Month: January 2012

By MoneyMorning.com.au

In August 2010 Kris asked if an Aussie Icon was on the ropes…

Back then, Kris laughed at broking firm, Morgan Stanley’s price target for Qantas [ASX: QAN] of $3.05. Turns out he was right to laugh. The stock didn’t get there.

And now, it’s now trading at $1.52 – just above its three-year low.

The other big airline stock, Virgin Blue [ASX: VAH], hasn’t done much better. Since Kris told his Australian Small-Cap Investigator readers to sell the stock, locking in a 100% gain in early 2010, the price has halved:

You can see the long-term share price performance of both companies in the chart below (Qantas – blue line; Virgin – pink line):

The bad news continued into 2011, with both stocks taking a beating. That’s despite revenue for both companies being higher this financial year, passenger numbers for the two airlines were up 3% in November over the previous year.

That said it’s been a tough year for airline shareholders.

Or has it?

In less than six weeks since listing on the Australian Securities Exchange, Alliance Airways [ASX: AQZ] has gained more than 7.5%.

And recently Credit Suisse set an ambitious price target of $2.38 per share by the end of this year…

Is it possible?

It might be. But the rising stock price relies heavily on the mining boom. That is, the company has a small fleet of planes that specialise in dropping ‘Fly-In, Fly-Out’ (FIFO) workers, most commonly mining employees, at their work sites.

By August last year, of the 90,000 resource industry employees in Western Australia, over 52% were FIFO. And the West Australian government reckons in less than three years, FIFO workers will make up more than 57% of the resources work force.

And that growth estimate is just for workers on the west coast of Oz.

But it’s not just WA that Alliance Airways covers.

If you can name a dense mineral deposit, they’ll fly there. As this chart of the Alliance route map shows:

And there’s another benefit of running an aviation business that benefits from the mining boom.

Unlike retail airlines, an empty aircraft isn’t a risk for them. That is, they charge a mining company the same flat rate per flight. Passing on the responsibility of filling an aircraft to the mining company. Empty plane or not, Alliance gets the same fee.

But what if the mining boom in Australia comes to a quick end? Well, the company has aircraft that can reach as far as the South China Sea and to our cousins across the ditch in New Zealand.

They’ve ensured the business is viable outside Australia by building up a small fleet of planes capable of flying internationally.

But for now, if the mining boom slows… and the need for FIFO workers dries up… the Alliance share price could see a fall similar to Qantas and Virgin.

There’s one more thing that could hold Alliance back should the ‘digging up rocks’ boom in Australia end. Alliance doesn’t have a retail market like the big two airlines. Alliance pretty much flies to big holes in the ground… and it’s hard to imagine these becoming tourist hot spots!

Right now, the S&P/ASX 300 Metal & Mining index is down 21% since this time last year. But in the last few weeks, it has gone back up. Given Alliance’s dependence on the mining boom, any change in the demand for resources – and, therefore, workers – will drive the share price.

And perhaps not surprisingly, for the few short weeks it’s been trading, the airline has tracked this index…

…A pattern that seems set to continue given the company’s relationship to the mining sector.

In short, a bet on Alliance Airways is simply a bet on the resources boom kicking on. If the mining companies keep turning a profit it seems likely Alliance will too.

Shae Smith
Editor, Money Weekend

The Only Airline Stock Worth Buying This Year?

Schlumberger Limited (SLB) announced its quarterly dividend of 27.5 cents per share, an increase of about 10% over its prior dividend in November of 25 cents. The company said that fourther quarter earnings were higher than epxected, and remained optimistic for 2012, despite the threat of Europe’s debt crisis impacting earnings.

This third trading week of 2012 comes to a close with investors digesting earnings results, including a miss by tech giant Google (GOOG). Hi.

Humana (HUM) was downgraded today by Wells Fargo (WFC) from outperform to market perform, as the firm has take a more cautious outlook with regards to Medicare Advantage. Shares are lower by about 3.4 percent.

The past week in monetary policy saw interest rate decisions announced by 8 central banks, with 4 of those announcing interest rate cuts, reflecting the ongoing European sovereign debt crisis and slowing global growth.  Those announcing interest rate cuts were Brazil -50bps to 10.50%, Georgia -25bps to 6.50%, Philippines -25bps to 4.25%, and Serbia -25bps to 9.50%.  Meanwhile those that held rates unchanged were Canada 1.00%, South Africa 5.50%, Mexico 4.50%, and Latvia 3.50% (Latvia did however reduce its required reserve ratios 100bps).  Also making headlines was a widening of the interest rate corridor, an effective easing, in Indonesia.

Following are some of the key quotes and comments from the monetary policy statements and media releases issued by the central banks announcing rate decisions:

• Brazil (cut rate 50bps to 10.50%): “The Monetary Policy Committee believes that the timely mitigate the effects coming from a more restrictive global environment, a moderate adjustment in the level of the base rate is consistent with the scenario of convergence of inflation to the target in 2012.”
• Philippines (cut rate 25bps to 4.25%): “the inflation outlook remains comfortably within the target range, with expectations well-anchored. Latest baseline forecasts indicate that average annual inflation rates are likely to fall within the lower half of the 3-5 percent target range up to 2013. Pressures on global commodity prices are seen to continue to abate amid weaker global growth prospects. However, the impact of strong capital inflows on domestic liquidity and the effect of geopolitical tensions in the MENA region on global oil supplies will continue to pose upside risks to inflation.
• Bank of Canada (held rate at 1.00%):“While the economy had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be more modest than previously envisaged, largely due to the external environment. Prolonged uncertainty about the global economic and financial environment is likely to dampen the rate of growth of business investment, albeit to a still-solid pace.  Net exports are expected to contribute little to growth, reflecting moderate foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.  In contrast, very favourable financing conditions are expected to buttress consumer spending and housing activity. Household expenditures are expected to remain high relative to GDP and the ratio of household debt to income is projected to rise further.”
• South African Reserve Bank (held rate at 5.50%): “The MPC remains of the view that inflation pressures are primarily of a cost-push nature, but is concerned that a persistent upward trend in inflation and prolonged breach of the inflation target could have an adverse effect on inflation expectations which could reinforce the upward inflation dynamics. However, the MPC is also cognisant of the slowing domestic economy and feels that given the lack of demand pressures, monetary tightening at this stage would not be appropriate. At the same time, the nominal policy rate is at a long term low and the real policy rate is slightly negative, indicating a monetary policy stance that is accommodative and supportive of the real economy.”

Looking at the central bank calendar, the week ahead has 8 central banks scheduled to review monetary policy settings.  The one on many people’s minds will be the US FOMC, which is unlikely to announce anything but people will be watching for clues of any further quantitative easing measures.  The key emerging market economy, India, will also be closely watched, but with inflation still high is unlikely to move just yet.  Other than that, the broad geography of banks on the calendar next week will provide a timely insight into the status of the global economy.

The Banco de Mexico held its overnight interest rate target steady at 4.50%.  The Bank said [Google Translated]: “the Governing Board believes that the current stance of monetary policy is conducive to achieving the goal of permanent 3% inflation, so has decided to maintain unchanged the target for the interbank interest rate. However, they remain attentive to the outlook for global economic growth and its possible implications for the Mexican economy, which in a context of strong monetary laxity in major advanced countries, in the end could make a suitable policy easing. Also, the Board will continue to closely monitor the behavior of all the determinants of inflation that might alert about widespread pressures on prices to adjust timely monetary stance, seeking at all times the convergence of inflation to its permanent objective of 3%.”

In trading on Friday, education & training services shares were relative leaders, up on the day by about 0.9%. Leading the group were shares of Career Education (CECO), up about 2.7% and shares of Universal Technical Inst (UTI) up about 1.9% on the day.

Microsoft (NASDAQ:MSFT) reported second quarter EPS of $0.78 after the market close today, vs. consensus estimates of $0.76.The company said Q2 revenues came in at $20.89 billion, short of estimates of $20.92 billion.The company cut its operating expense view to $28.5 billion – $28.9 billion, from its prior guidance of $28.6 billion – $29.2 billion, which includes Skype costs.Windows revenues came in at $4.7 billion, vs. estimates of $4.9 billion.

The South African Reserve Bank [SARB] held its monetary policy interest rate, the repo rate, unchanged at 5.50%.  The Bank said: “The MPC remains of the view that inflation pressures are primarily of a cost-push nature, but is concerned that a persistent upward trend in inflation and prolonged breach of the inflation target could have an adverse effect on inflation expectations which could reinforce the upward inflation dynamics. However, the MPC is also cognisant of the slowing domestic economy and feels that given the lack of demand pressures, monetary tightening at this stage would not be appropriate. At the same time, the nominal policy rate is at a long term low and the real policy rate is slightly negative, indicating a monetary policy stance that is accommodative and supportive of the real economy.”

Previously the SARB also held the repo rate unchanged at its November meeting last year, the Bank last cut the repo rate by 50bps to 5.50% in November 2010.  South Africa reported annual inflation of 6.1% in December, compared to 5.7% in September, 5.3% in August and July, 5% in June, 4.6% in May, and 4.2% in April this year, compared to its official inflation target range of 3-6%. 

The Wall Street Journal reports companies have sold $44.2B of high and low rated corporate bonds this year, the highest on record for the time period, according to Dealogic, as bond investors seek yields higher than Treasurys. The Wall Street Journal also reports American Airlines’ (PINK:AAMRQ) parent contributed just $6.5M by the January 15 deadline of the about $100M payment it was scheduled to contribute to the company’s employee pension plans, according to a federal agency. Reuters reports State Street Corp. (NYSE:STT), JPMorgan Chase (NYSE:JPM) and Ameriprise Financial (NYSE:AMP) are among the finalists bidding for Deutsche Bank’s (NYSE:DB) asset management division, sources say. Finally Reuters reports after overpaying for acquisitions in western Africa, Kinross Gold Corp. (NYSE:KGC) is becoming the cheapest gold-mining target anywhere, Bloomberg reports. The company sells for 76c per dollar of net assets, versus the industry median of 2.5 times.