Multi Currency Equity Investments – Update #17


Multi Currency Portfolio Course – Update #17 2008 – Multi Currency Equity Investments.

Multi Currency Equity Investments – Update # 16
reviewed seven successful shares in the portfolios we track (for our multi currency portfolios course).

Here are the seven equities.

Samsung Electronics-GDR COM
Adidas AG
Vestas Wind Systems
Kurita Water Industr.
Hyflux Ltd
ABB Ltd
Novo Nordisk B

Here is how these shares performed from November 2007 to April 2008

Share                       Portfolio       Invested     Val Apr
Samsung Elec.         Blue Chip       50,000         58,458
Adidas AG               Blue Chip       50,000          52,183
Vestas Wind Syst.    Green             51,000          63,250
Kurita Water Ind.      Green            51,000          54,937
Hyflux Ltd               Green             51,000          53,127
ABB Ltd              Infrastructure      50,000          52,005

Novo Nordisk B  Danish Health     50,000          56,294

I described these companies as having currency roots because though each may have an ultimate headquarters in Tokyo, New York or Zurich, it would be a mistake to view the shares of these companies as an investment in any one currency.

With the exception of Hyflux, these are truly global firms that earn income in many currencies.  Hyflux is more regional in the Middle East and Asia.

We are looking at details of each of these shares in our multi currency course but here can see an important general fact. Four of the seven shares are heavily involved in the environmental field.

We will look at details of each of these multi currency shares in this multi currency course.

Today’s multi currency update begins this review by looking at ABB Ltd in the infrastructure portfolio.

First let’s look at how the entire infrastructure portfolio has fared.  $100,000 was invested and $200,000 borrowed equally in Japanese yen and Swiss francs.

D/S Torm                     50,000.00           42,176.44
FLSmidth & Co.            50,000.00           50,648.87
ABB Ltd=                      50,000.00           52,005.09
Siemens AG                  50,000.00           43,520.11
Komatsu Ltd. 6301       50,000.00           45,193.83
Veolia Environ              50,000.00            37,771.03
Total                          300,000.00          271,315.37

Japanese yen loan      100,000.00          110,024.59
Interest at  2.750%                                     1,689.34
Swiss franc loan         100,000.00          110,082.29
interest at 4.375%                                       2,688.99

Total Liabilities                                       222,795.87
Portfolio Value                                          48,519.50

This portfolio has suffered serious damage since November.

Without leverage the shares have lost 9.1%…not all that bad during the period.

However the leverage has increased that loss by a factor of two…up to about
-27.3%.

Plus the borrowed currencies have appreciated  $20,100 versus the original investment of $100,000…another loss of 20.1%.

Interest costs add an additional $4,378.33 of cost or 4.37% loss.

Let’s add the losses together:

Drop in share value         –  27.30%
Appreciation in loan        – 20.10%
Interest cost                    –   4.37%
–  51.77%

There you have it, how to turn $100,000 into $48,000 and a bit in about six months…a sobering lesson on the risks of multi currency leverage.

This multi currency  portfolio would have been hit even harder were it not for ABB Ltd. which rose during this difficult time.

The Infrastructure Portfolio invested $50,000 in ABB shares in November 2007. That investment was worth $52,005, last week, an increase of 4% during the last six months which have been among the most difficult for equity markets in decades.

ABB is a huge multi currency company that operates in more than 100 countries and has offices in 87.

The company is headquartered in Zürich, and operates mainly in power and automation technology. ABB is one of the largest engineering conglomerate in the world with approximately 112,000 employees.

ABB is truly multi currency and its shares trade on the Swiss Exchange, Stockholm Stock Exchange and New York Stock Exchange.

ABB stands for Asea Brown Boveri.   ASEA (Allmänna Svenska Elektriska Aktiebolaget) was a Swedish industry company. It merged with the Swiss BBC Brown Boveri in 1988 to form Asea Brown Boveri.  ASEA still exists as a holding company owning 50% of ABB Group.

Though this share is in the infrastructure portfolio it could as well be in the Green Portfolio.

ABB describes itself as “one of the world’s leading engineering companies specializing in effective electrical power that increases industrial productivity in a sustainable way.”

Sustainability themes run though ABB’s entire web site. Here are a few quotes from the site:

Multi Currency Sustainability

“Sustainability is integral to all aspects of our business. We strive to balance economic, environmental and social objectives and integrate them into our daily business decisions.

Multi Currency Utility

“ABB is a global leader in power and automation technologies that enable utility and industry customers to improve their performance while lowering environmental impact.”

Multi Currency Technology

“Technology plays a key role for ABB. We have activities all over the world working to develop unique technologies that make our customers more competitive, while minimizing environmental impact.”

The success of this shares fortifies a recent message about Green Investing Ideals.

That message was about  Dr. James Lovelock, a scientist, author, researcher, environmentalist, and futurist who is considered the Godfather of climate change science.  Though controversial, so far everything he has predicted has come true.

Some of Lovelock’s  thinking includes the ideas:

“Focus on innovation not conservation.

“Invest in technology.

“Prepare to adapt to new ways of living.

“Crisis will bring a post consumer society.

“Human lives are most fulfilling when driven by a sense of purpose.

“We will soon be forced to live more purposeful lives.

“There is always reason to be optimistic.

ABB Ltd. Has obviously tied into this thinking so in this case we could call ABB a multi currency Green Infrastructure share.

Let’s run ABB Ltd. shares through another litmus test.

We have learned in previous multi currency lessons that:

* Cheap stocks outperform expensive stocks.

* Stocks in companies with rising earnings outperform stocks in companies with falling earnings.

* Companies with share prices already in established up trends do outperform those that are not n the trend.

* Stocks with high earnings and rising earnings outperform stocks with low and falling earnings.

* A formula for multi currency success is to buy cheap, high quality stocks with rising earnings and increasing attention from the market.

ABB Ltd. is one of the largest in its sector with $29 billion in sales last year.  It is high quality.

The shares have performed well for the past half decade as this chart from www.investorguide.com and bigchart.com shows.

ABB Ltd-stock-chart

The share is up 61% in the last year.

The volume bar in that same chart shows plenty of recent attention in the market.

The company’s 3 year revenue growth is 15.4% compared to this sector’s average of 13.2%.

This share is trading a p/e ratio of 17.4.

The PE ratio for shares globally (Morgan Stanley Capital Index MSCI) for major markets is 14.2 so comparing on a global basis these shares are not especially cheap.

The average PE ratio for Switzerland’s stock market average P/E ratio was 16.1, Sweden’s  11.6 and the USA’s 16.7.

Here are this month’s  S & P sector statistics:

Stock         Sector          S&P 500
Forward Earnings Yield     5.59           5.83              6.85
Forward P/E                      17.9           17.2             14.7
Price/Cash Flow                24.7          16.6              13.2
Price/Sales                          2.6            1.7                 2.7

A year ago these shares were at $20.05. At their current $32.84 they are not the cheapest.

Jyske Bank, however, has a  buy signal for ABB and Jyske’s analyst, Christian Nagstrup, wrote in late April:

“We still see strong market conditions for ABB after the release of very strong
Q1 accounts, which prompt us to maintain our BUY recommendation and
raise our price target.

“Q1 sales rose by 29% to USD 7,956m which was somewhat higher than our estimate at USD 7,638m  and consensus at USD 7,665m. Earnings were an even greater surprise, as ABB reported an EBIT (Earnings before interest and taxes) margin of no less than 17% compared to 13.2% for the same quarter last year and our estimate at 13.9%. EBIT came to USD 1,353m (+65% y-o-y), of which USD 85m were related to gains of exchange-rate contracts due to the weak USD. Adjusted for this gain, EBIT was 20% above our estimate of USD 1,058m and 18% above consensus. The adjusted EPS at USD 0.41 was 33% above our estimate at USD 0.31 and 25% above consensus at USD 0.33.

“The very strong earnings were due, among other things, to price increases, selection of good projects, better execution of projects and fewer costs due to purchases from low-wage countries. All divisions reported improvements but Power and Automation were the top performers. Particularly the extension and maintenance of the electricity network in the mature markets and infrastructure
projects in emerging markets are keeping up steam in the Power divisions. In Automation, especially orders for the metal, minerals and marine industry are creating solid growth. High metal and oil prices are stimulating demand.

“Like the management, we see no signs that the strong market conditions will stop in the short term, as orders are still received at a high pace. The order book rose by 30% y-o-y in local currency and is now USD 26.8bn corresponding to more than 90% of ABB’s total sales for 2007. In the course of Q1,

“ABB received orders worth USD 10.9bn (2% above consensus), which was an increase of 16% in local currency. If ABB can execute orders as it has done recently, the coming quarters look promising in our view. ABB reiterated its 2008 sales anticipations, i.e. 15-20% growth in the Power divisions and 10% growth in the Automation divisions. ABB will not publish its anticipations of earnings, but after the release of the strong Q1 accounts we expect higher consensus estimates and we will also raise our earnings estimates. We lift our price target from SEK 177 to SEK 195 (US$32.60).”

ABB’s share price in May has already passed Jyske’s target price set in April so the share is currently very hot…worth consideration since all this happened in a down time.

Regards,

Gary

Learn more about eurobond share investing October 3-5 at International Investing & Business Made EZ North Carolina
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and November 7-9 at International Business Made EZ Ecuador


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