The Ingham Analytics Weekly Letter on Sunday - 28 February 2021

Sunday, 28 February 2021

Welcome to our Ingham Analytics Weekly Letter on Sunday where we take a step back to see wood for trees - not taking ourselves too seriously. 

One topic we'll not be addressing this Sunday is the government budget of a practically failed state on the southern tip of Africa. You'll have had more than enough of column inches and verbiage this week, we have no intention of adding to the blah.

Financially, what was significant this week was bond yields in the US - and a spill over to stocks, bonds, FX, even gold. Interest rates have taken a turn up after being unduly depressed since COVID-19 unfolded last year. The yield on the ten-year Treasury went to 1.5%, it was 0.4% for a time last year and 0.9% at the beginning of January. 

Analysts, or algorithmic programmes, use valuation models that are cued off from the T-bond rate - the higher the rate, the lower the price of stocks, debt and so forth. Rates so absurdly low has had distorting inflationary price effects on some asset prices. 

We issued a note this week entitled "Booming along" which joins the dots on what is going on in equity, credit and commodities markets and the US economy - consumer, residential, prices, GDP. We won't bore you with the detail but please do click through on our website. The proverbial bottom line is that interest rates are too low, and we think need to head higher - perhaps a lot higher.

Mr Warren Buffet published his annual letter to shareholders yesterday at 8am eastern time. We haven' had the opportunity to go through it, but we'll share nuggets we glean with you all next time.

We've tackled the issue of EV's in past notes and the production value chain through to mining. Our Letter on 20 December 2020 referenced Toyota President Mr Akio Toyoda on the subject. The boss of the automotive behemoth criticised the hype around electric vehicles and made several cogent points, including the law of unintended consequences.

For those of you with classic cars propelled by internal combustion engines that you are eyeing to flog at auction in the future for a fortune, there is good news.  This week UK performance car mag Evo published an interview with the Porsche Vice President of Motorsport and GT cars. Porsche believes internal combustion engines using synthetic fuel will make them as clean as electric.

Here's the punch line. The famed sports car maker is developing such e-fuels that are intended to be used in all of Porsche's current and past cars without modification. Porsche's e-fuels are made from CO2 and hydrogen, produced using renewable energy. The CO2 reduction will be 85% whilst taking "well to wheel" into account the level of CO2 matches that produced in the manufacture of an EV.

Well to wheel references the whole process of energy flow, from the mining of the energy source to a vehicle being driven. In the research we've done holier-than-thou EV's aren't half as green as they are punted to be.

And on Friday, Nissan said it had reached a breakthrough to reach 50% thermal efficiency through its e-Power hybrid technology. The system uses the gasoline engine not to drive wheels, but to charge the batteries for an electric drive system. It's a series hybrid that does not offer plug-in capability. Nissan says that e-Power allows its engines to be more efficient because they are used as a generator for the battery.

Amazing propulsion technologies are coming through with implications for government policy choices, consumer preferences, practicality and investors too.

Something here for Tesla stockholders to think about. VW Group, which owns Porsche, looks like the better value alternative at 80% of the market cap of Tesla. Toyota's market cap is 37% of Tesla. Both VW and Toyota make real money from lots of cars and trucks, not from green credits and bitcoin. 

On a similar but slightly different combustible note philanthropist Mr Bill Gates has implored the world to stop scoffing meat. Cows are more damaging to the environment than coal-fired power stations.  A ruminant cow apparently emits 120 kilogrammes of methane annually. That is 1,000 times a human being. Livestock methane emissions are equivalent to 3.1 gigatonnes of carbon dioxide each year.

Mr Gates has weighed in on pandemics for the last decade and his words of warning were prescient. Food for thought this time. By 2050, if the global population reaches a staggering 9 billion, 70% more food will be needed. And assuming some of those become middle class they'll tend to prefer meat and dairy, as we've seen in China.

Artificial meat has something to recommend it.  Beyond Meat (NASDAQ:BYND) now has a market cap of $9 billion and the stock has performed well. Tyson Foods (NYSE:TSN) sold its stake in Beyond Meat but has its own inhouse venture to create lab-grown meat substitute. Kellogg (NYSE:K) owns Morningstar Farms which makes vegan and vegetarian foods. Conagra (NYSE:CAG) got into the plant-based meat market in late 2018 when it bought Pinnacle Food whilst Archer-Daniels-Midland is also in the plant-based protein business. Environmentally conscious investors who place ESG on their criteria list could check these names out. 

This Friday, African Gold Acquisition Corporation listed on the New York Stock Exchange under the ticker AGAC.U. It is a special purpose acquisition company or SPAC. 36 million units are in issue at $10. AGAC has no assets other than $360 million in cash. It has two years to find something, namely in gold mining in Africa.

These SPAC's are a popular vehicle in the US. We've had some experience with them. In the past year, $130 billion has gone into SPACs, also known descriptively as "blank-check companies." They aren't without drawbacks. There is little reason for the share price of AGAC.U to move much and time will tell if revenue producing mining assets can be found with the right risk profile and with some leverage attached to bulk up. 

In our last Sunday Letter, we brought up Multichoice in the context of the National Football League, which is asking for a 100% increase to renew the Monday Night Football package entered into a decade ago. Disney (NYSE:DIS), which has ESPN rights, is still in talks with the NFL but we understand through the grapevine that the NFL this week reached broadcast rights deals with CBS, Fox and NBC for double what they have been paying - that would mean $2 billion apiece now. Ouch.

And now for something completely different - with apologies to Monty Python. The mundane topic of Bed and Breakfast.

On Thursday, after market close, Airbnb released its maiden Q4 and annual results, and had an analysts' call. It's taken Airbnb a baker's dozen of years to become a sensation, revolutionising what was a mom & pop cottage industry with little to no central coordination. Sure, it has its detractors and has courted controversy, but it seems like it's here to stay - pun intended.

The public offering price was $68 per share with a total of 51.3 million shares listed of which 50 million was new stock. The stock closed at $206 on Friday, up 13%. There is accounting noise in the results, including non-cash items. Whilst the media focus on the lurid US GAAP loss, with accompanying adjectives, we'd suggest looking past that. This was a COVID-19 year with commensurate quarterly impacts.

What is encouraging for shareholders is Q3 2020, when there was tentative opening up. Airbnb had a substantial bounce back in revenue and a 60% rise in adjusted EBITDA to $501 million.  There was free cash flow of $328 million. What this shows is that even a modest normalisation has an outsized beneficial impact. Q4 and things got more locked down, but revenue was a fairly good 22% lower than the same period in 2019 whilst the Q4 EBITDA loss was only $21 million compared with $276 million in Q4 2019.

The Airbnb cash flow statement shows $3.7 billion in stock issuance and the company ended December 2020 with $7.7 billion in cash on hand off which we must deduct $2.2 billion in funds held on behalf of customers. Take off $1.8 billion in long term borrowings, add in $0.9 billion in marketable securities, and Airbnb has net cash of $4.6 billion.   

For those either invested or planning to, Airbnb quarterly results will continue to be volatile and unpredictable, but we think coming through COVID-19 the Airbnb business model looks to have traction and appeal. 17% of the float is shorted but we're not convinced short sellers are going to have a bumper payday on Airbnb. 

And finally, on 25 February 1991, thirty years ago this week, the Warsaw Pact ceased to exist, and the Soviet empire was no more. Shortly after, the Soviet Union also ceased to exist. For Eastern Europe it was freedom from an unbearable Marxist yoke. We'll raise a glass to that. Na Zdravi, as they say in Czech!

The big deal for us this week is the maiden Q4 and F2020 results of recently listed Airbnb.

Thank you all for visiting us.

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