The model portfolio is composed of international investments and is priced in US dollars. All foreign currency holdings are converted to US dollars, based upon closing currency valuations as of the date of publication. Views are solely that of the author, and will differ materially from conventional analysts as well as the investing public at large. The purpose of the model portfolio is to monitor performance of investments written about in this blog, and is not to be construed as research. The blog is written for entertainment purposes only, and does not represent investment advice in any way, shape or form. Always consult an advisor prior to engaging in any investment activity.
The Blog Model Portfolio is today adding to the positions of Grupo Aeroporturio Del Sureste (ASR-NYSE, $81.44), Novo-Nordisk (NVO-NYSE, $148.73) and Mastercard (MA-NYSE, $446.54).
Earnings season has largely finished, and the fiscal results from many companies in the portfolio were strong.
Of the 415 companies in the S&P 500 index reporting results, 67.5 percent have exceeded estimates, according to Thomson Reuters data through Friday morning, May 4th,2012.
Grupo Aeroportuario Del Sureste (ASR) reported a record fiscal quarter. Year over year earnings were up by a whoppiing 28.9%, on a revenue increase of almost 21%. EBITDA charged ahead by 22.4% year over year; margins exceeded 64.4% of revenues. The net, after tax profit margin earned in the first quarter of 2012 was 41.8% of sales.
A pending travel catalyst will be evident in the Cancun region of Mexico by late 2012.
In 2011, the Cancun International Airport served 13,022,500 passengers, or 35,678 persons per day.
Late in the 3rd quarter of 2012, the world's premiere business to business mall, Dragon Mart, will be opening their second global facility in the Puerto Morelos region of the Yucatan peninsula. Located strategically within miles of the Cancun International Airport and directly across the main highway from the port itself, the mall should draw businessmen from across the Caribbean, China, South and Central America as well as from within Mexico.
Dragon Mart Cancun is being patterned on the highly successful Dragon Mart Dubai, a destination mall that draws about 52,000 visitors per day; these are a combination of tourists who travel to shop and businessmen who specifically fly in from around the world to evaluate samples and negotiate bulk purchases that are drop shipped from China. In the case of high value light weight items, these would typically come in via air; in the case of heavier items, they would come in by sea.
This looks to be as important a development as I have identified in many years.
Seldom does a notable secular trend (the increase in global tourism based upon rising global incomes) coincide with a company specific development; it is even more rare for several trends to converge on a company that already generates monopoly profits. This certainly appears to be the case for ASR.
Some investors, taking into consideration the size and scope of the project, are undoubtedly skeptical that such a development is not already factored into the current price of ASR shares.
I disagree. Having gently probed sources throughout the investment industry globally, I have not yet heard of a single analyst that has taken this into account, or in fact even made private investors aware of the development. As evidence of my contrarian view, I wish to point out the story of AsiaMart Bahamas, a privately proposed, unlicensed, and as yet unfunded, business to business mall project in Freeport that has not evidently formally lined up tenants; the project backers announced as recently as April 4th 2012 that they intended to be the first Asian business to business mall of its kind in the western hemisphere, with a potential opening date of 2015. This boast was put forth in a press release recently published in the Bahamas.
One can only imagine the shock, dismay and profound disappointment felt by the principals of AsiaMart in learning, through a blog of all sources, that their much vaunted $200 million dollar proposal (a pittance for the scope of the b2b markets) was not to be a first mover. In fact, should AsiaMart ever get off the ground, it will be more than 3 years late (a lifetime in business), will feature fewer than than 1/4 the number of Chinese vendors that will be serving the b2b market as will DragonMart Cancun, and are investing less than 8% of the capital that will initially be put into Dragon Mart by the Chinese government and the Mexican governments combined.
One of the principals of the Asiamart project actually took the time to stammer out a retort to Forbes in the commentary section; the tone projected a total and utter unfamiliarity of the Dragon Mart project. In his dismissive paragraph, the respondant actually seemed to indicate a lack of awareness that Puerto Morelos (Puerto is the spanish word for port) does, in fact, contain a port.
For potential competitors to blithely presume that the combined governments of Mexico and China (the world's #1 exporter of goods) don't have a clue about logistics, represents hubris of the highest degree. It goes without saying that loss of first mover status by more than 3 years, in a competitive world, cannot be put into words.
So, for those efficient market theorists that believe that all public information is fully integrated into a share price, I beg to differ.
There is no substitute for research, and I am intolerant of those who are unwilling to perform research. Even those whose sole occupation is to be in the know are sometimes unaware of their competition. Proponents of a competing project with capital plans in the $200 million range, lying within just a few hundred miles of Cancun were, evidently until last week, unaware as to the existence, size and capital plans of Dragon Mart Cancun; one cannot help but think that the bulk of global investors and most analysts are also equally in the dark.
Qui Bono (Who Benefits) from keeping Dragon Mart under wraps?
There are certainly locals and connected individuals within Mexico and China who have modelled the impact of Dragon Mart Cancun into the Yucatan Peninsula.
If I was a real estate speculator, as one example, my objective would be to keep things quiet for the purposes of buying up as much raw land in the vicinity as possible.
If I was less than scrupulous, I might even try to put forth negative views in the Yucatan pensinsula region on various boards. Suggestions that Dragon Mart might somehow be bad for the local economy and will have a deleterious effect on local business could serve to cap real estate prices, during the quiet accumulation stage.
It should be noted that in Dubai, where the first Dragon Mart was built, the price of properties adjacent to the Dragon Mart in the city increased by 500 times prices paid in 2004.
Part of the relative lack of press pertaining to Dragon Mart may be due to a cultural reluctance of the Chinese to adopt the western style practise of boasting about ongoing business.
Western society has developed a terrible propensity to both hand out and expect "attaboys" for activities that are nothing more than part and parcel of daily business. In North America, a development of 5.6 km (the size of the Dragon Mart Cancun) would have a soil turning ceremony covered by dozens of media outlets, all flown in on the developer's dime. Each and every minor piece of work would be trumpeted loudly to the press so as to maintain a heady flow of positive news for terriifed bankers and impatient backers. The simple paving of roads would be touted as the next lunar landing. Even human interest stories would be circulated in the region, to talk about the benefits of the development to all, for the purpose of placating opponents. Such efforts to feed an insatiable news cycle involves the spending, in many cases, of millions of dollars.
The China business model considers all of this PR to be superfluous and a diversion of valuable resources away from the task at hand. I concur. Flying in press is a frightful waste of capital and an exceptionally poor allocation of human resource; a manager who is forced to shuttle reporters around a work site could be doing something far more productive to advance the project to completion.
In the case of Dragon Mart Cancun, a minor announcement was made indicating the site was selected; a completion date was indicated. The work is underway at present. When the work is completed and the mall is open for business, that's when you and I will hear about it again.
I've modelled just a small slice of the fiscal potential of DragonMart Cancun into my ASR forecast for 2013.
Some appear unable to comprehend the absolute profitability of ASR; let me try to add context. Grupo Aeroportuario Del Sureste, based upon net profits generated as a percentage of revenue, is currently the world's most profitable airport operator.
ASR generated a NET PROFIT, AFTER TAX, equal to 41.8% of sales in the first quarter of 2012. In that same fiscal period, Apple Inc., the world's most widely held and widely respected company, generated a net profit, after tax equal to 29.7% of sales. Apple has a contractor who makes all of the products for sale; it doesn't get any leaner or more efficient a business than that.
ASR generated almost 41% more profit, on every dollar of revenues earned, than did Apple. This is no knock against Apple; the company is great and is growing like a weed. I simply wish to provide a frame of reference in the public markets that investors know well. Apple is well known, highly profitable and generates exceptionally high margins.
My focus is to own lesser known companies, with strong catalysts, that are highly profitable and have superb balance sheets. As a monopoly, ASR does not have to worry about competition. ASR does not have to make substantial expenditures in R&D to come up with the next big thing. ASR DOES make substantial investments in real assets that have historically risen in value over time. Try replicating the Cancun airport in the western hemisphere in today's dollars (2 modern terminals with sufficient jetway capacity to service 25-30 million passengers annually, 2 newish landing strips capable of handing the largest of the Airbus fleet and lots of wholly owned land to expand further) and see if you can come up with a figure less than $3 billion US. Add to that, a further 36 years of contract to operate the airport. Add to that, the scarcity value associated with being the only publicly traded white sand/blue water tourist airport in the world today.
The best catalysts are the ones that a company doesn't have to pay for out of its own capital budget.
ASR will get the benefit of being in the right place, at the right time, when Dragon Mart Cancun opens. As to the potential financial impact of Dragon Mart Cancun for ASR; at a minimum it will be accretive; over the mid term, it could be transformative. I'll talk about it in further detail in Las Vegas.
Mastercard (MA) announced an earnings increase of 24.9% in Q1, on a revenue increase of 17.1%.
A whole series of contract wins commenced generating revenues in the first quarter of 2012. There are some one time costs associated with new contracts. These expenses modestly impacted the growth rates of EBITDA in the first quarter; the market seemed somewhat unimpressed.
Mastercard's international business is considerably greater in size than that of Visa. 66.7% of Mastercard's Gross Dollar Volumes (GDV) were generated outside of the United States. After currency adjustments,60% of MA's first quarter revenues were earned outside of the United States.
As a result, there is more quarterly variability of revenues based upon currency exchange rates; MA uses the US dollar as the fiscal reporting currency and converts all foreign revenues to US dollars. In the quarter that just ended, a fairly steep decline in the Brazilian real served to reduce MA total revenues by 2%.
EBITDA at Mastercard rose by 20% year over year and EBITDA margins topped 59.9% of revenues. For the same period of 2011, EBITDA margins were 58.5%.
Once again, Mastercard's revenue growth surpassed that of the US market favorite, Visa. V's revenue grew by 14.9% in the most recent quarter.
Mastercard's Global GDV grew by 18.3% in the quarter ended 03/31/12. At current rates of growth, Asia will surpass Europe at some point in the 2nd or 3rd quarter ot 2012 to become the second largest revenue market for Mastercard. Early in 2013, Asian revenues earned by Mastercard should exceed that of the United States.
Novo Nordisk (NVO) reported yet another earnings record, in a string of earnings records.
First quarter revenue grew by 13% year over year. EBITDA advanced 16.6% over the same period of 2011. EBITDA margins rose to 39.6% of revenues. Net profits advanced by 15%. As Novo Nordisk continued to use its huge free cash flow to retire shares, net profits per share rose by 18%.
Differing from almost all of the major pharmaceutical manufacturers, the company has no looming cliff of patent expirations to contend with. Revenue growth at NVO has been generated organically for as far back as one cares to look. The company has never felt the need to make dilutive acquisitions to goose up revenues.
Most of the large pharmaceutical companies appear to be under considerable pressure to offset the steep revenue declnes associated with patent expirations. In the case of many of the global pharmaceutical industry titans, the patent cliff in the years 2012-2014 is savage; some of the peer giants may see their revenues fall by 50% unless they can somehow replace the loss of the patent blockbusters.
This patent cliff has produced a response driven by terror; the entire pharma industry has become obsessed with a takeover spree that from afar appears ludicrous. Any smaller company with an FDA approved product, no matter how inconsequential from a potential sales point of view, is being gobbled up at mania prices. This, as with most bubbles, will almost certainly prove destructive to the investment capital of the acquirers at some point.
Novo Nordisk is controlled by the Novo Nordisk foundation, who holds 74% of the voting shares and whose mandate is to ensure a stable flow of dividends for philanthropic purposes. This cautious holder of the control stock gives me great comfort that NVO's managers, no matter how crazed the entire industry becomes, will not be able to easily make any wealth destroying purchases in the years ahead.
Standing almost alone among the giant pharmaceutical companies, NVO's prospects are such that management can, rather confidently, estimate internal sales growth of about 10%-11% for 2012. The low end of guidance was firmed up by 1% over the previous estimate.
The blog model portfolio will be adding to ASR, NVO and MA today.
These are not new ideas for the blog portfolio. All of the companies represent long time holdings and I am adding more shares to existing positions. My investment model is purely fundamental; timing issues and investor sentiment are unimportant to me.
The blog model has recently received dividends of $2404.60 US. This will be added to cash generated from the sale of 488 shares of Delhaize Group (DEG-NYSE-$42.37). Delhaize badly failed on earnings in Q1, 2012. DEG indicated that 2012 would represent a turnaround year, as opposed to a year of growth. That gets it booted from the account.
The total cash position of $22,981.16 will be allocated as follows.
1. A purchase of 100 shares of ASR will be made. With a full service commission of $100 US, the net investment will amount to $8,244 US.
2. A purchase of 23 shares of Mastercard will be made. With a full service commission of $100 US, the net investment will amount to $10,370.42 US.
3. A purchase of 28 shares of NVO will be made. With a full service commission of $100 US,the net investment will amount to $4264.44 US.
The bulk of dividend increases that typically flow through in the second quarter of each year still lie ahead.
As the portfolio operates with a fully invested, at all times, philosophy, this means that further investment activity in the next two months will occur. When sufficient funds flow through, there will be business to be reported on, with a view towards making new purchases or adding further to existing holdings. At those times, the blog model portfolio will dutifully write the actions up to readers.
I will be speaking at the Las Vegas Money Show on May 15th, 2012.
My involvement will be in the form of two panel discussions. I will be speaking about the developments at ASR in depth for attendees.
The Marketocracy team will be speaking about their investment strategies at the 2012 Money Show in Las Vegas on May 15th. Register at Marketocracy.com should you wish to attend.