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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: Has Apple become a defensive stock? More evidence German economy is sinking. US slides too. UK public borrowing down last year. Companies in the news: ARM Holdings, Petropavlovsk

Has Apple become a defensive stock?

Profits came in at $9.5 billion, from $11.6 billion a year ago. In fact, although profits were down, the results were better than expected, and Apple’s shares rose. Nonetheless the company has seen sharp falls in its share prices this year, and it was the first time in ten years that profits fell in a quarter compared to the same quarter 12 months earlier.

The real headline grabber, however, was the share buy-back. Between now and 2015, Apple is going to buy back no less than $100 billion worth of shares. In corporate history, only Exxon Mobile has ever spent more.

The company can afford it. It now has $145 billion in cash, and as it is making around $40 billion a year in profits it should still boast a massive cash holding once the share buyback has been completed.

Bull:       $100 billion dollars in a share buy-back. That’s around a quarter of its market cap. Apple is looking like a mature company now, operating in a mature industry, which pays out huge sums of money to shareholders.

Bear:     Err ditto above. Are Apple’s growth days behind it? If the company still has lots of growth potential, why the share buy-back?

More Bear:         But it is clear that the market in which Apple operates has reached something of a hiatus. The BBC quoted Lauren Balter, an analyst at Oracle Investment Research, who said: “Investors are looking for innovation. The reality is that people are looking at other products now and they are looking at other cool features from competitors.”

An idea:               Victor Basta, managing director of Magister Advisors, said the time has come for Apple to focus on its existing user base, and in generating revenue from software and micro payments. He said: “One definition of madness is to repeat what you have done historically and hope for a different result.” He added: “The world is now awash with device innovation. Devices are of course a fundamental part of Apple’s offer and will remain so. The point is that the device market is now hugely competitive and Apple should focus on simply being competitive – or good enough in other words. What is needed is a balanced approach in the business.”

Bull:       Okay let’s look at the argument above – that the definition of madness is to repeat what you have done historically and hope for a different result. So Apple must stop repeating its business model that has led to such abysmal figures, right? Here is an alternative definition of madness: to stop repeating a strategy that has achieved extraordinary results because of one less spectacular quarter. And remember Apple is still one of the most profitable companies in the world.

Apple is at its best when creating disruptive technology; when combining its design flare and attention to detail to create new markets. The touch screen smart phone and tablets markets were invented by Apple. Yes it is true that within these markets it invented, Apple no longer reigns supreme, but the age of disruptive technology in this business is not over. It is merely resting.

Apple is well placed to benefit from the next stages, indeed to excel from this opportunity.

One puzzle:        But this does leave a puzzle. If the argument described above is right, why the need for this share buy-back?

More evidence German economy is sinking

Yesterday it was the latest PMI. Today it was the IFO index. Germany is not having a good month.

Germany’s IFO business climate indicator fell from 106.7 to 104.4. Okay these are just numbers, but what do they mean? Well, the context is that the index has now fallen to within a whisker of the January reading, when Germany was still playing with fears of recession. The context is that the index has fallen for two months in a row.

Based on past readings of the index Germany probably isn’t back in recession, rather it is growing at around 0.5 per cent. Then again, another month of the index falling, and things really will look dicy for Germany.

Yesterday, the latest flash composite PMI for Germany – that’s an early estimate of the Purchasing Managers’ Index for both manufacturing and services – was released. It fell to its lowest level in six months.

Chris Williamson from Markit, the organisation which compiled the PMI data, said: “The deterioration in the two surveys suggests that the eurozone’s largest economy is being dragged back into contraction after a good start to the year. Anecdotal survey evidence indicates that business and consumer confidence has been hit by escalating worries about the region’s debt crisis, centred in particular on the political stalemate in Italy and the botched Cypriot bail-out, at the same time that global growth is slowing once again.”

US slides too

Meanwhile across the pond, the latest flash PMI for US manufacturing was a disappointment.

Just as was the case in Germany, the latest PMI fell to a six month low.

Chris Williamson at Markit had more to say, but this time on the US. He said: “The biggest monthly fall in the PMI since June 2010 raises concerns that the U.S. manufacturing expansion is losing momentum rapidly as businesses and households worry about the impact of tax hikes and government spending cuts. The PMI suggests that output growth has slowed from an annual pace approaching 8 per cent earlier in the year to only 2 per cent at the start of the second quarter.”

Later this week the first estimate of US GDP for Q1 is due for release. It may well bring encouraging news, but just remember that the story for April seems less promising.

UK public borrowing down last year

How you interpret the latest figures on UK public borrowing depends on how many roses you want to use to tint your glasses.

Use a generous splattering and the story is as follows: public sector net borrowing for the financial year to April 2013 was £86.2 billion; no less than £34.7 billion below the year 2011/12.

This was also less than recent OBR forecasts.

So now let’s remove the roses, and view the data from non-tinted glasses.

First of all, look at the data after removing the effects of the transfer of the Royal Mail Pension Plan. Now let’s remove the profits made by the Bank of England from QE. You will recall that the chancellor controversially asked the Bank of England to transfer the profits it made from creating money out of nothing and used it to buy bonds paying a yield into the exchequer. But the Bank of England has said it needs this money to fund any losses it may make when QE is reversed.

So, what then was public sector net borrowing for the year just finished after stripping out the transfer of the Royal Mail Pension Plan and profits from QE? It was £120.6 billion, a mere £0.3 billion less than last year.

In other words, strip out the one-offs, and the figures were flat.

They are likely to be flat next year too.

But for those of you with some roses stuck to your glasses, here is one more dose of reality. Sure the figures were better than the OBR recently forecast, but the operative word is recently. In fact borrowing was much greater than it originally predicted.

Public sector net debt, by the way, was £1,185.8 billion at the end of last month, which is the equivalent of 75.4 per cent of GDP.

So, there is only one thing for it: more austerity. More cut backs. But then again, what was that about the definition of madness?

Companies in the news

Tempus at the ‘Times’ took a look at ARM Holdings, covered in today’s thought for the day. See: ARM Holdings: has it peaked, or is there more growth yet?   and also by The Share Centre’s Helal Miah see, Strong Q1 performance from ARM Holdings, but investors advised to ‘hold’  Tempus fretted about the valuation, however and said not one to chase at this level.

At the ‘Telegraph’, Questor took a look at Petropavlovsk, Russia’s second-largest gold producer. Many fret about the company’s debt, which exceeds market cap by around three to one. On the other hand, Questor buys the argument that finding this debt is not a problem in Russia. It concluded: “Trading on an earnings multiple of just 4, falling to 3 next year, the shares are a buy for the more speculative part of your portfolio.”

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


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