price target now stands at $143. No surprise, Goldman Sachs has a Buy rating for the stock and has it now included on its “Australia/NZ Conviction Buy List”.

Similar to my arguments about the likes of Bellamy’s ((BAL)) and Hansen Technologies ((HSN)) -see above- Blackmores’ FY16 PE above 30 does not imply this stock is overvalued and overdue a sharp correction. If anything, Blackmores shares continue rising on most days, even with large parts of the Australian market under continuous and strong selling pressure.

This doesn’t mean Blackmores shares can only rise from here onwards. Consider the shares entered the new calendar year in the mid-$30s. By now, every trader worth his salt is on the band wagon, or at least considering it.

When I last updated my list of All-Weather Performers in the Australian share market, back in December, I suggested one potential barrier for owning shares in Blackmores was that volumes had shrunk quite considerably.

Well, that has changed since, and very dramatically so. A daily trading session for Blackmores now involves some $10m changing ownership between 10am-4pm. No wonder this is (finally) a Top-200 stock. The first one to break down the $100 per share barrier, and stay well above it.

And yet, Goldman Sachs analysts believe investors are yet to fully understand the growth potential that is opening up for the company. eCommerce in China is facilitating access to offshore products and Blackmores is very much a beneficiary of this appetite for high quality foreign produce, argue the analysts. On their own assessment, Goldman Sachs’ FY16/FY17/FY18 EPS forecasts sit 34%/41%/45% above market consensus, implying the PE of seemingly 30-plus is in reality a whole lot lower.

Predictions Are Like Noses

Reading through dozens of opinions and research, I came across a pointedly formulated communique from hedge fund owner Douglas Kass, whom I have quoted here before. Below is a fragment that does not need any further comments. It is strong enough to stand on its own.

Doug Kass (from seabreezepartners.net):

“I have frequently warned about the self-confident views (both bullish and bearish) of glib talking heads. This statement might be the single most important lesson taught from the last five weeks.

“Above all, always define and understand your risk profile and timeframes; never stray from them, despite the protestations and assurance of others. It is your capital to make or lose, not theirs.”

Wise words and I hope readers of this weekly commentary and analysis put me on the right side of Kass’s share market commentary analysis. Another one of his observations I found too hilarious to not repeat this week:

“Predictions are like noses (anatomical part has been changed to get through my editor!) – everyone has one!”

Rudi On TV

– on Wednesday, Sky Business, 5.30-6pm, Market Moves
– on Thursday, Sky Business, midday-12.45pm, Lunch Money
– on Thursday, Sky Business, between 7-8pm, Switzer TV

(This story was written on Monday, 7 September 2015. It was published on the day in the form of an email to paying subscribers at FNArena).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via Editor Direct on the website).

****

THE AUD AND THE AUSTRALIAN SHARE MARKET

This eBooklet published in July 2013 forms part of FNArena’s bonus package for a paid subscription (excluding one month subscriptions).

My previous eBooklet (see below) is also still included.

****

MAKE RISK YOUR FRIEND – ALL-WEATHER PERFORMERS

Odd as it may seem, but today’s share market is NOT only about dividend yield. Post-2008, less risky, reliable performers among industrials have significantly outperformed and my market research over the past six years has been focused on identifying which stocks, and why, are part of the chosen few; the All-Weather Performers.

The original eBooklet was released in early 2013, followed by a more recent general update in December 2014.

Making Risk Your Friend. Finding All-Weather Performers, in both eBooklet versions, is included in FNArena’s free bonus package for a paid subscription (excluding one month subscription).

If you haven’t received your copy as yet, send an email to info@fnarena.com

For paying subscribers only: we have an excel sheet overview with share price as at the end of August available. Just send an email to the address above if you are interested.

Click to view our Glossary of Financial Terms