Terrorism By Truck; Diplomacy By Insult
Theresa May is taking a lesson from Lyndon Baines. Johnson by giving the Brexit Tories so many jobs in her cabinet, starting with the appalling Boris Johnson as Foreign Minister. This is causing all those he has insulted in the past to recoil: women like Hillary Clinton (whom he compared to “a sadistic nurse in a mental hospital”); African-Americans like Pres. Obama (accused of moving out a Churchill bust from the Oval Office because of “his part-Kenyan ancestral dislike of the British Empire”); other Blacks who are “piccaninies”; Turkish President Recep Erdogan (who “sowed his wild oats with the help of a goat”). This despite being of part-Turkish ancestry himself and, at the time, a dual national holding a US as well as a UK passport.
Cheer up, Boris also insulted his fellow big-mouthed blond politician with a weird haircut: “the only reason I wouldn't go to some parts of New York is the real risk of meeting Donald Trump.”Boris and other supporters of Britain leaving the European Union have all been given jobs working on Brexit, meaning they will have to produce the good results their rhetorical fantasies promised during the referendum campaign.
Or to quote US President LBJ, “it is better that they are in the tent pissing out rather than outside it pissing in.” The leave campaigners now have to negotiate better terms than former PM David Cameron was offered—or face an end to their political careers, starting with Boris. Promises about how leaving the EU would allow stiff immigrant control, financial service passporting, less regulation, more free trade with non-EU countries, faster economic growth, more money for the National Health Service, whatever, will have to be fulfilled by those who made the promises.
You don't need guns to murder people, as was shown by a truck-driver terrorist in Nice during the Bastille Day festivities which at last count killed 84 people and wounded a hundred more.
Info on INFY
*Infosys (INFY) reported under International Financial Reporting Standards on its Q1 to end-June to end. The 2nd largest Indian internet outsourcing and services company produced mixed results. Revenues at $2.501 bn were up 2.2% quarter/quarter in US$, but only 1.7% in constant currencies. Compared to Q1 2015, the year/year rise was 10.9% in dollars and 12.1% in constant currencies. That's the good news.
Operating profit in the June quarter fell to $601 mn, down 3.7% q/q, but up 11.3% y/y failing to match sales. Net profit at $511 mn was down 4.1% sequentially and up only 7.4% y/y, showing that higher sales did not pay off. EPS was 22 US cents in the quarter, with the same drops.
INFY proudly announced that it has added three more $100 mn-plus clients to its roster, now at 17.
CEO Dr. Vishal Sikka, was granted stock options grants worth $2 mn which will be paid over on August 1, to vest over the next 4 years. Sikka commented on the results: “We had unanticipated headwinds in discretionary spending in consulting services and package implementations as well as slower project ramp-ups in large deals won in earlier quarters, resulting in a lower than expected growth in Q1.” Dr Sikka said not to blame him for this, but to pay out handsomely for his management brilliance all the same. He nonetheless claimed to be “very encouraged by our progress in the execution of our strategy”.
Commented our India reporter, Abhimanyu Sisodia:
“Results were below street expectations, as analysts expected declines in the 2-2.5% range. While most brokerages seemed satisfied with results, they compares badly to the to 3.7% sequential growth at rival Tata Consulting Services, TCS's highest ever. The biggest disappointment was INFY slashing its revenue growth guidance for this year to 10.5-12% from 11.5-13.5%, barely higher than industry body Nasscom's guidance of 10-12%. This makes it unlikely Sikka can meet his ambitious target of achieving $20 bn in revenue by 2020.
“Headwinds included lower discretionary spending in the consulting services vertical which cost INFY a whole percent of growth, plus macroeconomic uncertainties.
“Also hurting are higher visa costs and some obscene wage hikes [ed: including Sikka's.] While the employee utilization rate improved to 76.5%, up from 74.7% sequentially, attrition spiked to 21%, up from 17.3% in Q4 FY 2015-6 and from 19.2% in its Q1. To keep staff, INFY relaunched an ESOP for junior and middle level managers.
“Attrition is a concern not only because it's a critical measure of health in an industry driven by people, but also because of the senior level exit. Several other senior level employees also exited since Sikka began his tenure. INFY hired 3,006 employees during Q1, taking the total to 197,000.
“Old economy energy, utilities, and communication service sales grew fastest, up 3.1% q-o-q. Manufacturing contracts rose 2.9%. But the key financial services segment grew only by 2.2%. according to the CEO's statement.
“By region North American and European sales grew 2.5% and 0.6% sequentially, with Indian actually declining by 7.6%. INFY has been thrifty, with sales expenses rising 1.2% while administrative ones declined by 2.2% sequentially. Controlling this boosted the INFY margin which nonetheless contracted by 1.38% to 24.12%.
“While this was a disappointing quarter, INFY should resume the consistent growth momentum shown over the past year. Bombay pushed the shared down 8% when the results were published, also influenced by the ouster of INFY's AI head.”
Liquid assets including cash and cash equivalents and investments were $4.918 bn at end June, down from $5.202 bn at end March, but up from prior year end's Junes $4.75 bn. A dividend payment of $481 mn was made in Q1. Worryingly, I cannot find the cash figure for the start of this calendar year. INFY closed at $18.44 but new buyers should aim at $17 or lower given the poor quarter.
*Meanwhile the share price of Japanese messaging app firm Line soared 50% in Tokyo after it gained 36% in its NYSE IPO which values the tech startup at $9.3 bn. In my view that is another argument for holding on to INFY.
*Another Indian IT company, New Jersey-incorporated Cognizant Tech, CTSH, which I own, is also suffering in the wake of financial sector cutbacks on spending.
*Another winner is probably a British firm we sold too soon, Microfocus, MICFY, which updates Cobol and other vintage software so banks can continue to use their aging systems. It has expanded by takeovers and doubled its earnings last year. “Lex”, the unreliable Financial Times gossip column, cited Panmure brokers as saying the firm had an 80% profit margin.
Euroland Buys
*Dutch Antilles-incorporated Schlumberger Ltd (SLB) reports in dollars and should gain from the renewed global search for oil and gas. Its newly acquired One Subeas sub won at $300 mn contract from Australian Woodside Pete to supply of a sub-sea production system and a dual multiphase boosting system for the Greater Enfiled project offshore Western Australia which will produce an eventual 69 mn barrels of oil equivalent per day.
*Sweden's Autoliv renewed $1.1 bn in a 5yr multicurrency revolving credit facility with 2 years extension put up by a bunch of banks. The maker of auto safety equipment like airbags is branching out into new but as yet unspecified auto technology for smart cars.
Brit Buys
Sterling rose sharply when the Bank of England opted to delay any interest rate cuts. This hurt the London stock market, where we see bargains.
*BP plc (BP) will add another $5.2 bn in charges for the 2010 Deepwater Horizon disaster bringing its total bill to $61.6 bn, which sounds worse than it is. In fact the after-tax and after-insurance cost of the latest—final— payment due will come to only $2.5 bn for the last charges, and about $44 bn overall. But the total bill still vastly exceeds what BP was expecting at the time, but we didn't own it then. There will be no impact on its bond ratings, said Fitch.
*Jefferies Brokerage upped its target price for GlaxoSmithKline (GSX) to GBX 2000, or $52 for the ADR, up over 25% from its earlier GBX 1650 TP. The 6.7% dividend is safe thanks to non-UK earnings. 85%-controlled JV ViiV Healthcare earnings from HIV drugs were cited as another driver. GSK opted to keep it rather than continue the planned spinoff with partner Pfizer (PFE). It also brushed off worries about any threat to GSK's Avodart from generic prostate treatments being lauched by Mylan.
*Trying to buy Virgin Money (VRGDF) has been frustrating. VRGDF is thinly traded stateside and its market-maker has put a huge spread on the ADR, covering more than the impact of its UK price fall and the rise of sterling. I insist on a limit order for obvious reasons.
*Renishaw (RNSHF) tipped by Martin Ferrera, rose 10.71% on Wall St, where it trades once in a blue moon as RNSHF. I think its precision measurement line, initially developed for aviation applications, will gain other adherents.
America Buys
*Jefferies analysts have raised Barrick Gold (ABX) common along with other gold-mining shares to buy from hold. I have long recommended the company's dollar-denominated bonds, but would aim to get some capital gains as well. The broker expects the price of gold to top $1400/oz by Q4 which is its main reason for tipping ABX, of Canada, which has been actively cutting capex. The stock is also tipped as “an uncorrelated asset”. I think we should add some common to the bonds we own. Our bonds are at 108.45; we bought at 95.75. I post the bond prices showing the price of 100 bonds because the fees on mini-trades are prohibitive. Only by the bonds for a $10,000 face value. But now consider also the common stock.
*The US$ bonds being issued by Teva Pharma (TEVA) should be more favorably priced for buyers after the Israeli drug firm was downgraded by S&P this week over its debt ratio. It is issuing bonds also in other currencies to raise about half the amount it will pay to gain control of Allergan (AGN) generics. While I do not have the documentation yet, it has been delivered to our SEC and the underwriters are now fixing the terms after consulting with institutional buyers. They are: Barclays, BofA-Merrill, BNP Paribas, Credit Suisse, HSBC, and Mizuho. I have a brokerage account with HSBC that I will use to get some Teva US$ bonds in retail quantities. Watch this space.
Other News
*Vale (VALE) reiterated that there will be no further mining of iron ore at its Samarco jv site in Minas Gerais, Brazil, after a Nov. dam burst. It will start to pay its fines and penalties next month and expects to complete the process by mid-2017. However, a look at our lead item on British buys may lead you to decide it is not going to be that easy.
*Another Latin mixed bag from Mexichem, SAB de CV which announced that, as part of its strategy to consolidate its Leadership Team, it appointed Francisco R. Hernández Castillo to the position of Corporate Vice President and General Counsel effective September 1. Mr Hernandez has over 20 years of international business experience having been VP and General Counsel at Tyco International, responsible for all legal, public affairs, compliance, and regulatory matters for the corporate office and all divisions of in emerging markets including Africa, India, Middle East, and Latin America, having joined Tyco in 2005. This is the remnant of the Tyco CEO Dennis Kozlowski looted until 2002, before Hernandez was on board, then called ADT.
*I bought more Lingo Media, LMDCF at US$0.388, averaging up.
Fund Facts and Fiction
*EPFR reports that US investors redeemed holdings in Europe Equity Funds at a record high level moving money hit a new record high as investors turned either to the US with US Equity Funds recording their biggest inflow since late 3Q15, and emerging markets also luring in investors. Its global-tracked bond funds however absorbed another $9.9 bn in the week to July 13, while equity funds overall (but not invested in Europe) took in $10.8 bn—a 37-wk high. Money market funds added over $9 bn in new money.
*John and George Cole Scott (of Closed-end Fund Advisors in Richmond VA) produced a major report on among other investment vehicles, closed-end funds. The overall discount on CEFs fell from 10% in the middle of last year to ~4% now. However, non-US equity shares fell to a 12% discount from net asset value.They produced income-only yield of 2.3% but this was boosted by return of capital and capital gains to 17.5%. Their NAV was up 3.6% year to date but their market price (to end June) had gained 4%.
One reason for this disparity the Cole Scotts explained, is that foreign equity funds performed so well during their heyday, between March 2004 and Sept. 2007, with a total return of 133%
*Manuel Balce Ceneta of AP wrote giving new insights into how Pershing Square Hldgs (PSHZF) was viewed by Valeant Pharma (VRX) of Canada. The hedge fund head, Bill Ackman, was winging it. Thanks to MD reader GH for sending the article extracted below:
“Things could have been different if former CEO Michael Pearson had stuck to his original guns... Pearson didn't want Ackman anywhere near Valeant when the two first started talking. Neither did Valeant's board. This weird tension is recounted in an amended complaint to the ongoing lawsuit between Ackman's Pershing Square hedge fund, Valeant, and investors in Allergan Pharmaceuticals.
“Valeant tried to acquire Allergan with Ackman's help back in 2014, and now investors including State Teachers Retirement System of Ohio and Iowa Public Employees Retirement System are accusing them of insider trading...The plaintiffs allege that Ackman and Valeant['s Pearson].. teamed up in a hostile takeover. Valeant told Ackman that it would be attempting the hostile takeover, and Ackman is accused of buying up Allergan stock to compel [it to accept.]
“This is all based on SEC Rule 14e-3. Basically, if company A is planning to take over company B, anyone with knowledge of that takeover can't trade in company B once company A has started to make moves to bid for the company. The deal never happened, but Ackman (who got a nice payday when a white knight bought Allergan instead) and Pearson notoriously skipped off into the sunset together, becoming near-partners in presiding over Valeant's troubles.”
Ceneta adds, damningly:
“The fact that Pershing was to play no role in the combined company is not surprising given that neither Ackman nor Pershing had any prior experience investing in a pharmaceutical company, let alone running one. Indeed, Ackman told investors during an April 22, 2014 conference that 'we [had] never looked in pharmaceuticals before,' explaining that 'I [had] not actually looked at a pharmaceutical company of any consequence' before meeting with Pearson at the beginning of the year.”
PSH is trading here at $14.65. What should also be hurting the share is the likely outcome of its famous short on Herbal Life. It rose 5% on a rumor that the Federal Trade Commission will settle its longstanding investigation of the firm over deceptive market for $200 mn in fines, much less than what Ackman expected, and not label Herbalife a criminal pyramid scheme. The winner is Carl Icahn who is probably the largest long.
I am not sure if the AP story based on US regulations and revelations, has been read across the pond. I sold half her Pershing Square and views this fund as a learning opportunity. Now I am learning how unlearned Ackman can be.
*Asia venture capital firm DCM Ventures has raised a fresh $770 mn from backers, including Tencent, Baidu, and Softbank, all of whom know the software and IT needs of their industry better than brokerage analysts and investors big and small. This is the biggest pool of money raised since the former dotcom boom according to the Financial Times. DCM invests in China and Chinese firms linked to Silicon Valley. It raised $500 mn for an earlier fund just a month ago. About $23 bn in new venture capital for tech firms has been raised YTD
Disclosure: None.
great stuff as I wrote it!
Lol, love the modesty. But I agree.