Saturday, April 30, 2016

The Long Haul Weekly Review

Another week in the books as we close the first  four months of 2016. Crazy it seems how fast time goes. It was actually a busy week for economic news. We received the  FOMC rate decision, Q1 GDP, Personal Income, and Personal Consumption Expenditures to name a few.

The Federal Reserve kept it's benchmark unchanged for the week. Completely expected. What I didn't expect was for them to remove the wording regarding global concerns. Either way the world is slowly lowering it's expectations for rate increases.  Whether or not it's the best course of action remains to be seen. Although I'm inclined to think behind the scenes the Fed is under a lot of pressure from external source to keep rates lower longer than they'd like. Higher US rates would spell disaster for European and Japanese economies which are toying with negative interest rates.

Let's look at  Q1 GDP which came in at 0.5%. That's pretty weak growth for the worlds economic engine.  Although it's nothing new with the recovery from the Great Recession as this has been a rather tepid recover overall. It should be noted Q1 is historically a weaker quarter. It's also a bit of a disappointment from recent Q1's. Let's keep an eye out to see if growth accelerates for the remainder of the year.

Next is Personal Income(PI) and Personal Consumption Expenditures (PCE). PI actually rose 0.4% for the month and PCE rose by 0.1%. It's important that wage growth continues to show increases, while people keep their spending lower. The caveat is they can't cut their spending so much it ruins the business that depends on their spending. Here is a graph showing income, spending, and savings. Savings is the lowly green bar at the bottom. Yes Americans are very bad at it.

Company Earnings
It was an extremely busy week for our companies that reported earnings. We received reports from RAI, VGR, MO, MA, FB, PYPL, PG & WAB.  Business is going as expected for all of our picks, however the direction of each stock is not always what we like.

The news from the tobacco holdings was as expected. For the most part the volumes were down across the industry.  However RAI, VGR, and MO continue to make good money from their products.

RAI is seeing good strength from the brands it acquired with its Lorillard acquisition. The company continues to stick out with being able to grow it's volumes and revenues. Although much of that is attributed to the acquisition, their brands are performing better than competitors such as MO, PM, and VGR.

VGR is a quiet stock you never hear much about. However one thing you don't hear about is the nice growth it sees from it's real estate division. This quarter saw revenues grow from $130 million to $157 million on transaction closings of $5.7 billion. That's a healthy number.

Procter & Gamble earnings were somewhat of a dud. The company is a cash generating machine, although that wasn't evidenced by it's 1% dividend increase for this year.  I do expect the company to experience challenges growing EPS. I also think the 1% dividend raise is a blip. I'm willing to think in a few years we'll see something closer to 5% on a regular basis.

Wabtec reported earnings that seemingly weren't so good, but I thought were in reality pretty good. The company is actually one of the better performers in the portfolio since the start of the year.  In hindsight what a steal the shares were in the $60's.  I'm expecting the stock to get back to its highs within the year.

MasterCard and PayPal also highlight our payment processing holdings for the week. PYPL really hit it out of the ballpark with it's earnings report. Both are seeing great growth in their payment processing volume as consumers continue to switch more of their transactions to digital. This industry is just humming along at a solid clip, and I'm proud to own a lot of the players. One thing to note is both firms talked about their initiatives to incorporate their payment processing with other platforms that will allow their customers to purchase products seamlessly. One of the other platforms they mentioned just so happens to be Facebook.

Facebook crushed their earnings again and the stock zoomed 10% higher to hit an all time high at $120. It seems the Zuckerberg & Co can just turn on the money spigot at will. The company continues to invest heavily in talent and other initiatives which will one day pay off. I compare it to Google back in the early days when the company just generated gobs of cash that it reinvested to research other opportunities. However FB is still cognizant that it needs to invest heavily in products that are paying off now too.  I don't think earnings growth is done yet for Facebook. I wish I could get the shares at a better valuation based on traditional metrics, but it seems that might not be the case. I thought about adding in the $90's but ultimately passed. This is a well run outfit and I'm looking forward to the rest of the year with them.

That's all for now. If you haven't tuned in already to the live stream of Berkshire Hathaway I highly recommend. I've been listening to it while I finished up this post. Have a great weekend!

The Long Haul Investor

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