Magna International (MGA) Reaches Record High On Sales, Gold Companies Get Leaner and BlackBerry's Survival (Fairfax FFH)

       A lot has happened since my last post not the least of which is news of BlackBerry's (bbry) disappointing quarter.  Although I'm confident the company will survive as a private entity within Fairfax Financial (aka the Berkshire Hathaway of Canada), as an investor you have to be frustrated with the way things turned out - BlackBerry has already inked a $4.7 billion buyout deal with Fairfax (ffh) which already owns 10% of shares - at $9 a share the offer gives shareholders almost no return for the tech maker's bes, qnx and consumer handset division :  7500 patents alone are estimated to be worth between $1b and $2 billion, then there's the company's $2.82 billion cash on hand (up $800m from a year ago).  In fact BlackBerry's 2500 security-related patents could form the cornerstone of a new secure enterprise company.

As an investor the deal doesn't make sense, but as a Canadian I'm content with it.  You see, Toronto-based Fairfax is headed by Prem Watsa who is a big supporter of Canada's tech industry (1800 technology firms present in Waterloo and Ottawa, Ontario is North America's 3rd largest tech hub after California and Texas).  If there's any company out there that will give BlackBerry a decent chance to survive intact it's Fairfax (taking company private means it won't be broken up).
Personally, I feel as though BlackBerry can still make it the market - the billion dollar quarterly loss-writedown was blamed squarely on unsold z10 phones, the same phone that holds the distinction of being the company's highest priced device (profit from one phone as much as 3X as much as Nokia Lumia).  The corporate market didn't mind paying more (German government and Nato bought it) but many other consumers didn't -  From the reviews I've read and those of my peers, it's obvious the problem with the phone was the high price not the device !  At times last year even Apple blamed slower sales on the price of its phones.

The good news :  BlackBerry has since launched cheaper devices (q5, z30) and a high-end device with touch pad catering to traditional blackberry lovers (q10).  When BlackBerry gets the price right, the phones will sell.  Blackberry Enterprise Server remains in a league of its own, the company's devices continue to receive rave reviews, market share similar to Windows OS which heavyweight Microsoft remains committed to (paid $7b for Nokia handset division).  How much longer can BlackBerry rely on the corporate market ?  by 2016 38% of companies are expected to stop providing mobile devices to staff.

Techstocks continue to shine !   Interbrand just released its annual ranking of the world's most valuable brands and technology companies took four out of the top five spots including, for the first time the top position:  #1 Apple ($98.3b +28%), #2 Google, #4 IBM and #5 Microsoft.  The next highest ranked tech company Samsung also moved up, to #8 from #9 last year.  Microsoft's recent acquisition Nokia was the worst performer, falling to #19 from #57.

Auto parts supplier Magna International is red hot!  

Though last quarter dividends per share didn't change from three months prior, sales (+16%) and earnings (+19%) were up by a healthy margin.  Not unsurprising given that, US auto sales rose at a torrid pace last summer (annualized rate for August was 16 million up 20% the strongest in six years).  Auto sales expected to slow to 1.15 million units this month (at GM only by a couple percentage points; GM is one of Magna's biggest customers); but a big reason for that is fewer selling days.  Ford also one of Magna's most important customers, reported a sales increase of 12% in August.  Last year, Ford awarded one of Magna's car plants in Brazil with a silver award for its 'superior quality, delivery and cost performance".

Since 2009 Magna has also been a key partner of Ford's electric vehicle division, it was in 2011 that Magna began assembling electric and hybrid vehicles for Ford (notable since this year 2013 Ford is on track to break its own sales record for hybrid vehicles of 35,500 reached in 2010).  Ford's August year-to-date auto sales totaled 221,270 +17.5%.

Barrick Gold Gets Leaner

With gold prices testing the $1300 level gold companies are being forced to adjust accordingly - gross production cost which includes expenses associated with exploration must be reduced so that companies can maintain healthy profits (investors have been shown to punish companies when earnings drop - they seem oblivious to the fact that a 20-30% drop in the gold price is going to make it next to impossible to avoid a quarterly earnings drop).  Barrick Gold has responded to this pressue by selling high cost operations;  Last summer it was the 3 Australian mines that comprise Yilgarn South (1h2013 196,000 ounces at a cash cost of $1145/oz), sold for a combined $300 million.  Then this month, the company announced its intention to sell two more mines for $100 million.  This would put Barrick Gold halfway through its ongoing plan to sell or lower output at 12 of its 27 mines.

Gold Price Ratio Suggests Recession Looming, Target TGT Underperforms & Growth Stocks Nasdaq AFCE, ALXN

Relative to the United States, Canada has higher wages, higher fuel prices, stronger unions, and higher distribution costs and that often leads to higher retail prices.  Target Canada will open its first 124 stores in 2013 but it won't be an easy transition; The Canadian dollar is at a low right now (95.0c US) which compounds the problems Target will face in adjusting its prices to Canadian expectations.  Since launching in select markets earlier this year a new problem has cropped up :  consumer satisfaction dipped below 30% in August (vs May).

Target (nyse:tgt) Underperforming

Latest quarterly profit -13% weighed down by Canadian operations (expansion costs).  As of quarter-end Canada is home to 68 locations with another 56 to open by year-end.  Canada accounted for $275 million of the company's $17,120m sales this quarter but Canadian performance still not up to par.  Total North American sales were suppose to be up 2% this quarter not the realized 1.2%.  Earnings at 96 cents a share ($611m vs $704m last year) a cent below expectations.

Recession Looming ?

Signs certainly suggested it on Friday when growth in silver and gold prices contrasted with next to no change for the primarily industrially used platinum group metals. 

So far in August (1-20) investors extracted $30.3 billion from US bond mutual funds which amounts to the highest monthly outflow in 19 years.  Markets both domestic and international have benefited from the US Fed bond buying program which was originally instituted to help keep mortgage interest rates down, however what the Fed is now saying is that, even after its eventual exit from the program, short term rates shouldn't go up even though long term rates will.

The Fed purchases $85 billion worth of bonds each month - half mortgage bonds half treasury notes, as a sort of quantitative easing.  Because the Fed isn't being clear on when it will stop buying mortgage bonds, interest rates are gradually moving up consquently people wanting to buy homes are doing so before the expected spike in rates (July sales of existing homes +17.2% versus last year).  30-year fixed rates - May 1 : 3.35% ; August 23 : 4.58% highest since July 2011 ; 15-year rate @ 3.6%.
Unemployment remains a problem, it was as high as 8.2% in July.  Also, jobs numbers (+170th last month) are weak - most of the new jobs are part time and not specialized;  In June for example 400,000 people with college degrees lost jobs while 250,000 people without college degrees got jobs.  Another sign pointing to a weak economy - average age of vehicles on the road now 11.1 years, the highest on record.

Investing In Bullion, Make Gold A Priority (silver price, platinum)

                      Though it's true that for much of history the gold to silver ratio was 12, that trend ended more than half a century ago at a time when gold and silver prices were a lot lower than they are today.  In recent history the ratio has been somewhat erratic ranging from a low of just over 30 (April 2011 gold avg $1474, silver avg $42) to a high of 85 in 2008;  During this period there was a lot of downward pressure on both ironically coming from one of its biggest buyers central banks - rising interest rates cause money to flow out of gold and into other sectors of the economy but gold still stood out, maintaining a price at least 75% of its high, silver however presently trades at only 40% of it's 2011 high of $50.

During the last recession the price of platinum fell below the price of gold, an occurrence that usually only happens during crises  - the last time it happened was in the 1970's when the world's main economic drivers, the US and Europe were going through recessionary periods of low growth, high unemployment, high debt levels and oil prices.

The more recent inverse relationship between gold and platinum dominated the period of August 9, 2011 to January 2013.  Prior to that, since 1986 the price of platinum always exceeded gold with the exception of very few brief periods but even then the difference was marginal.  What this means is that the current economic climate is not as rosy as it's made out to be - the factors now driving gold closer to platinum are the same ones that come into play during times of economic uncertainty (central bank buying, inflation leads to lower confidence in the dollar, causing people to jump onto the bullion bandwagon).

Platinum versus Gold

For bullion buyers, the platinum group metals (pt, pd, rh) provide an interesting alternative to gold but a couple other key factors to consider may make gold the safer option.  In 2008 when rhodium hit $10,000 an ounce before hitting rock bottom a year later (2009 average $1500) investors lost interest in the white metal.  In a healthy economy, demand for platinum and palladium will still be there since both rely on industrial (catalytic converters) and high end markets (white gold plating, platinum jewelry);  however, yearly demand in general is not nearly as high as it is for silver or gold;  2012 platinum demand was about 6 million ounces, 7 million ounces for palladium which is only a fraction of the 155.4m ounces of gold, 1.16b ounces of silver consumed.

2012 exit year - Global reserves of platinum group metals total 2.328 billion ounces (2013 Mineral Commodity Summaries: 66m kg, annual production represents 0.6% of this) versus 1.799 billion ounces for gold (annual production represents 5% of this).  This doesn't sit well with me given that production of gold is some eight times greater than all platinum group metals combined.  As an investor what this tells you is that it's a lot easier to raise mine output to either match higher demand /or to put downward pressure on the price, than it is for gold.  At current prices, gold is just as rare as the platinum group metals but demand remains many times greater.  This is precisely why the rhodium crash of 2008 could never happen to gold (rhodium supply increased substantially as miners saw an opportunity to sell at higher prices but it turned out that demand was not nearly as strong as anticipated).  Platinum may be brighter but from an investment perspective gold still outshines it. 

Demand for platinum has a shiny future - light vehicle production is expected to increase by 13.6% over the next three years, with each vehicle needing a catalytic converter containing four grams of platinum and palladium what that amounts to is an additional 1.54 million ounces of pt/pd demanded.

Sobeys Leaps To The Top In Oil Rich Alberta, Acquires 213 Grocery Stores From Safeway (market share Loblaws)

        June 12th was a big day for Nova Scotia's biggest company Empire Company Limited (tsx:emp.a).  On that day, Safeway (nyse:swy) agreed to sell it 213 grocery stores for C$5.8 billion.  Sobeys last major move was a 1999 deal involving the Oshawa Group, that takeover only cost the company $1.5 billion but added more than $4 billion in annual sales and increased the number of locations by a factor of two.
The Safeway deal makes sense for Sobeys on a couple fronts. 
1) cost savings !  synergies of $200 million per annum averaged over the next three years.
2) Gives it grocery stores in sought after locations
3) Sobeys becomes a truly national grocery chain (large format supermarket locations go from 3 to 78 in British Columbia) 4) Gives it a leading market share position in Alberta which is significant for a couple reasons  i) Alberta's population growth is the highest among Canadian provinces ii) Alberta household income is some $15,000 higher than the national average meaning consumers could be more open to buying higher priced premium items (private label organic products have a higher profit margin).   July update - Sobeys parent company Empire Co exits the theater business by selling 44 theaters housing 349 screens for $255 million cash.  24 cinemas in Atlantic Canada (179 screens) will go to Cineplex for $200 million.  Landmark Cinemas is paying $55 million for the 20 Empire theatres in the rest of Canada (170 screens).  This is consistent with Empire Company's original plan to use $1 billion from asset sales to pay for Safeway (at fiscal 2013 year end the company had only $455m in cash).

The facts
- Sobeys pro forma annual revenue goes from $16 billion to $24 billion.
- 168 of the 223 Safeway stores (213 grocery, 10 liquor) are in British Columbia (75) and Alberta (93).  49 in Saskatchewan (33) and Manitoba (16).  Another 6 are in Ontario.
- Sobeys also gets 10 liquor stores (already has 29 lcbo stores most in Alberta) and 12 manufacturing facilities.  199 in store pharmacies, 62 fuel stations.
- Fuel business is growing !  189 gas stations in Quebec, 71 in Atlantic Canada and now 62 more in Western Canada.
- In the first half of 2013 $515.1m of the $780.5m in new revenue came from gas sales.  Boosting sales of gas is an effective way to increase revenue and cash flow. 
- As large a deal as it is, the Safeway acquisition doesn't give the company any additional market share in Quebec, and doesn't make much of a difference in Ontario (6 Safeway locations).  All of Ontario's grocery market share is held by Loblaws, Metro Inc, and Sobeys.  Sobeys needs organic growth there, acquisitions are not really an option.

A Next Move For Sobeys

 

 

Sobeys is in an enviable position.  Target (nyse:tgt) is allowing Sobeys to sell its own Compliments branded items at new Target stores across Canada.  Sobeys leads in grocery market share in Atlantic Canada, and discount chain FreshCo is having a lot of success competing with Loblaws and No Frills in Ontario.  Sobeys arguably runs a more diversified business than Loblaw Companies and that makes it a great investment.  Loblaws does have something Sobeys doesn't, a clothing business, but with pressure on apparel suppliers in Bangladesh to spend more refurbishing factories, increasing wages, profit margins may also be under pressure.

•  Lawtons can compete with Shoppers Drug Mart on a national scale. 

BlackBerry Undervalued: Investors Ignorant of Q10, Z10 Brand Strengths (bbry unit sales, smartphone market share)

         While BlackBerry has yet to release a low-end, more affordable BB10 phone to compete with Nokia's $99 Asha 501, I don't see that as being a major problem for the company going forward;  1) Its core customer base is still the high end corporate market 2) The market for high-end phones in key international markets is growing (Indonesia, South Africa, India), one reason for that is the modernization of mobile infrastructure capable of handling more data / 4G.  BlackBerry is the top smartphone brand in Indonesia, South Africa, Argentina and a top three player in India behind Samsung and Nokia.
more...   that doesn't mean however that Research In Motion does not need to eventually introduce a more affordable product.  BlackBerry 7 devices (Torch, Bold, Curve) remain popular in the East and with RIM scaling back production of that line, at least one of the newest phones (running on OS10) will need to be introduced to fill in the gap. 

BlackBerry Detractors Already Admitting Defeat
One of BlackBerry's harshest critics, an analyst at Cannacord which had slashed its sales estimate for BB10 phones earlier this year, is already calling the estimate wrong, off by at least half a million units per month. 
Early indicators suggest sales of the both the keypad (Q10) and candybar (Z10) phones are strong however it should be noted that those statistics don't take into account most international markets where the devices have yet to be launched.

Nearly 60% of RIM's 2012 revenue originated outside the US, UK and Canada.  In the Middle East where BlackBerry holds the leading share of the market for new phones at 35%, sales of the Z10 phone though not overwhelming remain promising at a rate of just over 250,000 units a month in Saudi Arabia and the UAE.  The figure doesn't include the Q10, something that has to be taken into account given that the keyboard remains popular among clients in the Gulf region.

Over the past year, Nokia introduced many of its key new smartphones while BlackBerry released nothing new (no full quarters reported on yet).  Despite this, BlackBerry somehow managed to sell the same number of smartphones as Nokia in the most recent quarter (4q2013).  The 6 million unit figure represents just under 3.0% of the global smartphone market, not bad considering BB10 was out for only a month in limited capacity (not available in the US) and that the phones have received rave reviews since being launched in the United States in April 2013.  Altogether, RIM sold 28.1 million smartphones in fiscal 2013 (March to March). 
Last month (April 15 to May 10) Research In Motion stock was up +14% making it one of the best performing tech stocks.

Battery life:  Can't go wrong with the Q10 ! 

The Q10 battery is larger and longer lasting when compared to OS7 phones.  The result ?  10-12 hours of device use on a single charge, more than double what the competitors have to offer.  This is just one reason why I'm optimistic about corporate clients remaining with BlackBerry.  Canadian Tire which has over 3,000 corporate users is one of several major companies already committed to the BlackBerry 10 models.

More reasons to buy Research In Motion:  23 of the 25 leading mobile carriers in the US, EU5 and Canada carry BlackBerry's newest Z10 smartphone compared to only 14 for the Nokia Lumia 920 meaning that RIM is poised to eventually outstrip Nokia in smartphone sales.  Not bad for a company with a market capitalization 40-70% lower.
RIM is succeeding in the high end market whereas Nokia is making a push for the low end market.  I don't expect sales at Nokia to best BlackBerry anytime soon, with Nokia's devices being low-end their margins are quite limited.  Even BlackBerry 7 phones are more profitable than Nokia's newest, and profit from one Z10 equals profit from three Lumias.

Gold Demand Remains Strong Despite Dip In Price (China, ETF, jewelry, bullion, central banks, supply)

     
          Between January 2012 and January 2013 central banks showed an insatiable desire for gold !   Even though prices weren't as high as they were in 2011 ($1895 in September 2011 vs $1780 September 2012) they were high enough as to give holders of the yellow metal a unique opportunity to sell at a generous price. 

So did debt laden countries sell ?  NOPE !  in fact just the opposite happened:

Italy kept its reserves stable at 2451.8 tonnes but because its total reserves fell slightly the % of reserves represented by gold went up from 71.0% -> 72.5%. 

Holdings by Greece actually went up 0.3 t to 111.9 tonnes which means gold now represents 82.7% of reserves up from 81.5% last year.

 Spain 29.7% -> 30.4%        281.6 tonnes ranks #18 globally

 

more information about gold reserves at International Gold Reserves by Country

 

China The Sleeping Giant

Though officially no significant movement was made by the Chinese, the world's second largest economy has routinely showed interest in boosting its reserves.  $3.3 trillion is in American dollars but the gold that it has is only worth around $50 billion (at a spot price of around $1500 an ounce). 

China has been the leading gold producing nation since 2007, at 370 tonnes in 2012 (+15t), its output is about the same as Russia and South Africa combined.  Because most of the gold is mined at many small operations by minor companies, it's not so easy to keep track of where all that gold ends up.  Taking into consideration the large number of nationalized companies in China and that almost none of China's gold output makes it out of the country, it's possible that Chinese reserves are higher than officially stated.  The only incentive China would have to not disclose the actual amount is to keep the price relatively stable, since skyrocketing gold prices would wreak havoc to their consumer market (jewelry demand alone is 265.5 tonnes, more than total US consumer demand in 2012).
America's excessive printing of money is another reason China needs to diversify out of the US dollar.  Gold represents only 1.7% of China's reserves compared to 64.1% average for all other countries (up from 62.6%).  To put things into perspective, if China's gold represented the same fraction of total reserves as US holdings do, China would have 5.8 times as much gold as the United States (47.2 tonnes).

Gold Demand for jewelry (-3.2%), bullion (-17.1%) down in 2012 but demand by central banks (457 -> 535t), ETF's (185 -> 279t), and China (779.8 -> 776.1t) remains strong.

 

Countries More Picky About Where Gold Is Stored

Germany announced earlier in 2013 that it wants to repatriate 674 tonnes of its reserves from American (300 tonnes) and French (374 tonnes) vaults.  Other countries such as Switzerland are also thinking about doing the same thing.  Switzerland has 20% of its reserves in the UK, 10% in Canada; Switzerland did this originally as a way to keep its gold safe during war times.