Friday, July 29, 2011

Market Timing with ECRI

I like these guys. Their announcements are clear and straightforward. And if they don't know something, they say it.

They do not make predictions, they just observe changes in their indicators. Their Weekly Leading Index (WLI) tracks short term changes in the economy. It has an average lead of 10 months at business cycle peaks and three months at business cycle troughs. The stock market is one component. Their Long Leading Index (LLI) is proprietary and leads about a year. It does not include the stock market.

We don't interpret the results ourselves, but wait for ECRI to make news releases. There is a lag, firstly because they are predicting the economy, rather than the stock market, and secondly because they alert their customers first. Too bad it seems they are not interested in individual subscriptions.

Lets see how useful their results have been:

They firmly called the recovery at point 1, in early April 09:
  • 03 Apr 09: WLI Edges Up: "With WLI growth rising to a 23-week high, an upturn in the U.S. growth rate cycle is now in clear sight". [Note: Good call. Would have doubled my profit.]
From late 2009 to late 2010 (at 2), there was talk of a "double dip recession". ECRI generally discounted this. [I started following their releases here]:
  • 31 Oct 09: No Double Dip: Growth is "broad based". "On the issue of double-dip recession, we do not see a real downturn in the next few quarters".
  • 27 Nov 09: Sharp Recession Sharp Recovery? WLI is "consistent with a steady economic recovery."
  • US Yearly growth gauge down, double dip unlikely (6th Feb 10): trends pointing to a double-dip recession are "nowhere in sight."
  • 28 May 10: WLI Growth Tumbles: "The downturn in WLI growth evident since early 2010 has recently intensified, so it should be no surprise when U.S. economic growth slows noticeably in the months ahead," [Note: we must distinguish between a slowdown in growth and a slowdown]
  • 19 Jul 10: Slowdown Call came long ago: "For now, ....the data indicates slowdown, not recession"
  • 01 Sep 10: Recession or Soft Landing? Currently in a slowdown. Historically, slowdowns result in a recession more than 50% of the time. Inconclusive, will make a call by end Nov.
  • 18 Oct 10: No Double Dip recession but Jobs Growth to slow: "We categorically rule out a double dip recession." GDP/production/jobs numbers will go weaker, but not negative...may feel like a recession.
  • 06 Mar 11: Big Picture Outlook: Cyclical expansion is speeding up. Growth will continue at least till Sept.
In Mar 11 (at point 3), they signal a slowdown in growth rate (not a recession):
So far, their calls have been spot on. Lets see how the latest one turns out.

Sunday, July 10, 2011

Always Coca-Cola (KO)

The world's biggest seller of sugar water, and a cashcow. Their competitive advantage is their distribution network. This is a short post - nothing to say that hasn't been said elsewhere - the only question is what price I would buy it.

The company estimates they account for 1.7bn out of 55bn (about 3%) drinks drunk daily (this must also include water). They now sell a large number of drinks, not just Coke. In Singapore, for example, we see Minute Maid Pulpy, Heaven & Earth Tea, Vitamin Water.

Quick summary of business
Coca Cola is actually 2 businesses: concentrate production, and bottling. (From Morningstar): The pressure on bottlers' margins and the demands by the syrup makers for distribution and production flexibility have been sources of conflict between the parent companies and their bottlers for many years. (In 2010) Coke has followed the lead of its great rival PepsiCo PEP by acquiring the North American operations of Coca-Cola Enterprises CCE, in a strategy intended to eliminate these conflicts and make the firm more responsive to changing consumer tastes.

Geographical breakdown
Looking at profit, note that:
  • Only the North American sales include bottling.
  • Any bottling done in other regions is in the 'bottling investment' category.

I'd estimate that half their profit comes from emerging markets (Pacific, Latin America, Africa & Eurasia, and perhaps a bit of Europe).

Cyclical and Growth
Trying to get some idea of their growth rate. Looking at growth over the 2008/09 recession. "Unit case volume" growth measures the amount of liquid sold:

They seem to be getting:
  • zero growth in developed countries (~45% of their 2010 profits).
  • high-single or low-double digit growth in developing countries (~55% of their 2010 profits).
Looking at these: 4-5% long term annual growth seems realistic (all driven by emerging markets).

Discounting the 5bn extraordinary profit from buying over CCE's operations, their 2010 EPS is $2.87.

Morningstar (seems to) estimate their earnings at $4.20 per share (?), up significantly from 2010. They project lower growth of 4% in emerging markets, with growth following inflation rate in developed markets. They recommend buying at 13 PE (~ U$ 55)