Reporting Season
It has been a busy month with US reporting season providing some bumper profits, yet cautious guidance. A number of companies beat their earnings estimates and guided the market to weaker profit growth in the next quarter and year.
Quarterly earnings are interesting, yet often have little to do with the long-term returns of a business. Reading Google’s 2011 quarterly report with revenues of around $8 billion, tells you almost nothing about how Alphabet would go on to generate $65 billion a quarter a decade later. The market’s obsession with short-term results clouds true long-term thinking.
“Nobody buys a farm to make a lot of money next week or next month” Warren Buffett
Safran
Safran upgraded their free cash flow forecast for the year from around €1 billion to €1.5 billion. To generate €1.5 billion in free cash flow during this environment is truly extraordinary and highlights the resilience of Safran.
After the US announced they are opening up their borders, Safran shares have rallied close to 10%. We still strongly believe that the market is missing the growth opportunity for Safran now that the 737 Max has commenced flying together with borders reopening.
Fiducian
Fiducian has announced a significant purchase of Peoples Choice Credit Union Financial Planning operations with $1.1billion FUM.
We calculated that this is an approximate 20% increase to their valuation.
Fiducian is a unique beast in the finance world with their triple clip strategy. They clip the ticket on financial planning, funds management and platform fees. Being able to take margin from these three businesses allows them to buy other businesses with only one stream of revenue and add the other two streams and significantly increase the margin of the acquisition.
Their net cash position allowed them to make this significant acquisition without needing to dilute shareholders with potentially risky capital raisings.
Meta (Artist formerly known as Facebook)
Facebook is now called Meta.
The name change was announced at the Facebook Connect augmented and virtual reality conference in late October and to say that Mark Zuckerberg is energised and excited about the Metaverse would be an understatement. The new name reflects the company’s growing ambition beyond social media.
The Metaverse is simply an online virtual world which will be accessed hopefully through Meta (Facebook) VR platform and headsets (Oculus). In this world, Facebook intends to have a network effect of millions (potentially billions) of people who interact in a virtual way.
Whilst it is exciting, it may or may not work. Someone else might build the platform that becomes ubiquitous. The first major social network, Myspace, was not the long-term winner.
Zuckerberg’s foray into the Metaverse doesn’t materially change our valuation of Meta. The core businesses in Meta (Facebook and Instagram) continue to generate enormous amounts of cash and will do so at increasing rates into the future. The slated $10 billion spend on the Metaverse over the coming years, will be a fraction of their profits over the next 10 years.
The price of the company is undemanding at just under 20 times next year’s earnings after cash.
The Metaverse bet is essentially a free lottery ticket. If it works, it could change the world and make Meta copious amount of money. If it doesn’t, Meta will still generate increasing profits in the coming decade.
Starting December 1, Facebook’s stock ticker symbol, FB, will switch to MVRS and this spells the end of the widely- known trading acronym FAANG coined nearly a decade ago which stood for Facebook, Amazon, Apple, Netflix and Google parent Alphabet.
Alphabet
Alphabet continues to exceed all expectations with a 41% year on year increase in revenues for the quarter. We have owned Alphabet for approximately a decade and we could not have guessed that it would be this profitable in 2021 with $18.9 billion in net income for the quarter.
Google Cloud continues to grow very quickly at 45% per annum.
YouTube is still growing at 43% per annum.
As our second largest position, we remain very comfortable with the holding, considering that it is surprisingly not expensive after subtracting their $142 billion in cash and assuming that their “other bets” division are not negative assets.
Berkshire Hathaway
Berkshire had a solid result. They continue to buy back stock at a reasonable rate of around 4.4% per annum.
Warren will not buy back stock unless Berkshire is undervalued. Thus, Berkshire is undervalued in a market that is probably overvalued with many areas of the market fuelled with wild speculations.
We continue to believe that the risk to Berkshire is a positive outlook on the stock and fewer buybacks. Our range of outcomes for Berkshire is somewhere between 7% and 15% per annum over the next decade. If the stock rises, then it will only return around 7% per annum. If there is weakness in the stock and buybacks continue at around 5% per annum, then the expected return for Berkshire is around 15% per annum.
Many worry about a market correction. If you are retired and can’t handle the volatility, then this is potentially warranted. If you are a long-term holder who does not intend to sell during a dip, then one of the best things that can happen is a market correction, only if the businesses you own are buying back stock and have spare cash and do not need to raise capital under duress.
Around 90% of our portfolio is companies with little to no net debt and most of the companies are buying back stock with their spare cash. If there is a market correction, I expect us to have higher returns over the next decade than if the market doesn’t correct.
Amazon
Amazon had a weaker result than the market was expecting. With 15% growth in revenues, it highlighted the difficult of having higher comparison from such a buoyant Covid home shopping period a year ago.
The segment that is more important to long-term holders was more than acceptable. The Amazon Web Services (AWS) reaccelerated to 38% growth.
As AWS becomes a larger part of Amazon, sales should continue to grow at a reasonable rate and its higher operating margins should continue to increase Amazon’s overall margin expansion.
Microsoft
Microsoft had a result that we were expecting, however surprised the market on the upside. We have highlighted in the last year that as Azure becomes a larger part of Microsoft that revenues and profits would accelerate. Revenues grew at 22% and operating profits grew at 28%. To put this in perspective, until last year when Azure started to rapidly increase Microsoft’s revenues and profits, revenues only grew at 8.7% a year for a decade.
We continue to expect Microsoft to “win the cloud” with Azure growing at solid rates for a few years to come.
Satya Nadella is a fantastic leader and we couldn’t be happier that he runs our third largest holding.
Thank you again for your continued support,
From the Team at Valor
Performance of Model Portfolios as at 31 October 2021*+
