Berkshire’s Bonanza, Apple Nixes Units, and Here Comes the Midterm!
People will try to tell you that all the great opportunities have been snapped up. In reality, the world changes every second, blowing new opportunities in all directions, including yours. --Ken Hakuta
One of the key concepts in the business world is margin, and it is applicable in a number of important ways. If you work in an enterprise, from small to large, margins refers to the profitability from selling your product and it can be analyzed at a different number of points, usually gross margin, operating margin, and net margin. The second crucial idea of margin is quite important as well, and involves how to to change the company and its financial performance. Another term for it is ‘Moving the needle.’ What will affect the company in a big way? When researching potential companies, you are trying to find great leadership who looks at each part of their business to find out how they can grow the number of customers, improve much money those customers spend, increase the frequency they spend it, and add to the number of places customers can use their services. Obviously there are costs involved with each of these objectives, so financing the investment as efficiently as possible is also important. I bring these ideas up because earnings season highlights both margin issues for almost all companies. As an example, this past week, IBM decided to purchase Red Hat for $34 billion in cash. Clearly, it is a great deal of money and it was big premium to what Red Hat’s stock was trading at, which leads an analyst to question, why would they pay such a large price over the existing one? From a strategic point of view, IBM has struggled over the last five years and in the large enterprise area, the heightened competition for cloud computing (public, private, and hybrid) has rendered Big Blue as potentially irrelevant. As such, a different approach or ‘game changing’ event was the ultimate course of action. Will it work? Time will tell as Mr. Bezos’s AWS and Microsoft’s Azure are very tough competitors, not to mention Oracle, Salesforce, etc, etc. My point is that each business, especially if you are a publicly traded one, has to look both margin topics as an ongoing opportunity, regardless of the specific situation.
In the larger areas of the investment world, the October jobs number came in quite strong at 250 thousand, which pretty much assures investors that Jay Powell will hike interest rates another twenty five basis points in December. For many, higher wage growth is the key area to look at as inflation is a major concern for both equity and bond investors. Apple reported big revenue gains with higher selling prices but got dinged for eliminating unit volumes when it reports in the future. Berkshire Hathaway posted nearly 7 billion in operating profit but the massive gains were found in higher investment market values. The company also bought back plenty of stock. Shell reported their highest profits ever on the strength of oil and gas prices, and Chevron showed improved profits as well. Speaking of oil, the price suffered a setback this week on US temporary exemptions for countries buying from Iran. Elsewhere around the globe, there are more rumblings in Asia about countries aligning with US and its allies to combat the Belt and Silk initiative of China. Costly financing terms by big Red has turned many countries off as they are concerned with long term infrastructure and the strategic value of ports, roads, and natural resources. And now, lets turn to what you all were waiting to hear about, yup, the midterm election.
On Tuesday, citizens across the United States will take to the polls to vote against their most hated party and the respective politicians that belong to it. Although I say it in jest, there is probably plenty of truth to that as the vitriol between D’s and R’s is astounding. One only has to turn on the television, radio, computer, or cell phone to notice it, not to mention the ten phone calls you get every night to annoy, oops, persuade you, to vote for their candidate. Noteworthy prediction site Five Thirty Eight has Democrats with a five in six chance of taking the House, and the same for Republicans keeping the Senate. Governors races are also critical, especially in swing states Florida, Ohio, Virgina, and here in Nevada. My own opinion is the intensity of the animosity between both sides make any kind of prediction very tough as how can anyone really know what is going to happen? We heard the same thing a few years ago about Hillary being up 5-8 points, and look how right that was, ahem. So, get out your popcorn and rocks as Tuesday night will make interesting viewing. Especially at the margin.
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