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Ingham Analytics Weekly Letter
21 February 2021
Hello Voornaam,
Welcome to our Ingham Analytics Weekly Letter on Sunday where we take a step back to see wood for trees - tongue in cheek, not taking ourselves too seriously, it is after all Sunday.
We referenced bitcoin in our last Letter on Sunday and shared our thoughts thereon. Coinbase facilitated the $1.5 billion Tesla bitcoin purchase. In the fintech arena there are rumours circulating that Coinbase, started in 2012, could be seeking an IPO sooner rather than later although no official filing with the SEC has been made.
Now, as we suggested, we'd normally be cautious of cryptocurrency directly but Coinbase is a cryptocurrency exchange that charges a small percentage fee on a transaction, so you aren't exposed to the same degree of volatility. Coinbase could be a direct listing rather than a public offering to raise cash, in which case the only shares available would be shares that insiders and early-stage backers would be prepared to sell as part of their exit strategy.
There are 43 million users on Coinbase, and it has the equivalent of over $90 billion of assets on the platform. There are 1,200 employees. If each employee is paid $100,000 the cost base would be around $120 million with probably not much else in overheads. It could be potentially quite profitable, depending on the volume. The average fee is 0.2%.
All we know about value is that it has raised $500 million privately and was thus valued at about $8 billion in 2018 - which seems like another century given what we've been through this past year. A figure of $77 billion was bandied around this week based on presumed OTC trades on the Nasdaq Private Market.
What sparked our interest this week was that Coinbase has appointed a new compliance officer. You need this if you're going to be faced with regulatory scrutiny. The appointee was global head of financial crimes at Stripe, the payment processing outfit. Stripe is purportedly being valued at $115 billion.
All this giddy pricing makes real economy technology titans like General Electric ($105 billion), Raytheon ($112 billion), Boeing ($126 billion) and Lockheed Martin ($94 billion) look positively good value for money - they make proper engineered stuff, have proper net asset values, and old-fashioned analysts like us can assign a proper value to them.
Talking of NAV there is no tangible data on Coinbase and no financials, but we'll keep tabs on this alternative cryptocurrency play.
The hypocrisy of do as I say, not as I do is politically alive and well in the US of A. The freeze and power outages in Texas took second place from Wednesday because a well-known Texas Republican senator jetted off to balmy Cancun in Mexico. We checked - the temperature was 29 degrees centigrade on Friday. Dallas, by contrast, was minus with a hard freeze warning, which is problematic for plumbing.
The optics didn't look nice even though the fellow quickly flew back, having been spotted. This is the same senator who criticised the mayor of Austin for taking a holiday in Mexico last November while saying that his own city's residents should stay home.
The rich are different from most, they have more money. The rich also have more COVID-19 vaccines. This week Great Britain has inoculated a third of its population and counting, sitting on a ginormous 407 million doses - enough to give a double-jab to every person, from new-born babies to nonagenarians, three-times over. Meantime, we learned that just ten countries had administered over 75% of the world's available vaccine supply. Based on 196 formally recognised countries that's a long way to go before the end is in sight. And with it a path to economic normality.
On the topic of economic normality, earnings season in the US is producing a decent crop of figures from listed companies, COVID-19 notwithstanding. Sure, companies like Walt Disney have seen parks attendance profits evaporate but the entertainment company's Disney+ channel shot up to 95 million paid subscribers. Several REITs we monitor have released good tenancy statistics and cash collections.
Australia and New Zealand have had a reasonable pandemic experience, relative isolation has its advantages but both governments have handled things reasonably well. Bendigo & Adelaide Bank reported interim earnings this week with cash profits up and bad & doubtful debts down - the share price soared. ANZ Bank too had a strong Q1 update on Thursday, they even had a provision and impairment release whilst capital adequacy was higher.
The shares of Australian banks on the ASX have been among the best performers in the world and are still not back to paying full dividends, but when they do, you'll get a decent yield - and none of the sovereign risk you run holding a South African bank, no matter how well-managed. On the topic of banks, we also learned this week that Berkshire Hathaway has sold off its remaining investment in JPMorgan Chase and has sold Wells Fargo down to only $1.4 billion. Mr Buffet is also buying into oil - mopping up Chevron.
We mentioned last week that iron ore is a useful barometer of China's industrial bounce back and is having benefits for Australia. Well, the mining colossus BHP reported half-year earnings this week and a stonking good result it was too. In a note entitled "Dividend delight" we raised our estimate for the full year dividend in US dollar by 23% which amounts to an extra $0.40 per share.
Fun fact: at the current spot price of iron ore our BHP earnings forecast would be almost 30% higher this year than our base case. Iron ore contributed 70% of Group earnings for the six months, up from 64% for the year ended June 2020 and 59% for the half-year ended December 2019. We estimate BHP will make $29 billion for the twelve months in earnings before depreciation - there is an old British saying, where there's muck there's brass.
One has to make a visit to Port Hedland, 1,400 kilometres north of Perth, to get a true sense of the scale of Australia's iron ore mining. Mile long train sets belonging to the likes of BHP, Rio Tinto and Fortescue haul the ore from inland to the port for loading on ships bobbing out in the harbour, voraciously gobbling up the stuff for shipment to China's steel industry. In 2020, China produced 1.05 billion tons of steel, a first. There is no sign of that changing. Imports of iron ore amounted to 1.17 billion tons, also a record. It's all oresome.
Sibanye-Stillwater also produced a bumper full year result although largely priced in on the stock market. The trailing price earnings ratio of 6x may seem cheap but we'd advise to not let that be an arbiter of value. There are new investments but far less than would be the case because of South Africa's hostile mining backdrop.
Gold Fields too reported a bumper 2020 result. Fun fact: the company has two of its four gold assets in Australia called Granny Smith and Gruyere, apples and cheese go well together. South Africa is becoming almost an irrelevancy at 10% of Group production from South Deep and 4% of cash flow. Australia is 45% of production and 57% of cash flow.
Back to Disney and the subject of entertainment. There are grumblings about the Multichoice subscription cost. Cancel and stick with Netflix some say. Ja well, no fine. Bridgerton can't compete with the Premier League, Currie Cup and the Dafabet Warriors vs Six Gun Grill Cape Cobras at Kingsmead. And DSTV isn't sleeping on the entertainment job, pumping up local content across Africa (the SABC isn't and can't because it is run by the ANC idiocracy). The Multichoice share price has held up well since listing.
If you reckon Multichoice is pricey spare a thought for Disney. It pays the National Football League $1.9 billion a year for its Monday Night Football package, a deal that expires this year after a decade. This week the NFL asked for a 100% increase from its four network partners of which Disney is the biggest through ESPN. The NFL collects $5 billion a year from Disney, Fox, CBS and NBC. That's a new bill of $3.8 billion, assuming Disney coughs up.
A doubling of NFL television rights implies compound annual growth over ten years of 7.2% pa. Based on US CPI an inflation linked rise would get us to $2.3 billion for Disney, which suggests American football price inflation is 65% more than a US basket of goods and services.
This week we also issued "Carnival or just a Bloody Circus?" in which Andrew says Carnival Corporation, a cruise line business, is to bond investors what GameStop is to equity gamblers. Andrew also did a super note recently on GameStop entitled "Stop the Game - I want to get off" so if you want a proper quantitative take these notes are a must read.
Cruise lines were on an ocean wave until COVID-19 rudely scuppered the show. But we now have a new show, the high-yield debt market show for a high-wire circus act performed by bond junkies. The variance in implicit corporate survivability for Carnival, in just one calendar year, is off the charts, as our numbers show. If you think GameStop mania is a one-off equity markets thing then think again, there is plenty of evidence we're unearthing about potentially catastrophic insanity - financial markets are the new circus, even as the traditional circus with acrobats is shut down by COVID-19.
And finally, with the world population heading to an unsustainable 8 billion and with other species and habitats being eradicated, it was good to learn this week that scientists have cloned the first US endangered species, a black-footed ferret duplicated from the genes of an animal that died 32 years ago.
Elizabeth Ann was born in December, but announced this Thursday, to a tame domestic ferret and is being raised at a breeding facility in Fort Collins, Colorado. The cute little black-footed ferret is a genetic copy of Willa who died in 1988 and whose remains were frozen in the early days of DNA technology. This cloning achievement is promising for other endangered species.
The big deal for us this week is a black-footed ferret duplicated from the genes of an animal that died 32 years ago, a triumph of science - much like vaccines.
Thank you all for visiting us.
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