BPY 4Q2018 Results Analysis

BPY 4Q2018 Results were solid with Office Occupancy at 93.5% (up from 92.5% year ago) and Retail Occupancy at 96.5% (up from 96% year ago). Rents for expiring leases were up 8% in office and 11% in retail so we don’t see a retail Armageddon yet. They sold out the US Logistics IDI acquires in 2012-2013 to Quebec Pension Plan for $3.5B which was a 20% IRR and 2.5 times multiple over the 6 years.

They increased dividend by 5% to $1.32 per year. At the $14.92 price of BPY on Dec 24 2018 this is 8.8% dividend yield. BPY at $18.70 today is still a good price and we think the units are at least worth $25. BPY announced a Substantial Issuer Bid (Type of Buyback in Canadian Law) for $500M at prices between $19 and $21 which is good for retiring 2.5% of shares. As of now there are 974M shares ($1.06B shares including dilution from conversion of preferred shares and other convertible securities).

The stock will likely trade at these low valuations over next 1-2 years until they pay down debt from GGP acquisition and until they prove that retail malls can be tuned into multi use properties with office, hotels and apartments.

BPY 4Q2018 Results

BPY 4Q2018 Letter To Unitholders

Brookfield Infrastructure Partners 4Q2018 Results Analysis

Brookfield Infrastructure Partners (BIP) reported 4Q2018 Results.

 FFO was $3.11. Stock is trading at $38.5 which is 12.4 times FFO multiple. FFO was flat in 2018 compared to FFO of $3.11 in 2017. BIP did a lot of asset rotation this year and was impacted by currency depreciation in Brazil, Australia which was more severe than expected.

In 2 years time we can expect FFO to be above $4 as they close on announced transactions and make new investments and raise rates. If stock trades at same multiple we can expect to see $50 stock while we also receive 5.25% dividend in mean while. Dividend was raised from $1.88 per year to $2.01 which is a 7% raise. We can expect dividend increases to be stronger over next 2 years as FFO grows and if USD strength against BRL, AUD, CAD, GBP reverses there is more upside.

Brookfield Infrastructure (BIP) Reports 2018 Year-End Results

GOOGL 4Q2018 Results - Revenue Growth & Margin Moderation

Alphabet (GOOGL) 4Q2018 Results show 22% Revenue Growth to $39B. EPS wasm12.77. Profit margin trending down to 22% from 24%.

Amazon as a new competitor while Facebook (FB) remains its primary competitor in advertising. 
Cloud and Other Bets businesses (Waymo etc.) hold some promIse but not yet material to impact top and bottom line.

GOOGL has net cash of $104B which equates to $150 per share. At current trading price of $1100 excluding cash a buyer pays $950 per share so assuming $48 to $50 EPS in 2019 one is paying 20 times earnings. GOOGL is a good value as a company that is a dominant market leader with secular tailwind in online advertising and growth prospects in AI trading at 20 times forward earnings excluding cash.

Alphabet 4Q2018 Results

Canadian National Railway - Continues To Chug Along

Canadian Nattional Railway (CNI) reported 4Q2018 earnings that were very strong and confirm the turnaround in the operations after JJ Ruest took over the company almost a year ago.

CNI ended 2018 with EPS of C$5.5 and projects EPS of C$6.15 for 2019 which is 10%+ increase. North American economy continues to power along and outlook for most end markets including Inter-modal, Grain, Commodities, Chemicals, Oil and Gas all very strong for 2019. Autos and Lumber (Housing) could be softer than the peak in 2017/2018. CNI is trading at $83 (C$109) which is close to 17.5 times Forward EPS which is inline with long term averages. CNI increased the dividend by 18% to C$2.15 from C$1.82 and also plans to buy back 2-3 % of shares outstanding which are currently stand at 727M.


CNI 4Q2018 Earnings Release
CNI 4Q2018 Results Presentation

FB and AAPL - Best Value In Large Cap Tech

FB and AAPL are the Best Value In Large Cap Tech. Even with FB rising to $165 after 4Q2018 earnings and AAPL at $165 after 1Q2019 earnings they trade at 16 times and 12 times Forward EPS Multiple excluding net cash. These are reasonable multiples for growing companies that are dominant in their end markets and with some innovation can accelerate earnings growth.

AAPL 1Q2019 Earnings Release

FB 4Q2018 Earnings Release

Opportunity to take a Bite of Apple

The correction in AAPL from $233($1.1T market cap) to $145 ($690B market cap) has brought AAPL shares to a very reasonable valuation. Excluding the net cash position shares trade for 12 times forward earnings for a company that is the #1 in its industry and has no immediate risk of disruption.

The slowdown in sales and earnings due to impacts in China and risk due to US China trade war are now priced into the stock. If AAPL can show incremental innovation and show some growth in services and hold its ground in iPhone and iWatch sales we can expect a $200 share price and $900B valuation. Any innovation would imply additional upside.

Now Is A Time To Buy Stocks

Now Is A Time To Buy Stocks where there is fear and uncertainty in the market. This opportunity where valuations are down across the board including high growth stocks and value stocks has valuations for S&P at 14 times forward earnings. It is quite possible that valuations can get further attractive over the next while into 1Q2019. However timing the bottom is a fools errand and dollar cost averaging down over the next few months is a reasonable approach. The previous such market dislocations including Jan 2016 (Commodity Cycle Bottom), Jul 2015 (Chinese Market Crash), Jun 2012 (Euro Crisis), Sep 2013 (Emerging Market Bond Crisis due to Perceived Fed Rate Increases) Aug-Oct 2011 (US Govt Shutdown etc.) have all been good opportunities looking back.

Below are some of the geo-political and macro economic factors at play in the market over the next few months. It is good to remember that the works is uncertain all the time and investors focus on it at some times while they ignore it most other times.

Market Outlook For Next 6 Months

I believe a confluence of political and macro economic issues will weigh on the stock market over the next few months. These will be compounded by swings in investor psychology which can lead to sharp sell offs due to herd like mentality. 

1. China US Economic Warfare 

China and US are engaged in an economic and geopolitical warfare that will last a long time and is inevitable. There may be a truce but this is a 20 year battle. China has got economically strong and will overtake US economy in next 10+ years due to their faster growth rate and higher population which is moving from semi skilled to highly skilled economy focused on services and higher end manufacturing. This economic might will be translated into military spending and enable it to challenge US as the #1 superpower. China has also been running a smart operation to steal US and Global Intellectual Property. US wants to remain #1 so they will challenge and try to prevent rise of China any further. US and China will target each other’s economy and companies and this will create winners and losers in industries and specific companies. Some US manufacturing and service and tech companies will benefit while other agriculture companies and some companies exposed to Chinese customers will be negatively impacted. 

Companies may reduce new investments and consumer sentiment and investor sentiment may be affected. Strong employment in US and rising wages may counter this effect. 

Brexit Mess and Anti Immigrant Right Wing Movement in Europe

UK is mired in a mess with Brexit with a lose lose options all around and a deeply divided country. EU countries need to cut down immigration or else there will be a huge backlash as in US from the voters. The uncertainty and trade friction caused by Brexit will reduce consumer sentiment and business investment in the next 2 years and can effect the economy. With lower sentiment house prices and demand for luxury goods and big ticket items like cars may go own in near term. 

US Political IssuesI believe Trump administration may run into issues with legal matters if they conspired with Russia to tilt the 2016 US presidential election. I think this will be ongoing and may or may of resolve before 2020 elections. Regardless of outcome I don’t think this will impact the US economy in the long term as the lower taxes and reduced regulation and capitalist system will favor investors and company profits.

Trend Against Large Cap Tech Monopolies Sentiment has turned negative against large cap tech monopolies like AMZN, GOOGL, FB etc in US and Europe and globally. Europe will likely increase regulation and also enforce minimum taxes on revenue. However the monopoly and market position of tech giants is so strong that their business juggernaut will continue to move forward. Growth rates of earnings may slow and hence the P/E multiples may continue to contract. 
 

Interest Rates & Monetary Policy

Possibility of accelerated interest rate increases in US were a risk. However the intervention of Trump and other factors now seem to imply the US Fed won’t raise rates much from this point.

This could be a positive for emerging market economies like Brazil and India. Brazil has elected a new pro market leader after 15 years so investment sentiment and returns are expected to be good and BRL weakening over last few years has made the agriculture and other industries very competitive globally. In India outcome of April 2019 elections may have a major impact on international investor sentiment.