I know you'll be expecting me to share a photo of John Fallon straight away here
Upside down, or something
Here's Sarah Palin
After this endorsement of Trump i found myself reading the transcript of her speech
It's here: http://www.buzzfee...j0QQ878#.xmGl661j1
“Well, and then, funny, ha ha, not funny, but now, what they’re doing is wailing, “well, Trump and his, uh, uh, uh, Trumpeters, they’re not conservative enough.” Oh my goodness gracious. What the heck would the establishment know about conservatism? Tell me, is this conservative? GOP majorities handing over a blank check to fund Obamacare and Planned Parenthood and illegal immigration that competes for your jobs, and turning safety nets into hammocks, and all these new Democrat voters that are going to be coming on over border as we keep the borders open, and bequeathing our children millions in new debt, and refusing to fight back for our solvency, and our sovereignty, even though that’s why we elected them and sent them as a majority to DC. No! If they’re not willing to do that, then how are they to tell us that we’re not conservative enough in order to be able to make these changes in America that we know need to be…Now they’re concerned about this ideological purity? Give me a break! Who are they to say that? Oh tell somebody like, Phyllis Schlafly, she is the Republican, conservative movement icon and hero and a Trump supporter. Tell her she’s not conservative. How ‘bout the rest of us? Right wingin’, bitter clingin’, proud clingers of our guns, our god, and our religions, and our Constitution. Tell us that we’re not red enough? Yeah, coming from the establishment. Right.
Some people say this is a piece of performance art
Piece of something that's for sure
Right wingin’, bitter clingin’, proud clingers of our guns, our god, and our religions, and our Constitution.
And so to Pearson
We were looking at the new logo earlier
Sums up how I feel
Oh , hello Neil
We were noting how it resembles Disney
Draw your own conclusions from that
But in the meantime, do look at this quote
What did you get yesterday Neil
With your bag of stock
But tell me this
If you had held on
Read the statement at 7am this morning
What would you have done at 8am?
sell sell sell sell sell sell
Yeah, thought so
with extreme prejudice
an awful statement
FT sales proceeds gone
to fund another restructuring
progressive dividend scrapped
where was the good news
We no longer have an economic interest in Pearson. Neither are we open to suggestions of being insiders
Although we did tell you about the job cuts in advance wink smile
That must be it
The City likes job cuts
and held dividends
So the stocks up cos the divi is being maintained primarily
I think so
For the record
Thursday’s trading update was the fourth profit warning under chief executive John Fallon, and the second time that he has announced a major restructuring plan since taking charge in January 2013
But look -- it's obv what's happened here
Fallon has gone all in.
He knows that another profit warning and another failed restructuring
But why would anyone think this plan will be any more successful than the last?
(I think this is actually the third -- they just didnt make the second properly public)
anyway it confirms
So he might as well promise a divid into the middle distance
what old ML readers already know
Cos if he fails he's out of a job anyway
I have the reverse midas touch
Neil -- stop beating yourself up
So if I say oil is heading to $20
you all know what to do
I sold my few bits of stock the day of the takeover
People have already been on whether our rating is under review
Rating was RUN of course
Perhaps I can come in to add some context, rather than gripe all show about our PA trading.
Oh yes, lets have some City wisdom
Sure! Let's start at the top. So, at Q3 the implied guidance was for c.£740m of operating profit
At Q4 it's c.£720m
Ah, but lower interest charge means EPS is bang in line. So, not a profit warning.
(Except for 2016.)
And it's a dollar earner remember
That has clearly helped
Unchanged final dividend of 34p per share, so 52p total, though the progressive policy's been abandoned in place of holding while Pearson rebuilds cover.
10% of staff on the way out, the majority in the current half.
To save £250m in 2016 and another £100m in 2017
at a cost of?
Against a restructuring cost of £320m, which makes it a bit nil-sum.
Unless you want to believe the 2018 guidance. And it seems the market does.
In terms of the five-point plan .........
1. creating a single product organisation for courseware and focus on personalised next generation courseware in areas where enrolments are growing;
2. integrating its North America based assessment operations and focus on personalised online assessments
3. reducing its exposure to large-scale direct delivery services and instead focus on scalable online, virtual and blended services
4. implementing major efficiency improvements across all enabling functions (technology, finance, HR) to achieve global best practice; and
5. rationalising the property portfolio.
Or to summarise: stop selling lots of stuff, but keep the customers.
Which is a good plan, right?
You take failing operation, sack its staff, but give its client list to a different bit of the business.
On the assumption that the customers will buy what they're told.
As we've seen, Government buyers are famously chilled out about behemoth "single product" organisations
That try to push standardised courseworks via erratic websites, solely to help their own margins.
That goes down really well in places like California, as we've already seen.
So, to the warning.
Point 5). Does that mean FT Towers is going to be sold to the Candy Brothers and developed into luxuty penthouse flats?
Almost certainly Neil -- but we are hear for the next two years, apparently
Yes, certainly. There's also that big ugly building in High Holborn, which seems a good redevelopment candidate.
Although that's subject to change, im sure
Or perhaps they could the office in the Strand and move the head office to an industrial park in Hounslow
Does it really need a grand office in central London to flog educational supplies?
Handy for the airport as well West London
Incidentally, look at the redevelopment of the old Vinopolis site. There's money flooding into Borough Market to make it a kind of South of the River Mayfair.
Already fully of bloody tourists
Honestly. Vinopolis development backed by the folk who own Burlington Arcade.
Ok, behind the curve on this
Didn't know that
I noticed the Whisky shop had closed, but that's all
Yup. Anyway, One Southwark Bridge looks an increasingly valuable piece of real estate.
Back to Pearson though.
First, context on the warning. Guidance of operating profit before restructuring charges of between £580m and £620m
(Or £260m to £300m including charges, which Pearson will be excluding from headline EPS).
Which is my way into Cazenove, which explains the moving parts.
The mid-point of the new guidance is c-9% below Bloomberg consensus operating profit and c-13% below consensus adj EPS, though we acknowledge that consensus was factoring in some elevated restructuring charges being included in EPS, and therefore ex restructuring charges guidance is further below consensus, in large part due to higher disposals (in the college books space).
We make the following changes to our estimates:
2016E: We reduce our organic revenue growth across all divisions (to -3.7% for
the group), especially in North America (JPMe -5.2%) given the continued tough
trading environment and known testing contract losses. Our revenues are broadly
stable given recent US$ strength (we now assume £:$ 1.43). Our operating profit
falls from £681m to £586m with c-£20m the lower 2015 starting base, c-£40m
due to college book disposals, +£250m extra cost savings benefit, -£110m of
incentive compensation, and remainder due to underlying market conditions
(higher ed enrolment pressure, smaller K-12 adoption year etc) and other
operational factors (including cost base inflation net of FX, cost of back office
simplification and extra product amortisation). Our adj EPS falls -18% to 51.7p
as a result of the reduction in our EBITA, together with an increase in our
assumed tax rate (from 17.5% to 19%). We estimate 1.0x dividend cover
(assuming a flat 52p dividend) and 1.3x end 2016E Net Debt/EBITDA.
2017E: The lower starting base of operating profit is broadly offset by the
additional £100m of cost savings expected. Again, our EPS reduces by slightly
more than the reduction in our operating profit due to a higher assumed tax rate.
We estimate 1.2x dividend coverage and 1.2x end 17E ND/EBITDA.
Last, we note that in 2018 we look for £800m of operating profit, which is slightly
higher than our previous estimate, and assumes that the company's new products
have good operating leverage and that education market conditions have normalised.
Hmm. I don't get why the market believes Pearson can reach this number? Is it because the cost savings kick in at that point?
It's a fair question. One times dividend cover in 2016 in a structurally declining market doesn't look great to me.
And that's the point here
every single rival has warned recently
to one degree or another
this isn't cyclical
And you're paying 15 times forward PE. That's a premium to the rest of the media sector.
(Which, of course, Pearson shouldn't really be in.)
What multiple are US education businesses on? About 6?
Depends whether you believe the P in the PE. Recent evidence suggests you shouldn't.
Big underlying downgrades for FY16E look nasty, but not unexpected with sentiment poor. Good news is a new plan, but at a cost and more oriented to savings rather than a growth rebase, which we would have preferred. Investors will make up their own minds on execution capability/delivery as well as structural pressure, but we believe the maintained dividend is affordable given the strong B/S and gives a reward to offset the risks. ‘Perfect’ delivery would imply a stock on sub 10x P/E in CY18E.
And Ian Whittaker, who really, really hates Pearson.
Liberum, of course. Wall of text incoming.
Oh yes, let's have that
PEARSON (KEY SELL, 540P TARGET PRICE): Conference call has finished. Shares up 10%, presumably because the bulls on the stock believe the management are taking decisive action to turn around the company. We do not believe it will and investors should selll into the strength. Our key points: (1) the assumptions laid out are too bullish based on what is happening - Pearson is suggesting that 17 will see stabilisation with 18 returning to growth (remarkably similar to what they suggested in 2013 when they talked about FY14 stabilisation and Fy15 growth and then disappointed) but that peers suggest that book rentals continue to make market share gains in US higher education; Common Core is falling apart; state budgets in the US, even when growing, are not resulting in higher education spending; (2) Some of their strategy assumptions look misplaced - for example, they are making that US universities are betting bet on online programmes, when the evidence suggests the trend is turning against US online higher education; (3) Execution risk is extremely high - the company is essentially asking shareholders to trust them - again - that they can deliver the numbers when many of the factors influencing their numbers are out of their control (e.g. book returns); (4) This may seem unfair but Pearson's commentary and explanations of their problems seem remarkably similar to those that other structurally challenged industries a decade ago such as directories and newspapers were using to explain their problems i.e. continued explanation of warnings by pointing to "cyclical" and / or policy and regulatory factors being worse than expected to explain the misses with it usually taking the fifth or sixth profit warning before market consensus switched to realising the problems are structural in nature. Reiterate as key Sell.
I think Neil Campling hates it even more
I like the cut of his jib
Assumptions to hit 2018 targets still assume organic revenue growth returning in 2017 (after flat organic growth for six years) reflect market share gains, a stabilizing market next year, new growth services, strong China and Brazil markets and no further decline in common core (remember US states are beginning to replace Pearson and 21 could follow Texas lead). The company has previously admitted it is difficult to predict enrollments but these new plans assume enrollment stabilization numbers based on a range of assumptions of US unemployment rates. They don't even fully account for the structural decline and policy impact (gainful employment rule introduced seven months ago) which remains a huge industry headwind.
So, in summary, the operating profit guidance of £580-620m includes the benefit of £250m of savings ex the £320m implementation cost, underlying of £330-370m. This compares with 2015 Op profit of £720m. It is a severe decline. This is the second major restructuring plan in three years. If management is given the benefit of the doubt, which is a stretch given the history of mixed execution, and assume the valuation remains at 9.4x FY16 EV/EBITDA, and assume the mid-point of the adjusted numbers this takes the stock to 797p. Which perhaps explains, in part, the positive price action today. However, if we take fairer value 6x FY16 EV/EBITDA (closer to the education peer group multiple) fair value is 492p. As such we would use today's strength to SHORT MORE.
So, yes, our own recommendation is under review
I'm going to say SPRINT
(I notice fjp73 is as annoying as ever. can I zap him?)
This is markets live
12% on the price currently; 16% earlier. Madness
(dying to use the function again)
It's permanent now
(@NH: he's 10% of our comments per day. Think of the audience engagement metrics.)
We lost the sin bin functionality
Let's move on
On what? Not sure
Oil price is down again
Guess Wall St rallied in to the close
I'm intrigued by this angle various strategists and economists are using
That markets are 'wrong"
Fundamentals are fine.
Markets off in their own queasy world
markets moves supposedly don't effect the real economy
But the obv question then -- is why has the Fed and other spent the past eight years pumping up public markets with QE
I thought that was to prime the underlying economy, right?
Guess we should look at the movers, other than Pearson
I guess we should. Other than Pearson. Though it's a Thursday so it's all a bit trading statement-y.
(It's been fun but I have a meeting. Must dash)
(Seeya Neil. Thanks for joining)
We can do the miners quickly, I guess.
(Any time. If you have any commods questions in future give me a shout)
S32 numbers provide us a hook.
Doesn't autoprice. Shares up 3.5% at ....... wait, 44p.
What was the spinoff at? 110p or so, wasn't it?
So, S32 looks exactly like all the other mining updates.
(@Bored with banks: actually, not so much. They're zapped with zero tolerance as soon as identified.)
Production mixed, guidance reduced, cost savings to the fore.
End markets hopeless, management muddling through.
You know the scene. Here's Deutsche Bank to put some numbers on it.
S32 has reported an 11% decline in Cu Eq for the Dec Q, below our forecast
7% decline, due to lower production from SA Manganese and Illawarra. The
remaining assets performed strongly though and S32 has reduced net debt by
US$81m in the last three months to end 1H16 with US$115m of net debt (DB
US$159m). This indicates to us that the US$350m cost out program is well on
track. S32 has not announced any asset closures/restructures aside from
confirming the early termination of its power contract in Brazil (which has
reduced our NPV by 4%). S32 is trading at 0.65x P/NPV, remains FCF at spot,
has compelling cost out potential and has an improving balance sheet, Buy.
The Alumina, Aluminium, SA Coal, Cerro Matoso and Cannington assets were
all steady QoQ. However manganese ore production declined (177kt ore, -71%
QoQ) due to the suspension of Wessels and Mamatwan in Nov 2015, and coal
production at Illawarra (1.5Mt, -41% QoQ) was impacted by geological issues
and a longwall change-out. Guidance at Illawarra has been reduced by 7% to
8.25Mt. We expect 3Q production to be impacted by the continued curtailment
of SA Manganese (this is positive for cash flow though), SA aluminium (22
pots offline, also cash flow positive), Illawarra Coal (two more longwall
change-outs) and GEMCO (weather/planned maintenance). We remain in line
with FY16 guidance for all assets which implies a 7% Cu Eq decline YoY.
S32 has managed to reduce net debt by US$81m in the quarter to US$115m,
well ahead of our US$159m estimate. This has been most likely achieved
through lower costs and capex. The Appin Area 9 project is three months
ahead of schedule and 30% below the US$845m capex budget with
commissioning starting this Q. The new and more efficient longwall will
replace the older West Cliff longwall paving the way for labour restructuring at
Illawarra. Our group capex estimate of US$624m remains below FY16
guidance of US$700m. S32 has terminated its power contract with Eletronorte
in Brazil earlier than we had anticipated. S32 will still realise a US$60m
underlying EBIT contribution in FY16, however removing this contract has
reduced earnings in forward years and lowered our NPV by 4% to US$1.35/sh.
And Jefferies, which illustrates its price target as a kind of reverse speedometer thing. In case you can't understand what a price target is.
South32 reported a solid quarterly result with the company remaining on track
to meet full year guidance at the majority of its operations. Disappointing
production results at Illawarra were offset by strong performances at its lower
cost operations and sharply lower capital costs at the Appin Area 9 project. Our
valuation increases +4% to $1.73/share due a weaker AUD (circa $170-200m
positive annual revenue impact) which in part is offset by our decision to lift our
provision costs from $750m to $1,500m. We remain POSITIVE.
While on the sector ......
Citi capitulates on Anglo American.
Anglo underperformed the major mining companies in the “super cycle” and has now underperformed in the subsequent bear market. We examine what led to this underperformance and conclude that the company faces a number of structural headwinds. Our analysis of the company’s asset portfolio against commodity price volatility (past 6 years) suggests a probability of the company’s NPV being less than zero of around 27%. Following our recent commodity price changes ( Global Commodities Focus ) our target price falls to £2.00 from £3.00, and we downgrade to SELL/High Risk from Neutral/High Risk
Though they've changed their research portal to be annoying, so I can't share any more than that.
what? They are saying there's a one in four chance it's worthless??
Well that's quite a turnaround i think
Well, it's increasingly difficult to know how on earth to value miners.
At least, how to value the equity.
Which in most cases is dwarfed by the debt.
Morgan Stanley's mining folk kick around the theme this morning.
At equity cycle bottoms, valuation becomes more complicated. Net
earnings and free cash flow disappear and book values are subject
to impairment risks. The shift in weighting from equity to debt within
enterprise value due to negative free cash flow and weak earnings
adds extra complications.
Long term historic trailing figures for BHP Billiton and Rio Tinto underline
these issues. P/B has declined to around 1.0x with the RoE declining to a 35
year cyclical low of 0% or less in 2016. However, trailing EV/EBITDA is actually
rising as the book value of debt does not adjust to the cyclical decline in
For companies with very high financial leverage like Anglo American or First
Quantum, this analysis is complicated further by the fact that the market value
of debt trades far below book value thus reducing the enterprise value (if we
were to mark to market).
Was looking at First Quantum yesterday. There's a special sit .......
Trying to sell a Lapland copper-platinum mine to fund a Panama copper mine. Net debt about five times its market cap.
Doesn't trade much over here, though, which might be a blessing.
Anyway, back to MOST.
While taking note of those caveats, the chart shows that - with exception of the
deep global recession of the early eighties and the cyclical earnings peak in
2011 - Rio Tinto and BHPB's valuation is reasonable. Although it is still some
way off the historic (absolute) lows of 0.5x P/B and 4-5x EV/EBITDA in the early
Pearson's going up again!
Jefferies just upgraded.
Educational publishers have a future, by delivering on the formative assessment imperative. PSON appear to reference this imperative in the FY15 statement, promising. In addition, the statement lessens a number of negative catalysts for the stock, the FY16 guide in particular. Re-structuring phase II is positive, the cost-cutting aggressive. Upgrade to BUY, PT 880p
That's from underperform.
There is a future for educational publishers. As for other publisher 'verticals', success is dependent on delivering digital technologies that move the value proposition away from content. In our opinion, the most compelling offers deliver on 'formative assessment' by incorporating 'adaptive learning' functionality into digital products and services. Educational publishers that deliver will succeed.
Does PSON get it? Probably, but in recently PSON has wrapped everything in complexity, and the question is more difficult to answer than it should be. Some clarity today.
Getting past some meaningful negative catalysts. The FY16 guide, more or less 10% below consensus, 50p to 55p seems reasonable. The announced re-structuring, cost cutting in the main, is aggressive, 4,000 FTE's, c.10% headcount. The dividend policy shift, less meaningful and leverages asset sale proceeds to sustain 2016. But most importantly, the statement reduces some of the profound uncertainties around numbers. Still much work to do on simplicity and transparency, but reassuring to hear Fallon talk about aspirations there.
Move to BUY. PSON off 47% LTM, FTSE 100 down 16%, dividend yield will sustain north of 6% and we believe the financial risk seems skewed to upside, should Fallon deliver.
"financial risk seems skewed to upside, should Fallon deliver" ........
That's true, I guess.
But I don't think it's a buy case, personally.
As for other publisher 'verticals', success is dependent on delivering digital technologies that move the value proposition away from content.
oh yeah, so easy to deliver
Hey, we haven't done the Wolf Hat!
Wolf hat. Always the highlight of Econ-con.
Each year we look out for his hat appearing on CNBC
And here it is!
Thanks to @HaidiLun for snapping that
He needs the extra headroom to cool his gigantic brain.
Got to confess i don't monitor Davos on CNBC
Nope. Ditto. We should, however, do a montage of Wolf hat.
The CNBC astons below would give a kind of potted history of financial markets.
hehehe -- very true
ECB -- not much to add
I'd be surprised if Draghi does anyting radical
Too much else going on elsewhere
He'll want to keep powder dry
What little he has left
When markets this volatile, sensible central bankers stand back
ie, non-Chinese central bankers
(roddy1234 -- no, but there will be more and better quality video specials)
Allied Minds bid just dropped 6p or so. Looks like someone's trying to shift a load.
Live price 252p. Lumpy though.
People just have to hold their nerve on that one -- put it away and forget about it.
K. I've no view.
Otherwise among the fallers, not sure what caused the Home Retail selloff earlier.
Actually, still down 5%.
Arbs seem to be without explanations, other than noting that Tosca seems to be the main buyer out there.
Tosca's against the bid, for whatever reason.
As per ........
In sellside, Morgan Stanley downgrading Rolls-Royce.
Largely because they prefer Safran.
Savings enable EPS and cash flow recovery, but from an elusive base:
Our new 2016 EPS of 26.5p is -50% vs. 2015 and -5% vs. consensus. While
Civil issues are well flagged, continued weakness in Power Systems & Marine
end markets (see What the Data Say) means a risk of more disappointment.
As a result, it is hard to establish a sustainable level of future profit for RR and
when that might be achieved. We assume RR cuts group costs by £150m by
2017, rising to £200m from 2018, and that by 2020 £175m of dual running
costs in Civil have also been eliminated. The result is scope for EPS to return to
2015 levels by 2020 (22% CAGR) and for free cash to move from a ~£420m
outflow in 2016 to an inflow of ~£670m by 2020, with greater beyond.
Base case more than priced in, risk of de-rating: RR has stopped
underperforming since the Nov update (+7% since 13 Nov vs Civil Aero avg. -
9%) despite a weaker outlook for Land & Sea and the recovery we model looks
more than priced in. The market appears willing to pay a premium for RR vs
peers, perhaps assuming a quicker recovery than we do, hence we fear a
marginal de-rating. RR trades on ~13x 2018e EV/EBITA discounted back, a
~30% premium to MTU (11x) and Safran (9x), while RR's long-term historical
avg. for 1-yr forward EV/EBITA has been 11x, a ~13% discount to MTU (12.5x)
and Safran (13x), likely due to differences in business mix and accounting. With
the quality of Civil profits set to improve at RR, we can argue for some of the
discount to close. To set our new PT we apply 12x and discount back at 8%,
arriving at 515p for 6% downside vs. 37% upside at Safran and 19% at MTU,
hence we move RR to a relative UW.
This is notable mostly because Morgan Stanley's house broker to Rolls.
I know there's loads of trading statements we havent covered
And so on
Can't look at everything
INdeed. Most haven't been covered because I haven't read them.
Halford here http://www.investe...1601210700055089M/
Stocks on a tear
Oh, and still nothing to add on Ocado ........
As always when a 20% short gets toasted, there's all sorts of conspiracy theories circulating.
None of which are worth your time or attention.
Oh, and an operational notice before we close.
The Palin picture at the start of the show needs to be credited to pro snapper Gage Skidmore, via Flickr.
And with that, let's end.