Tuesday, 20 March 2012 - 20:00
Charts
Earnings and PE 9 March marked the 3rd anniversary of the bottom of the 2007/2008 bear market, where the S&P500 index declined a massive 57% to 9 March 2009 from its October 2007 high. Then in just 2 years, the same index gained 100% from the lows made! Most global stock markets followed a similar pattern.
In trying to understand valuations, let’s revisit some basics. The value of a business is the discounted value of its future earnings at an appropriate discount rate. This should be relative easy to arrive at, but we know that because we are dealing with future uncertainty, there is a range of possible outcomes, hence the ongoing price volatility.
At the core, there are only 2 variables that affect the value of a share of a business – the income that it will generate, and the discount rate applied to that future income stream in order to arrive at a net present value. Expanding on each of these:
• A 100% shareholder has a claim on all of the future earnings generated by that business. Therefore a part shareholder has a proportional share in those future earnings. Some of the earnings will be received by way of a dividend, while typically the bulk will be reinvested back into the business for future growth and hence higher future dividends.
• The discount rate applied to the future stream of income is the second main factor in valuing a company. While the discount rate is affected by the prevailing interest rates, a rational investor will want to apply a higher discount rate to a more cyclical business, while one with superior management, a strong balance sheet and better quality and higher earnings growth, will justify a lower discount rate.
Instead of quoting discount rates, use is made of the price to earnings (PE) ratio, which is more or less the inverse of the discount rate. i.e. a company with steady and growing earnings, a strong balance sheet and quality management will justify a higher PE ratio. This metric is widely used and typically easier to understand.
The effect of the multiplication of these two factors can and does cause the price volatility that we see on a daily, weekly, and monthly basis. For example look at the reported earnings per share for all the S&P500 companies. It peaked in mid-2007 at around $85. Analysts would have been forecasting various forward levels around this, but then came the global financial crisis and earnings fell dramatically to below $10 a share by mid-2009.
As reduced earnings were quickly factored into investor forecasts throughout 2008, so share prices tumbled, eventually ending down almost 60% off the peak. But the interesting thing is that just as quickly as company earnings fell, so they have reversed all the way back up again with the 12 months to the fourth quarter of 2011, with almost all companies having reported, reflecting earnings per share of $87. Forecasts from S&P expect these to rise to $100 for the full 2012.
The chart below reflects S&P500 earnings from 1970 with the massive 2008 dip and subsequent recovery.
Source: Crestmont Research
In addition to the sometimes very volatile earnings, the multiple that investors apply to those earnings has a huge impact on valuations over various periods. I.e. an investor might suffer a loss from a company, which delivers on its expected earnings, because the rating on these earnings goes down. For example earnings may move up as expected from say 23 to 35, but the rating drops from an initial 18 to 10, resulting in a price decline from 414 to 350.
The only certainty with any investment is the price paid. Other than this, an investor does not know the exact details of the future earnings stream or the future price that an investor will be willing to pay for those earnings, making forecasts difficult.
A prudent investor will look at both the level of earnings and the rating of these earnings when making an investment.
Kind regards,
Ian de Lange
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966
Tue, 20 Mar 2012
Top News
South Africa's rand fell more than one percent against the dollar on Tuesday, breaking a 3-day advance and ending as the weakest performer in a basket of 20 emerging market currencies as the greenback rallied and concern about Chinese growth hit commodity currencies. Full story
South African shares wilted on Tuesday on renewed concerns about China's growth outlook with resource stocks including Anglo American leading the wider market down. Full story |
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More than 30 bombs struck cities and towns across Iraq on Tuesday, killing at least 52 people and wounding about 250, despite a massive security clampdown ahead of next week's Arab League summit in Baghdad. Full storyResponding to an international petition, celebrity tweets, and spreading public outrage, the U.S. Justice Department opened an investigation on Monday into the shooting of a black teenager by a neighbourhood watch captain who escaped arrest. Full storyPrime Minister Mario Monti began a final push on Tuesday to forge a deal with trade unions on labour reform that marks a crucial test of his ability to revive Italy's chronically uncompetitive economy. Full story |
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Markets | Financials and commodity-linked
stocks were among the top fallers as European shares retreated
from eight-month highs on Tuesday, after waning growth in China
and. . . Full story | | Britain's top share index
suffered its sharpest fall in two weeks on Tuesday, as concerns
over materials demand in top consumer China hit
commodities-linked. . . Full story | | Renewed concerns about
China's economic growth weighed on global stocks and boosted
bonds on Tuesday, while oil prices dropped more than 1 percent
on. . . Full story | | U.S. stocks fell on Tuesday
after a 3-day winning streak for the S&P 500 on concerns that
China's economy may be slowing down.. . . Full story |
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| Gold fell for the first time in
four days on Tuesday, hampered by the strength in the dollar,
which profited from the growing. . . Full story | | U.S. stocks fell at the open
on Tuesday, taking a breather after the S&P 500 advanced for a
third straight session and moved. . . Full story | | Hong Kong shares finished
lower in weak Tuesday trade, underperforming most Asian peers as
investors took money off the table with the ongoing. . . Full story | | European shares fell for a
second day on Tuesday, as investors continued to take profits
after a rally to an eight month high. . . Full story |
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SA Business | A South African lawyer said on Tuesday he was preparing a class action lawsuit against leading gold mining firms on behalf. . . Full story | | The number of people employed in South Africa's formal sector inched up only 0.3 percent in the fourth quarter of 2011. . . Full story | | Anglo American is looking for thermal coal assets in Australia and Indonesia, especially as prices of potential targets have come down,. . . Full story | | Fatalities are falling in South Africa's mines as the industry is subjected to a surge of inspections, and the country's mines. . . Full story |
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| Anglo American said on Tuesday it was looking to acquire iron ore assets in Australia and Africa as it strives to increase its footprint in the sector.. . . Full story |
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Company News | JD Group Ltd. ("JD Group") and Steinhoff shareholders were referred to the important dates and times in respect of the partial offer as set out in the circular to JD Group shareholders dated 11 February 2012. JD shareholders are further referred. . . Full story | | Linked unitholders are advised that the following individuals have been appointed as independent non-executive directors of the company with effect from 20 March 2012. Both individuals will serve on the board and audit and risk committee of the company:
* Dr. . . Full story |
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Company Results | Revenue for the year ended 31 December 2011 shot up to R176 million (2010: R108.6 million). Gross profit soared to R72.2. . . Full story | | Revenue for the year ended 31 December 2011 increased by 9% to R1.6 billion (2010: R1.5 billion). Operating profit jumped by. . . Full story | | Turnover increased to R1.7 billion (R1.3 billion). Gross profit rose to R388.6 million (R308.4 million) and operating profit improved to R145.7. . . Full story | | Sales went up to R858.6 million (R792.6 million) but profit from operations more than halved to R23.8 million (R56.8 million). Profit. . . Full story |
World Markets (Spot Prices)
Name | Time | RP | Move | % Move | JSE Overall | 17:00 | 33878.56 | -335.51 | -0.98% | JSE Top 40 | 17:00 | 30026.43 | -369.10 | -1.21% | JSE Gold | 16:59 | 2423.36 | -16.00 | -0.66% | JSE Financial | 17:00 | 24749.08 | -80.62 | -0.32% | JSE Industrial | 17:00 | 37541.65 | -95.13 | -0.25% | JSE Indust 25 | 16:59 | 31508.83 | -111.25 | -0.35% | JSE Resource | 16:59 | 50562.83 | -1269.85 | -2.45% | DJ Futures | 19:40 | 13110.00 | -70.00 | -0.53% | DJ Ind | 19:41 | 13183.73 | -55.40 | -0.42% | SP 500 | 19:56 | 1405.16 | -4.59 | -0.33% | Nasdaq | 19:56 | 3067.91 | -10.41 | -0.34% | FTSE 100 | 18:35 | 5891.41 | -69.70 | -1.17% | DAX | 19:06 | 7054.94 | -99.28 | -1.39% | CAC40 | 19:06 | 3530.83 | -47.05 | -1.32% | Nikkei | 19/03 | 10141.99 | 12.16 | 0.12% | Shanghai | 09:26 | 2376.84 | -33.35 | -1.38% | Hang-Seng | 10:26 | 20888.24 | -227.05 | -1.08% | All Ords | 07:38 | 4365.60 | -15.60 | -0.36% | NZSE 50 | 06:46 | 3487.01 | 1.04 | 0.03% |
| | Name | Time | RP | Move | % Move | Gold | 19:59 | 1647.80 | -16.11 | -0.97% | Gold/Rand | 19:56 | 12533.91 | 5.94 | 0.05% | Gold/R kg | 19:56 | 402965 | 531 | 0.13% | Silver | 19:59 | 31.9170 | -.9570 | -2.91% | Platinum | 19:59 | 1652.00 | -23.50 | -1.40% | Palladium | 19:59 | 690.30 | -9.60 | -1.37% | R157 | 17:06 | 6.93 | .10 | 1.39% | R204 | 17:06 | 7.81 | .10 | 1.23% | Brent Crude | 19:56 | 124.13 | -1.42 | -1.13% | Rand / Dollar | 19:59 | 7.6035 | 0.0720 | 0.96% | Rand / Pound | 19:55 | 12.0348 | 0.0934 | 0.78% | Rand / Euro | 19:55 | 10.0664 | 0.0918 | 0.92% | Rand / NZD | 04:57 | 6.2216 | -0.0023 | -0.04% | Rand / AUD | 19:55 | 7.9823 | -0.0177 | -0.22% | Yen / Dollar | 19:58 | 83.6000 | 0.2250 | 0.27% | Euro / Dollar | 19:55 | 0.7557 | 0.0005 | 0.07% | Dollar / Euro | 19:59 | 1.3228 | -0.0009 | -0.07% | Pound / Dollar | 19:55 | 0.6305 | 0.0014 | 0.22% |
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Click here for the Sharenet Spot Price page
The JSE Today
Trading Statistics
Date | Adv. | Decl. | Unch. | Actives | Volume | Value | Trades | Orders |
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20/03/2012 | 147 | 201 | 71 | 419 | 320,376,263 | R16,326,238,750 | 108234 | 2366351 | 19/03/2012 | 136 | 191 | 76 | 403 | 217,505,223 | R10,705,215,921 | 82496 | 1813299 | 16/03/2012 | 171 | 195 | 52 | 418 | 346,257,724 | R18,500,235,126 | 99503 | 2378395 | 15/03/2012 | 136 | 214 | 75 | 425 | 365,887,884 | R25,512,678,837 | 183171 | 2671292 | 14/03/2012 | 250 | 117 | 68 | 435 | 380,934,505 | R22,163,507,388 | 130964 | 2383594 |
* Includes all listed instruments on the JSE
Index Summary Index Name | RP | Move | % Move | Top 40 | 30,026.43 | -369.10 | -1.21% | Industrial | 37,541.65 | -95.13 | -0.25% | Mid Cap | 47,405.25 | 26.69 | 0.06% | Small Cap | 35,997.26 | 291.64 | 0.82% | Resource 20 | 50,562.83 | -1269.85 | -2.45% | Industrial 25 | 31,508.83 | -111.25 | -0.35% | Financial 15 | 9,383.98 | -36.30 | -0.39% | Financial & Ind. 30 | 35,136.66 | -149.15 | -0.42% | All Share | 33,878.56 | -335.51 | -0.98% | Oil & Gas | 28,189.53 | -447.99 | -1.56% | Mining | 32,615.16 | -834.05 | -2.49% | Gold Mining | 2,423.36 | -16.00 | -0.66% | Platinum Mining | 61.06 | -.01 | -0.02% | GENERAL MINING | 8,246.46 | -288.12 | -3.38% | Oil & Gas Producers | 15,156.99 | -240.88 | -1.56% | Basic Materials | 27,895.23 | -683.84 | -2.39% | Chemicals | 15,356.16 | -33.93 | -0.22% | Forestry & Paper | 14,153.09 | -169.43 | -1.18% | Industrial Metals | 30,483.36 | -591.49 | -1.90% | Industrials | 32,429.42 | 2.15 | 0.01% | General Industrials | 89,311.46 | 192.09 | 0.22% | Consumer Goods | 32,352.07 | -195.43 | -0.60% | Automobiles & Parts | 5,242.22 | 6.79 | 0.13% | Household Goods | 177.26 | -3 | -1.60% | Health Care | 39,769.10 | 196.03 | 0.50% | Beverages | 105.73 | -1.33 | -1.24% |
| | Index Name | RP | Move | % Move | Food Producers | 59,149.65 | 187.98 | 0.32% | Personal Goods | 483.90 | .80 | 0.17% | Consumer Services | 63,333.20 | -129.00 | -0.20% | General Retailers | 52,413.89 | 27.24 | 0.05% | Travel & Leisure | 3,739.52 | 6.14 | 0.16% | Media | 92.45 | -.21 | -0.23% | Support Services | 2,476.25 | -27.98 | -1.12% | Telecommunications | 69,696.40 | 369.09 | 0.53% | Financials | 24,749.08 | -80.62 | -0.32% | Banks | 46,778.31 | -221.11 | -0.47% | Non-life Insurance | 41,432.75 | 648.26 | 1.59% | Life Insurance | 19,944.59 | -81.19 | -0.41% | General Financial | 2,320.89 | -7.37 | -0.32% | Technology | 28,792.40 | 455.05 | 1.61% | SHARIAH TOP40 | 3,096.22 | -52 | -1.66% | FTSE/JSE SHARIAH ALL | 3,201.05 | -46 | -1.42% | COAL MINING | 27,261.36 | -541 | -1.95% | FTSE JSE Fledgling | 5,327.59 | 10 | 0.19% | FTSE/JSE Alt X | 1,234.95 | 16 | 1.33% | SA LISTED PROPERTY | 413.12 | | -0.09% | CAPPED PROPERTY | 336.55 | | -0.20% | RESOURCE | 27,920.54 | -674 | -2.36% | DIVIDEND PLUS | 196.00 | -1 | -0.26% | FTSE/JSE RAFI 40 | 7,098.51 | -77 | -1.08% | Capped Top 40 | 15,849.56 | -182 | -1.13% | Capped All Share | 17,138.24 | -167 | -0.97% | JSE TABACO | 4,938.79 | -17 | -0.34% |
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Click here for the Sharenet Index Summary page
Latest Consensus Changes** Code | Company Name | Status | Updated | REM | REMGRO LIMITED | BUY | 16 Mar | SBK | STANDARD BANK GROUP LIMIT... | SELL | 16 Mar | CPI | CAPITEC | BUY | 15 Mar | VKE | VUKILE PROPERTY FUND LIMI... | BUY | 15 Mar | FFA | FORTRESS INCOME FUND LTD | BUY | 15 Mar |
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Results Expected** Expected | Company Name | Fin. Date | 21 Mar 2012 | 1TIME | December 2011 (Final) | 21 Mar 2012 | ARROWA | September 2011 (Final) | 21 Mar 2012 | ARROWB | September 2011 (Final) | 21 Mar 2012 | DELTA | December 2011 (Final) | 21 Mar 2012 | RANLD | December 2011 (Final) |
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Recent Dividends** Share Name | Dec-Date | LDT | Pay-Date | Amount | ELBGROUP6 | 12-03-19 | 12-04-13 | 12-04-23 | R 0.0600 | ELBGROUP | 12-03-19 | 12-04-13 | 12-04-23 | R 0.1800 | VUKILE | 12-03-16 | 12-04-04 | 12-04-16 | R 0.7050 | O-LINE | 12-03-16 | 12-03-29 | 12-04-10 | R 0.0300 | CULLINAN | 12-03-16 | 12-04-13 | 12-04-23 | R 0.0100 |
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Ex Div** Share Name | Dec-Date | LDT | Pay-Date | Amount | SANTAM | 12-02-28 | 12-03-15 | 12-03-26 | R 8.5000 | SANTAM | 12-02-28 | 12-03-15 | 12-03-26 | R 3.5500 | IMPERIALP | 12-02-22 | 12-03-15 | 12-03-26 | R 3.3843 | CAPITEC-P | 12-02-29 | 12-03-15 | 12-03-26 | R 3.3658 | PSGFIN PREF | 12-02-29 | 12-03-15 | 12-03-26 | R 3.3473 |
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Upcoming AGMs** Code | Company Name | Date | Status | SDH | SecureData Holdings Ltd. | 20/03/2012 | Confirmed | HDC | Hudaco Industries Ltd. | 22/03/2012 | Confirmed | ZPT | Zaptronix Ltd. | 27/03/2012 | Confirmed |
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