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There has been plenty of juicy content for private investors to seek their teeth into this week. Announcements from retail sector continue show (or at least make it appear) that ‘everything is ok’, weakness in the housing market is being reflected in the numbers from some listed companies, and a profit warning from Robert Walters hints at trouble in the employment market.
But I would argue that the most useful content to grace the internet this week is Terry Smith’s annual letter to shareholders. As ever, it is fabulously written, but runs to a length of 19 pages so I would recommend finding a quiet moment over the weekend to sit down with a cup of tea and maybe some snacks and digest the full thing properly. Here are my key takeaways:
It is, of course, worth noting that fund managers’ letters to their shareholders are generally used as marketing material and, we can’t all invest like Terry Smith with enormous sums of money. (And even if we could, it wouldn’t necessarily result in outperformance, the fund massively underperformed the FTSE All Share in 2022, because - just like most of us - it wasn’t exclusively invested in the energy sector). But even so, there is a lot to learn from the letter.
And now onto the big company stories that caught my eye this week. I’ll be taking a look at:
According toTesco (LON:TSCO) andJ Sainsbury (LON:SBRY), Brits had a merrier Christmas than they did last year. Revenues were up by more than 7% at both companies in the six weeks to 7 January - ahead of the 5% increase in sales in the third quarter (which includes the Christmas trading period for Sainsbury, but not for Tesco).
But neither company admits whether this has come from an increase in volume or an increase in price. Tesco discusses the 7.4% increase in the volume of its Low Everyday Prices range, which sounds pretty good, but doesn’t say how much those goods contribute to overall sales. Management also point to the high number of goods which are now matched to Aldi prices, but Aldi is passing on its inflation costs as well and so matching those prices doesn’t mean a great deal.
Sainsbury’s says that its own price inflation is under that of actual inflation - but as actual inflation is currently significantly higher than the revenue growth reported by the company, that doesn’t tell us much. The charts used in the company’s presentation are more helpful (although they don’t have numbers on them so are less helpful than they could have been!)
Volumes seem to have declined at all of the big British supermarkets in the third quarter (the stats in this chart come from Kantar):
And prices have increased (although at Sainsbury they have increased the least):
Aldi and Lidl have performed especially well: despite substantially higher prices (something that is being reflected by anecdotal evidence on Twitter), they managed a big volume increase in the final quarter of 2022 and continue to take market share away from the big four supermarkets.
At the other end of the value scale, we also had numbers from Marks and Spencer (LON:MKS) this week. Food continues to be a solid contributor with revenues up 6.3% on a like for like basis in the 13 weeks to December. Management says that was driven by strong volume and value (although it’s not clear what value means - is it cheaper items which appeal to the every day consumer or is it fancy goods for special occasions?) The clothing and home division (a long time disappointment for M&S shareholders) also had a good quarter. Although management point to the fact that they are doing a much better job as an ‘omnichannel retailer’ it is likely that M&S benefited from the same trends as Next: the Covid-threat weighed more on sales last year than many of us realised.
One big omission from all these companies updates was a comment on margins and profits. All of them spoke a lot about value and discounting (even though it seems that prices have risen overall). When set alongside the inflation in the price of raw goods, that could have a severe impact on profits. We will find out more when the companies release their full results later in the quarter.
Higher mortgage rates have impacted property companies at all ends of the value chain. House builders Barratt Developments (LON:BDEV) and Persimmon (LON:PSN) this week both revealed a huge drop in private reservations - there are fewer buyers in the market for new builds. Estate agent Savills (LON:SVS)said the same problems have restrained the commercial rental part of its business.
But the latter has said that the market for prime real estate has held up - non-doms buying multi-million pound homes in London with cash are less concerned about mortgage rates than first-time buyers. (A comment on normal residential property was conspicuously absent in this week’s trading update, especially as the non-London residential market is the single biggest contributor to Savills revenues). Savills says that the re-opening of China should support the higher-value part of its business in the coming months.
House builders meanwhile are facing additional pressures from the end of help-to-buy, which provided a huge boost to demand until the scheme was terminated last year. The outlook for the sector is still bleak.
But technical indicators for both Persimmon and Barratt are more upbeat. Both companies’ share prices have been consistently crossing their 50-day moving average in recent weeks as momentum ticks up slightly. They both exhibit the kind of quality and value metrics that markets are currently favouring. Mark talked about the indicators he looks for to ‘surf the StockRanks’ successfully this week - both Barratt and Persimmon could be contenders for the ‘paddle out’ stage.
But with house prices still rising (revealed by a higher average price of home sold by Persimmon in the latter part of last year compared to the first six months), there are fears that many potential homebuyers are holding off making a purchase in anticipation of a big fall.
Anyone for a Rolls-Royce Phantom II, painted in Dark Emerald, with a custom mounted drone landing zone on the boot and an internal roof lining bedecked with fibre optic lights to reflect the night sky? RRP: £500,000.
“Yes please,” said over 6,000 customers in 2022, mainly from the US and Middle East. That helped to boost Rolls Royce sales to record levels last year according to the company’s owner BMW.
The company and its German peer Mercedes have also benefited from strong domestic demand for electric vehicles, attributed partly to a planned phaseout of EV subsidies. Both companies have been investing in their EV infrastructure and have now said that supply chain bottlenecks have started to ease, meaning vehicle delivery should pick up in 2023.
As the challenges of recent years starts to ease for the automobile sector, there could be some turnaround opportunities. Here are some highlights from our analysis of the numbers at some of the biggest:
Price to Earnings Ratio (rolling): 4.5x at VW compared to 24x at Tesla
Relative Strength (6 months): +18% at Mercedes compared to -50% at Tesla
Operating Margin (last year): 12% at BMW and Tesla compared to 2% at Ford
Tesla’s enterprise value has fallen below its £300bn - a bit more reasonable than recent years (although not when compared to group sales - see chart below.
In the long-term, the trajectory for electric vehicles is undeniably upward. Ignore the noise created by Tesla and politics and there should be some decent opportunities to be unearthed in companies (even the British ones) that have exposure to the market.
One of them, Ab Dynamics (LON:ABDP) provided the market with a short update ahead of its AGM this week. The company has pursued an acquisition strategy to increase its software offering, which helped send recurring revenue up to more than 40% of sales last year. The company says it has a strong order book and is well placed for the year ahead, but it hasn’t given specific numbers. And investors might be put off by the fact that, as Graham wrote earlier in the week, “it is valued as if it is a US tech stock”.
About Megan Boxall
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Hi Rusty2,
With the ROCE (32%) figure I am talking about the metric if you were to assess Fundsmith as a company i.e. the return of the 'company' dividend by its assets-current liabilities. You are right, the actual performance of the holdings was very poor - PayPal was a problem and I would also argue that Meta has been a big mistake (which the fund still holds).
I have now clarified that figure in the article.
You are right, the actual performance of the holdings was very poor
To be fair to Mr Smith, many of the holdings held up very well and the fund did not significantly diverge from major indices after 10 years of consistently knocking them into a cocked hat. Is that so bad?
He was certainly guilty of holding onto PayPal and Meta for too long - as was I. But the fund did what I says on the tin - buy and hold, ideally indefinitely- which means through thick and thin. I admire that he is a business owner, not a position jumper from short term opportunity to another. And far from hoping to be right 55%-60% of the time, his selections are almost universally successful. It’s the macro that bit growth stocks, not the company performance (apart from the two mentioned above).
Diversification is the mantra for every investor.
Not only in holding various asset classes but also holding the best and the worst (most disliked)sectors.
For me the housebuilders are currently in the latter category. Almost all the known unknowns are known about the sector. Rising interest rate, rising cost of living, expectations of big house prices drop and so on.
adding to all of that no one is recommending the sector as a buy for 2023!
It has its place in a diversified portfolio.
On carmakers.
Apparently on average electric vehicles cost a third more than a comparable ICE.
The Ford F-150 Lightning EVs sell for $84,868, compared to $65,173 for a comparable gasoline F-150.
It takes nine years for the buyer of an electric vehicle to recover the price premium through lower fuel and operating costs. By then the battery is dead or under-performing so a big replacement cost or its written off.
That said the direction is clear despite vehicle cost inflation.
The Chevrolet Bolt and Nissan Leaf come in at a more affordable $30,000 and qualify for purchase subsidies with GM launching a similar level Equinox. Tesla is looking to build a cheaper Model 2 for us less affluent.
The current Teslas will be premium brands competing with Porsche and Audi etc and the Mustang E.
Tesla will struggle in Chinas big market due to Mr Musks activities and the internet connectivity through his Starlink satellite system - but suspect the chip can be replaced with the Chinese state equivalent to monitor your every transgression and pump propaganda at you on your journey.
Expect taxes to rise and subsidies to be removed as the income from ICE vehicles declines making them even less affordable for the masses. And who want's to risk buying a second hand battery. Used to kick the tyres, take for a test run and that's it - now probably need some kind of diagnostic equipment. All comes back to cost of metals and batteries.
I always thought hybrids were the way to go but believe they are very heavy and do not give the overall mpg benefit from a good diesel.
As for driverless cars I don't think GPS, 4G, 5G etc are robust enough on our congested roads - ok on Route 66 maybe but Hanger Lane - two hands on the wheel and foot near the brake, not watching netflix.
They all need Dr Copper so Freeport-McMoRan (NYQ:FCX) Glencore (LON:GLEN) Atalaya Mining (LON:ATYM.
Recycling is another area supporting the revolution and like Steel Dynamics (NSQ:STLD).
TOYOTA MOTOR (NYQ:TM) are going the hydrogen route I believe and if anyone can plus probably the most reliable cars available. Currently a value trap but not sure the usual stocko metric applies to a £158bn company.
Terry Smith's letter is a very entertaining, and also informative, read. Most entertaining is the section on Unilever:
"Returning for a moment to Mayonnaisegate, amongst the outpouring of comments last year were a number of apologists for Unilever who were at pains to point out that the Hellmann’s brand has been growing revenues well and this was proof that ‘purpose’ works. Of course there is no control in that experiment; we don’t know how well it would have grown without the virtue signalling ‘purpose’. It also confuses correlation with cause and effect. There may be a positive correlation between stork sightings and births but that doesn’t prove that one causes the other. Maybe Hellmann’s would be growing as fast or even faster without its ‘purpose’.
To further illustrate the point, this year we are moving on to soap. When I last checked it was for washing. However, apparently that is not the purpose of Lux, the Unilever brand, which apparently is all about ‘Inspiring women to rise above everyday sexist judgements and express their beauty and femininity unapologetically’. I am not making this up..."
Thanks - Terry Smith's annual letter is always worth a read. I particularly liked the Unilever LUX comments.
The grocer updates were very interesting, but I agree that volumes vs. price mix was very unclear. The overall picture was quite positive - Sainsbury, Tesco and M&S all holding up and actually doing quite/very well. M&S turnaround seems to be working. Waitrose and Morrison were the two losers, both of which had a sales decline. With inflation of c10% that was a dreadful performance and shows that their proposition is not good enough versus the aggressive competition of the rest and Lidl and Aldi in particular.
On carmakers, very interesting.....is it possible that EVs are the wrong technology and Toyota will win with Hydrogen vehicles? EVs just appear a problem buy unless you have solar panels and don't travel more than 100 miles given the high purchase cost, lack of infrastructure, high electricity prices (caused by gas) and battery life of less than a decade. Hybrids are sensible and Toyota led this foray. However, long-term, hydrogen vehicles may just be the winner if this can use the petrol station infrastructure already insitu.
Anyway, Tesla (NSQ:TSLA) price reductions now mean that their cars are commodity products, as cars have been for well over a century. There is no recipe for making high ROCEs in the car industry, which is why thousands of car manufacturers have folded over the last 100 years. The TSLA price is in a stage 4 downtrend which doesn't appear to have finished in my opinion. The graph here indicates it could at least half from here to get to a sensible valuation versus other more established car manufacturers.
*Past performance is no indicator of future performance. Performance returns are based on hypothetical scenarios and do not represent an actual investment.
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Megan, which Fundsmith figures are looking at? The Fundsmith fund was -13.8% in 2022. Terry Smith made a big mistake with Paypal which was one his largest holdings.
Food revenue going up 6% does not look that good considering food price inflation. Aldi and Lidl were up around 27%.