Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories Who would have thought it? WH Smith goes against the grain. Apple disappoints as sales rise by a mere 18 per cent. Chinese manufacturing hits two year high. UK wages fall further behind inflation. MPC split, but still fretting about appreciation of the pound. Companies in the news: Land Securities, Randgold Resources, WH Smith
Who would have thought it? WH Smith goes against the grain
HMV, Blockbuster, Jessops, Comet, so who is next? If the latest string of announcements from the company has any meaning, it won’t be WH Smith.
It all begs the question, of course: Why?
Common sense provides the rationale for the demise of the aforementioned four retailers. Common sense has been telling us that WH Smith has some uncommon problems, for some time.
Yesterday the company revealed plans to open six more stores. It also revealed Christmas sales figures; they weren’t good, but they weren’t disastrous either.
In the five weeks to January 20, underlying sales were down 5 per cent. But WH Smith has its not very secret secret weapon to deal with falling sales. And that, of course, is cost cutting. It managed to shave £4 million off its costs during the period in question.
Chief Exec Kate Swann said: “We are in a fortunate position that we know we have got a good balance sheet and are very cash generative so can keep growing.”
At yesterday’s annual meeting with shareholders, Darren Ager from Charles Stanley, said: “Who would have thought in 2003 that WH Smith could deliver these kind of returns. The reason is Kate’s attention to detail.”
And that pretty much says it all. So if you are going to pay attention to detail, you need a decent slide rule, a very accurate ruler, and sharp pencils. But where oh where are you going to get them? The answer of course, is Smiths, which has been putting more emphasis on stationery products. The stationery market is less competitive, and offers higher margins than many of the other markets in which Smiths operates.
Some might say that in order to pay attention to detail, you don’t need a slide rule, you need a spreadsheet; you don’t need sharp pencils, you need accurate typing. How much future does the stationery market have, do you think? Or will there always be a niche, but one big enough to justify High Street presence?
WH Smiths does score in two other ways. First there are its magazines and then there are its franchises at railway stations and airports. One assumes it doesn’t sell much stationery at stations.
Since there is a limit to how long you can cut costs, your view on the long term future of this company surely depends on whether you think paper media has a future in a digital world. Will tablets do away with the need even to buy paper magazines for train journeys and plane travel?
Apple disappoints as sales rise by a mere 18 per cent
Okay, profits were flat on this time last year, but even so you would have thought that Apple’s shareholders would have been delighted with an 18 per cent jump in sales. The fact that profits did not rise with sales was largely down to costs associated with product launches.
Expectations are everything, and we have become so used to Apple posting extraordinary growth, that the share price has gone off the wall, with a p/e ratio current occupying the dizzy heights of 11.64.
Stop! What was that? A p/e of 11.64. For a company that has been one of the fastest growing firms in the world for the past decade, that p/e does not look that dizzy.
Apple’s threat lies into regression to the mean. It is now just one of many companies in the smart phone tablet market, and frankly the latest products are much of a muchness. Even the new Microsoft Surface products are looking comparable.
Then again, it only needs one more year of growth equalling its average annual growth rate of the last ten years, and all those Apple cynics may look a little silly. It depends on whether you think Apple can do it again with another product, perhaps iTV. See: Opportunity may await investors in the world’s biggest company
Chinese manufacturing hits two year high
Admittedly, if you drill down, you might conclude there is something unsustainable about the whole thing, but right now China is doing a pretty good job of dispelling doubts that it is on the mend.
You may recall that in Q4 last year China expanded at 7.9 per cent, which was better than expected. For 2012 as a whole growth was 7.8 per cent, which was the lowest level in 13 years, but better than the official estimate of 7.5 per cent.
The Q4 performance in particular suggested China was back in recovery mode.
This morning saw the release of the latest flash Purchasing Managers’ Index for Chinese manufacturing, produced by Markit and HSBC, covering January. It’s only a flash, meaning it’s an early estimate, but even so its reading was pretty encouraging.
For the fifth month in a row, the PMI rose on the month before, this time rising to 51.9 from 51.5 in December. The January score was in fact a two year high.
However, according to the PMI survey, exports were flat in the month. Then again, that was an improvement on recent months which have seen sharp declines in exports.
UK wages fall further behind inflation
The latest data from the ONS on the UK labour market was classic bull and bear.
Bull, because once again unemployment fell and employment rose. In fact, according to the Labour Force Survey, UK employment is now the highest ever – 29.7 million, and in the three months to November this measure of employment rose by 90,000. As a percentage, employment is now 71.4 per cent, and that, by the way, is around 1.5 percentage points off the 2007 peak.
As for unemployment, this fell by 12,100 in the three months to December and, just as encouragingly, the ONS revised its figures for November’s falls upwards, from 3,000 to 8,900.
All that took UK unemployment down to 1.56 million, the lowest level since 2011. As a percentage, however, UK unemployment has not noticeably changed since last summer, and has been at 4.8 per cent every month for some time.
The bear bit relates to average wages. Average wages in the three months to November including bonuses rose by 1.5 per cent, the lowest level of wage inflation since last July. If you exclude bonuses, averages wages rose by 1.3 per cent.
According to the RPI Index, inflation in November was 3 per cent.
As you no doubt recall, many economists thought the UK would enjoy stable recovery once growth in average wages started to exceed growth in retail prices. Many predicted this changeover in the relationship between wages and retail inflation would occur towards the end of 2012.
It ain’t happening.
MPC split, but still fretting about appreciation of the pound
If you glance across the headlines you will spot scare stories about the decline of sterling; of how a crash in the pound is a real danger, and how absolutely terrible this will be.
So far this year, sterling has fallen as follows: on January 1 there 1.2271 euros to the pound and 1.6318 dollars. At the time of writing there are 1.1875 euros and 1.5841 dollars.
The pound is now at its cheapest against the euro since the end of 2011. Against the dollar it is at a six month low. So it’s down, but so far the falls have hardly been the stuff of a crash.
But in the latest minutes from the Bank of England’s MPC, once again doubts were raised over the appreciation of sterling seen over the last 18 months. It seems that the Bank of England wants to see further falls in the pound.
As for QE, just one member – David Miles – voted for more. Looking further forward, the committee seems pretty divided over the need for more QE, and, if anything, opinion seems to be getting more polarised.
Companies in the news
Today, Tempus in the ‘Times’ took a look at Land Securities (Given the quality of that portfolio, further progress looks likely in due course) and Randgold Resources (It took comfort from the physical size of the West African regions, and the distance between Randgold’s assets and the troubles in Mali). At the ‘Telegraph’, Questor took a look at WH Smith and concluded that the shares are a hold for now.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees