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Happy Friday and the weekend ahead! Welcome to this 20th post of investing, not rocket science! Investing Doesn't Have to Be Rocket Science: this is our Non-Expert Guide to Portfolio Management.
A quick recap of this series so far:
In the 1st post: I defined a basic portfolio framework. The objective of this million dollar portfolio is beat inflation and an equity index. The investment style presented here is active portfolio management, without the use of leverage and a time horizon greater than 5 years. The benchmark index is the MSCI ACWI IMI.
From posts 2 to 19: I have evaluated 66 stocks and 4 potential bond additions. The portfolio is long 15 stocks, 1 Bond and short 1 stock. You can read all about it in the previous posts here: https://www.claritech.app/blog
Today, we look at the Q1 2023 earnings announcements, in particular for the stocks in this portfolio and on the watch-list. I am also taking a re-look at Vodafone (which is a stock in the portfolio) and evaluating it with other stocks in the same sector: BT Group, Orange and Deutsche Telekom.
A quick portfolio update:
· Since Inception, the portfolio is up +4.29% while the benchmark is down -0.45%
· All Asset Classes: Equities, Bonds, Real Estate and Cash have contributed to positive performance in the portfolio.
· Interesting that both the long and the short positions has moved in favor of positive performance.
Earnings Q1 2023
At the time of posting this, the three stocks from the portfolio or the watch list which are expected to announce results this week are JPMorgan, Citi and HDFC Bank. This space will be updated when data is available for these three stocks.
In other results, Delta Airlines posted a lower than expected “adjusted EPS” of 25 cents a share (expectation of 30 cents a share). Unadjusted (or GAAP) EPS at loss of 363 million (loss of 57 cents a share). The airline sees travel demand rising and expects “record advance bookings for the summer” and is expanding its capacity in the current quarter by 17%. While trends are improving for the company, it still struggles with free cash flow (see illustration below). The stock closed lower by -1.1% yesterday.
Infosys posted results below analyst expectations and forecast a revenue growth of 4% to 7% in the current fiscal yea ending March 2024. The company posted a net profit of US$749 million for the quarter, which is a rise of 7.7% from the previous year. The company sees uncertainty and budgeting delays among its customers in the financial services sector, with higher uncertainty in the US when compared to Europe. The company sees positive trends in revenue and eps. However, free cash flow sees a decline (see illustration below). The stock closed lower by -9.7% yesterday.
Let’s dive into todays evaluation:
I read an analyst report on Vodafone and the analyst preferred BT and DT over Vodafone. The purpose of the evaluation is to make a decision if I should Exit, Replace or continue to Hold Vodafone in my portfolio.
To assist with the evaluation will be the semi-quant method that I introduced in post 14. This should help avoid biases while assessing financial data of these stocks. You can read about it here.
Why should I invest in stocks from the Telecommunication Sector?
· Telecommunication services are an essential part of modern life, with high demand for internet, mobile, and other communication services. This makes the telecommunication sector relatively resilient, as people continue to use these services regardless of economic conditions.
· As technology continues to evolve, telecommunication companies are at the forefront of developing new products and services, such as 5G networks, Internet of Things (IoT) devices, and cloud-based solutions.
· Including telecommunication stocks in your investment portfolio can provide diversification, which is the practice of spreading your investments across different sectors and asset classes to reduce risk.
· Some stocks in this sector are known for paying dividends to their shareholders. Dividends are typically paid out of a company's profits and could provide a regular source of income for investors.
· Telecommunication companies often operate on a global scale, serving customers in multiple countries. This can provide exposure to different markets and diversify your investment geographically.
As with any investment, it's important to conduct thorough research and consider your own financial goals, risk tolerance, and investment timeframe before making investment decisions. It's also recommended to consult your advisor to ensure that investing in telecommunication stocks aligns with your overall investment strategy.
Company Financials:
· Revenue multiple: Vodafone has a low revenue multiple (0.6x) to its market-cap followed closely by Orange and BT Group (0.7x).
· BT Group has a high earnings yield at 12.9%. Orange and Vodafone have earning yield of 8.1% and 7.2% respectively.
· Deutsche Telekom has the highest unlevered free cash flow margin at 12.4%, while Vodafone generates a free cash flow margin of 7.1%
The semi-quant method has Vodafone in the lead at the end of this section.
Efficiency, Valuation and Volatility:
· All 4 companies have operating income margins in the range of 11.8% to 13.9%
· Vodafone has a low PEG ratio at 0.01 followed by Deutsche Telekom at 0.17
· Deutsche Telekom has a high debt / equity ratio at 312%, while the other 3 companies are in the range of 140 to 150%
· Vodafone and BT have positive Price / Tangible Book Value.
· Realized volatility relatively lower for Orange and Deutsche Telekom (17%), while Vodafone is at 24% and BT Group is at 32%.
The semi-quant method has Vodafone and BT Group sharing the lead at the end of this section.
Trends in Company Financials:
· Operating income margin: BT group sees a declining trend, while the trend is relatively stable for Deutsche Telekom. Vodafone has a rising trend in operating margin.
· Diluted Earnings Per Share: Deutsche Telekom sees a rising trend (also seen in its stock price), while Vodafone has likely turned a corner moving from negative EPS to a rising trend. BT and Orange see a slight decline from the average of the last 5 years.
· Unlevered Free Cash Flow: BT Group has negative free cash flow. Vodafone sees a decline as well, but currently maintains a positive cash flow. Deutsche Telekom has a relatively stable free cash flow followed by Orange.
The semi-quant method has Vodafone in the lead at the end of this section.
Fair Value, Upside Potential and Dividends:
· I assess fair value and upside potential using two methods: Fair Value (InvestingPro) and the Analysts Fair Value estimate. While the InvestingPro method is objective and based on their valuation models, the analyst fair value is subjective to the view of the analyst. Both are important and an average of the two tends to provide a good indication of the potential upside.
· BT Group sees largest potential upside on average, followed by Orange and Deutsche Telekom.
· Dividend yield highest for Vodafone (8.4%), followed by BT Group (5%) and Orange (6.1%).
The reason I go through this 4 step evaluation process is because of a risk in depending on one or two financial metrics to make an investment decision. Research is a continuous process, although I must also say that fundamental analysis is based on past data and performance and there is no guarantee that the trend will continue. Research can reduce risk, cannot eliminate it.
Summary of the evaluation:
The semi-quant method has BT in the lead at the end of this evaluation, followed closely by Vodafone. While BT Group has edged out Vodafone in this evaluation, the company has negative free cash flow (in a declining trend) and until this reverses, I am going to continue to hold Vodafone in this portfolio (stock has positive cash flow, although also in a declining trend).
Positives: Vodafone is diversified into markets in Europe, Middle East, Africa and Asia. This could drive revenue growth. Vodafone's German business provides stability and modest growth.
Negatives: Spain, Italy and UK are highly competitive markets. Price wars cut into margins. Lack of fixed line network.
On the charts, comparative of five year price range of Vodafone, BT Group and Deutsche Telekom. Vodafone is at the lower end of its 5 year range (which likely means it has priced in negative expectations) while Deutsche Telekom is at the top end of its range. BT Group is around the center of its 5 year price range.
If you or someone you know is interested in receiving a free remote consultation on their investment portfolio, regardless of location, please don't hesitate to contact us.
This series is for information purposes only without regard to any particular investment objective, financial situation, suitability or means. It is not be construed as a recommendation, or any other type of encouragement to act, invest or divest in a particular manner (whether explicit or implicit). We recommend that you are familiar with the terms of use.
In the future posts, I continue to track Q12023 Earnings, in particular for the stocks in the portfolio and the watch-list.
Thanks for your time! See you in the next post!
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