The Disappearing Middle Class

Check out the numbers in this article by Robert Reich. They show the middle class' erosion of purchasing power over the years.

"In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income. " OUCH!

The article also discusses how the middle class has dealt with this over the years. It's hard to see what the disappearing middle class can do next to boost family income. The implication is a long term drop in consumer buying. Very consistent with PIMCO's new normal.

bought AKO.A

Sorry, I'm a bit late on this one. I bought AKO.A on June 23 at $19.88 CDN. This includes $20 in commissions, which should have been 10$ but I did not specify all or none, so they split my order in two and charged me twice. Thanks a lot. Lesson learned.

Embotelladora Andina S.A. is a Latin America Coke bottler based in Chile, but with sales in Argentina and Brazil as well as Chile. It bottles other stuff besides Coke, and gets about half its revenue from Brazil.
There are two share classes: AKO.A and AKO.B. The B shares get a 10% higher dividend than the A shares, but have no voting rights. Also, the B shares are a lot more liquid. However, at the time I bought these, the A shares had a higher yield. Of course, there are also corresponding ADS issues which trade in new york in USD.

I'm not sure why but the shares have just shot up to $23 USD. AKO.B is up too, and on slightly higher volume at that.
So why buy this company? I think it's a good consumer staples stock for Latin America. It's a good brand (Coke) and what it sells is cheap enough that a lot of people can afford it. For those with less money, it makes a nice treat. For those with more, they can get addicted to the caffeine and drink lots.

Here is what I like about this company:

• inexpensive consumer staples
• great brand (Coke)
• Good market (Brazil)
• Compared to similar companies (Diageo, PMI, Yum), AKO has very low debt.
• I started out looking at the Greek Coke bottler, but found AKO more compelling.
  

Here is what I don't like about this company::

• EPS growth has been lacking the last few years. I think this is what has been holding back the share price.
• You can see it graphically at morningstar by mousing over the little bar chart icons on the left & seethe graph below for a longer time frame.
  
• You can see revenues are down, but taxes are up, leading to a drop in EPS.
  
• Overall, it's a good company. The decision to buy comes down to your growth estimate.
  

That's the story. Here are the numbers.

growth and efficiency:

• net margin > 7%*, last 5 years (actually >10 for each year) good trend. small drop in last few years.
• roe > 15%, last 5 years (actually >20 for each year)
• eps growth over 3 years, average for the last 5 years = 27.9%
• increase/decrease in outstanding shares last 5 years -> none
• improvement in efficiency ratios over 10 years, but stable for last few years.
• free cash flow> 0 last 5 years: all 5 years. a bit choppy but growing trend.
• avg eps growth (in chilean currency) since 2001 = 20%
• expected growth rate: 10% (analyst estimate)**

* I read somewhere that the long-term S&P500 average net margin was 7%.
** From reading a lot of expected growth ratings, it seems to me that when analyst don't know what to guess, they often guess 10%.

Valuation:

• p/e ratio vs historical is v low, but not vs the S&P. (I.e. (S&P P/E)/(AKO P/E ) is a bit lower than in the last 5 years.
  
• yield is hard to figure because AKO gives out a big dividend at end of fiscal (May) and the dividend amount really bounced around, like many companies outside North America. The dividend was lower in 2009.
• fwd p/e (morn.) 13.3
• peg :1.3
  
• fwd yld (morn) 1.68%
• morningstar:
• p/e, p/s, p/b all slightly lower than industry.
• rev growth 3yr avg higher than industry
• eps growth 3 yr avg much less than industry
  
• net margin much much higher than industry
• roe much much higher than industry.
• debt/eq much much less than industry
  

Financial health

• payout ratio TTM is 48%.
  
• leverage: 1.74 (always less than 2)
• current ratio: 2.13

DCF valuation

• Had a lot of trouble figuring cash flow TTM due to the currency difference and the multiple originals per ADR. SO I used TTM eps instead, including the eps from the quarter ending in june 2010.
• avg YoY eps growth (in Chilean currency) since 2001 = 20%
• discount rate: 2.83% (ten year tsy yield)
  
• eps ttm (Q2 report + s&p) = 0.85 USD, per ADS.
  
• for a deps valuation of $21.87 USD per ADS.

A couple of notes about this. First I calculate the value of the earnings that will accumulate over the next ten year; not over an infinite period. This is to make it more comparable to the 10 year bond, whose yield I use as the discount rate.

Second, I think its silly to expect a growth of only 10%. First, the historical growth rate is much higher. Second, Brazil has great demographics, with more young people than old people, low debt and the poor are becoming less so. (There is an article on this in the current issue of the economist. It shows the payoff from what many people derisively refer to as "social engineering"). Anyway, with 10% growth, you get deps valuation of $12.54.

The recent news is that EPS have dropped. That's because of higher Brazilian taxes due to a loss of tax credits and a higher rate of taxation resulting from the increased revenues from Brazil. While EBITDA was up 9% yoy, net earnings were down 14%. It looks like these taxes are not a one-time expense; they should continue to be this high in the future. If the shares drop, they could get close to fair price.

Another Gem from Bill Gross

Gotta read this one.

Preferred Shares - Update

Since I sold out my preferred share positions, the Euro blew up and people are fearing a double dip recession. Consequently, fears of inflation abated and 3 of the preferred share issues are up between 2% (cl.pr.b) and 6% (bns.pr.m, pow.pr.b). BCE.PR.A is down 4%.