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Brian Barbour
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Studying for a Masters in Oil and Gas Law ,University of Aberdeen,UK Past: LLB Law (Hons) University of Aberdeen Diploma in Professional Legal Practice,University of Aberdeen Started to learn about investing from the age of 17 and traded a bit due to low available funds. From the age of 18 I... More
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  • Is Apple A Sell Before Earnings?

    Apple AAPL is anticipated to release Q3 earnings on July 21st. Theaverage estimate is for earnings of $1.78/share on revenue of $48.92B. This ranges from a low EPS estimate of $1.65/ share on revenue of $46.9B to a high of $2.05/ share on revenue of $52.64.

    AAPL Chart

    AAPL data by YCharts

    How China is affecting the share price

    The company's share price has been on the retreat ever since hitting a high of $132.5 on May 22nd. This has been in part due to the panic from investors in the Chinese markets. The Shanghai Composite Index has been in freefall since the start of June. The Index had been skyrocketing, however, this was at the expense of building up gigantic amounts of margin debt. As of June the country's margin debt stood at a staggering $358B. This eventually resulted in the bubble bursting with the Index falling over 34% last month, and over half of the listed companies being halted on the exchange. The state has been intervening, however, with little avail.

    (click to enlarge)

    This has lead to increasingly attractive value and entry point to build a position in the company. The company currently stands with a P/E of 14.9 and a forward P/E of 12.3 with a dividend yield of 1.73%. This stands at a large discount to the P/E ratio of the S&P500, at 20.

    I am sceptical over the effect the situation in China will have over the present earnings numbers. Although in the Q2'15 Greater China accounted for 29% of the revenue, the growth YoY was a staggering 71%. This was the highest increase by region; however, all operating segments apart from Japan had large revenue increases YoY with the Americas, Apple's largest market, reporting a 19% increase. These increases in sales from non-China segments should dramatically offset any fall in sales from China.

    Apple's Capital Return Program

    On April 27th, Apple announced that it would be increasing its Capital Return Program to $200B. Within this program, the company intends to repurchase shares worth $140B. This was an increase from the previously announced $90B. This indicates that Apple directors strongly believe that the share price is heavily undervalued.

    Obviously, we cannot tell before it is announced how many shares have been repurchased at over the current quarter by Apple through the repurchase scheme. However if we look at the previous quarter, Apple managed to achieve 40% EPS growth from 27% revenue growth under the old repurchase scheme. If we assume Apple achieves the same increases this quarter under the previous capital return program, it would be reasonable to assume they would achieve similar EPS gains over this quarter YoY.

    As the EPS consensus for this quarter is $1.78, this represents a 39% EPS increase YoY. This is lower than the 40% achieved in the last quarter under the old repurchase program. Now that Apple has increased the buy-back by 66%, this should provide further EPS increases. I believe that this will help offset any drop in earnings in China.

    Apple Watch

    There are worries over slowing sales of the newly released Apple Watch after a report by 'Slice Intelligence' was released showing that sales of the watch were only 20,000 a day in the US. This contrasts with the week of the launch where sales were averaging 200,000 a day.

    There are many flaws to this piece of research:

    • Slice only gathers information from 'email receipts'. This means all purchases made without an email receipt are not accounted for.
    • This is only data recorded in the US, does not show any insight into non-US sales.
    • The data is received from a panel of 2.5 million online shoppers. This means that purchases made in-store are not accounted for.

    These points really limit the credibility of the report. However, what I believe limits the credibility of the statistics is the fact that the Apple watch is a completely new product category. This means that those looking to buy are more likely to actually go to the Apple store to test the product before purchasing, unlike with the Iphones andIpads where the differences between models have been very minor such as just a change in size.

    With that all said, before the watch was released, estimates for sales of the watch were very conservative. Most investors had the idea that it would not become a product category the size of the Ipad or even the Mac. Even if there is only a small number of watches sold, I don't think investors were expecting much anyway.

    Earnings History

    Over the past four quarters, Apple has managed to beat expectations in its earnings results. Over this period, this works out at an average beat by 9.5%. These figures show that analysts have been consistently very conservative over Apple's earnings estimates. If the analysts follow suit from their previous estimates, this should provide a margin of safety for beating the numbers.

    Iphone Orders up

    According to a report by the Wall Street Journal, Apple is asking its suppliers to produce up to 90m Iphone 6S's by year end. This time last year Apple initially asked for 70-80m Iphone 6 Units. This shows that Apple is expecting record demand from it's Iphone segment and can only be inferred from current sales. This is definitely a good sign.

    A recap

    There has been a huge amount of negative sentiment around Apple and the market as a whole. This varies from the Chinese Composite Index falling over 34% in the last month alone to reports of weak Iwatch sales.

    However, Apple has increased its share repurchase scheme by 66% and has reportedly asked for record numbers of the next Iphone model to be built. In addition, Apple has beaten the earnings estimates from the previous four quarters by an average of 9.5%.

    I believe that Apple at $120 presents a great buying opportunity for the long term investor.

    Disclaimer: The opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision.

    Tags: AAPL
    Jul 11 10:50 AM | Link | 1 Comment
  • Showing The Ropes For The Young Or New Investors
    Learn from others to prevent your own mistakes

    The great advantage for the young investor is that they own the greatest asset. Time. Time allows you to make mistakes and get back on your feet again. It gives you options on what your investing strategy could be, and it gives you the gift of compounding. There is no doubt you will make many mistakes through your lifetime, however, if you can learn and act upon these mistakes it can stand you in good stead.

    I will try to share some things I have learnt from my own experiences as a young investor, however some of these guidelines could be applied to investors of all ages.

    Get experience before risking your own capital

    There are plenty of brokers that let you invest fake money into shares. This should be your starting point. It will give you an idea of certain qualities of the stock market such as volatility, the need for diversification and reasonable expectations for returns.

    How much money should I have before I start investing?

    This entirely depends on your goals and whether or not you want to be active or passive in your investing. When I started off with £2,000 ($3140) as an active investor, I quickly found out that it was hard to diversify my holdings and be cost effective. The trading and forex charges were too high a percentage of the net value of the holding. This made making realisable gains harder to achieve. I would advise at least £5000 ($7852) as a starting point if you want to be an active investor.

    However, this does not mean you cannot invest effectively with a small amount. Investors with small amounts of money can buy certain index funds that can be very cost effective and provide diversification. Index funds are an accumulation of many companies into one product. Ones I would recommend are the S&P500 Index and the FSTE100 Index. Both of these can be bought with low management fees.

    Make use of legal tax-free structures

    In the UK, investors can invest up to £15,240 (as of 2015) tax free EVERY YEAR in shares. This means that you will not pay income from dividends or capital gains tax on selling your shares. It is vital that you make use of these products before investing any money into a regular share dealing account. This will save you an incredible amount of money over the long term, especially if you start young!

    If you are resident in the US there are similar products such as Roth IRAs.

    Where do I get my information?

    There are plenty of sources to get information on investing and the fundamentals of certain company shares. This could be from the business section of a financial related newspaper, or from the Internet.

    It is important to check multiple sources when looking for information, as some sites might provide out of date and therefore misleading information. From my experience, I have noticed that certain credible websites could still give misleading information. For example, if you search many UK companies on Yahoo Finance, often you will not be given the correct information. I have found it is best to use UK sites for UK shares and US sites for US shares.

    Another place to get valuable information is company annual reports. These will explain what the company does, its goals and its financials. These are invaluable.

    Pitfalls of a rookie investorLeverage

    One of my first mistakes was using leverage. In its most basic form, leverage is 'borrowing' money in order to purchase a bigger, or more, of a security. This amplifies both gains and losses. It can almost be addicting when you make a lot of money from leverage that you forget how much risk it carries. This can result in you losing more money than you invested in that security. I found that leverage caused much unnecessary stress and led to trading behaviour, which I do not think is a great trait to have as an investor. I have found that investing without leverage changes the way you invest. You will generally make more rationale decisions if you give yourself time, however you will not become a millionaire in a month. However, investing is not a race, there is no finish line.

    Following Analysts recommendations

    Security Analysts provide recommendations on company shares generally with a 'buy', 'hold', or 'sell'. It can often be tempting to follow these recommendations, however from past experience this will not lead to much success. These recommendations are there to encourage trading, and therefore higher brokerage fees for brokerage houses. A good illustration of this is examined in the book 'Bull!' by Maggie Mahar.

    Penny Stocks

    I have never been induced to buy penny stocks, however many people still do. They are basically stocks of companies with little substance and huge risk. Generally, advertisements that display penny stocks will promise large returns. A famous quote that sums up this well is,

    If something sounds too good to be true, it normally is.

    I believe all investors would do well to steer clear of penny stocks.

    When should I think about saving for retirement?

    The simple answer: now. The earlier you start, the more you can make use of the wonders of compounding. There is nothing stopping you freeing up some cash in the future.

    To summarise
    • Do what you can to maximise your potential by continuously learning and starting early.
    • Do what you can to minimise your costs
    • It is never too early to start investing for your retirement!
    Jul 06 7:56 PM | Link | Comment!
  • Why Are Multinational Companies A Particular Target For Regulation?

    From the 19th century there was a prominent shift from separate national economies to a global economy with the emergence of multinational companies, particularly in the United Kingdom and later on in the US. Since then, multinational companies are constantly targets for regulation. However all countries, regardless of size or power, all face difficulties of different degrees when trying to regulate these corporations. This essay will discuss what makes multinational companies a particular target for regulation, the array of regulation used, and the many difficulties these national regulators face in attempting to regulate these multinational companies.

    MNC definition.

    In order to understand why multinational companies are targets for regulation, it is first necessary to understand the definition of multinational companies. A Multinational company (MNC) is a company that controls assets in at least 2 countries. This involves a parent company in one country, which then controls an affiliate or subsidiary company in another country. Dr. Tindall defines MNCs in his book "Multinational Enterprises" as "a combination of companies of different nationality, connected by means of shareholding, managerial control or contract and constituting an economic unit".

    Economic harm

    Lawmakers around the world have ambivalent views towards MNCs for many reasons. Many countries realise that MNCs have to be controlled because of the harm they can cause countries economically and politically. More often or not, the MNCs seem to be able to hold countries to ransom. These are not just the third world countries but also the developed countries. In the undeveloped countries there is undoubtedly more favourable laws for these corporations to operate in for several reasons. For example, the laws regulating labour in companies operating in undeveloped countries are very unfavourable towards the worker, and even if a victim did have a case they are unlikely to be able to afford to go to court or would not have access to justice in the first place. The International Labour Organisation (ILO) Declaration of Principles on Multinationals and Social Policy states,

    "Wages, benefits and conditions of work offered by multinational enterprises should be not less favourable to the workers than those offered by comparable employers in the country concerned".

    In developing countries comparable employers may not exist and the ones that do are likely to have a very low standard for workers so the Multinationals, even if they provide a better quality of employment are very likely not to offer anything close to what they offer in Western developed countries. This is attractive to MNC's as they would not have to worry about legal claims against them and could in turn pursue higher profits from spending less. Furthermore, many counties have had to drop the 'red tape' to multinational corporations to attract inward investment. A typical example of this is the United Kingdom, which, as Muchlinski describes, "has traditionally welcomed inward investment under successive Conservative and Labour administrations". Examples of this include the repealing of the Exchange Control Act in 1987, which removed the most significant restrictions on inward and outward investment under English law. The UK along with the US typically have to try and strike a balance with more favourable investment laws as they have typically higher corporation tax rates than other countries such as Luxemburg or Ireland which tend to be a favourite countries for incorporation for companies as they have very low rates of corporation tax. Author Dambisa Moyo of 'How the West was Lost' states that the poor economic policies and the loss of technological advantage over the rest of the world has led to the West's relative decline. The policies of the west, she predicts will cause the GDP of China to overtake that of the US and UK in the not too distant future. The multinationals have been acting as a vehicle for the transfer of technology to the west as they are generally western companies that operate in the east such as China as by doing so puts their costs down. This results in much more business, productivity, and amounts of exports happening in the east.

    Harm - tax avoidance

    Another evident harm that has been brought to attention of the public in recent months is the fact that in countries such as the UK, many companies operate, employ workers, and make profits while paying little to no tax at all. For many years they have been avoiding tax by using legal loopholes causing billions of pounds worth of revenues that should be going to the UK government to go to low tax rate countries. The publications from the UK Parliament show that while revenues of tax going to the government rose in value by £4.5b in the year 2011-2012 from the previous year, at the same time there was a decrease in corporation tax revenues of £6.3b. A major factor in this is major corporations such as Starbucks and Amazon using transfer pricing to send the money to a company belonging to them, which is located in a low tax rate country. Transfer pricing is where a subsidiary in a tax haven can over-invoice the charge the parent for use of patent technology or the supply of products. This effectively makes it seem as if these corporations are not making a profit, when actually they are being transferred out of the UK.

    Environment harm

    The harm to the economy of countries is not the only evident problem. There is a huge problem with the effects MNCs are having on the environment and the health of country's citizens. Such examples of this include the case 'Re Union Carbide Gas Plant Disaster at Bhopal, India. India tried to claim $3.3 billion for compensation for the gas leak, which caused several thousand deaths and to affect the health over half a million Indian citizens. The Union Carbide Corporation US 2nd circuit case ended up being resolved out of court with Union Carbide paying around $470m, 15% of the amount claimed by India. Another example is the BP Deepwater Horizon case that involved an oil spill causing dramatic environmental effects to the Gulf of Mexico in 2010. Litigation is still going today and is bound to come to a settlement between the US and the corporations involved. The dispute over who is liable continues between BP, Transocean and Haliburton.

    Difficulty regulators face

    Countries have problems trying to regulate the MNCs for several reasons.

    One problem is that there are territorial limits of national and regional regulation. This stops powerful counties being able to impose laws in different countries where the MNCs are making advantaging from while harming them at the same time economically. This can be shown from the case of Lonrho v Shell Petroleum where the defendants refused to give up documents in the possession of their wholly owned subsidiaries in Rhodesia and South Africa where the directors of those subsidiaries refused to disclose them. The Lonrho case is an example of extraterritorial enforcement being used. This is where the enforcing jurisdiction makes direct orders against the foreign units of the MNC, or takes non-judicial measures within its jurisdiction against the assets of the foreign entity, or denies it certain privileges usually given to enterprises engaged in the same business such as import licenses or tax credits. The extraterritorial application of law can have serious political effects. It can be seen as either an attempt by the regulating state to impose its policies on others. Also, the target's state's exclusive territorial sovereignty will have been infringed. This can lead to diplomatic conflict. Developing countries who rely on foreign aid are more likely to accept extraterritorial jurisdiction by power regulating states such as the US, China or the UK.

    Race to laxity- Delaware states.

    As it is quite evident that national and regional regulation has its limits, there is possibility of an international agreement between nations to try to come to a solution. In February of 2013, the G20 leaders met in Moscow to try to crack down on tax avoidance. The main support for this was UK, France and Germany. If successful, it could cause the profits of many corporations that enjoy low tax rates to decrease by a large amount. The actions they are trying to stop are the transfer pricing and what David Charny explains to be the race to laxity. This is where when one country lowers its tax rates or tries to make itself more attractive for Foreign Direct Investment (NYSE:FDI), there are certain countries who will always do one step further, therefore making it ever more attractive to MNCs. Charny explains a note able example of this in "An American perspective on the 'Race to the Bottom' in the EC". In the US, New Jersey became the most popular place in the first great merger wave in the 19th century with very favourable rules on the formation of trusts. The second wave of incorporation came 1920s and 30s. However, by this time Woodrow Wilson had tightened the state's corporate law that led to a huge shift of companies reincorporating in Delaware-drafted with the help of the multi billionaire DuPont family in a way to protect managerial and shareholder interests- appeared favourable to managers of corporations. Even now Delaware remains at the forefront of incorporation in America, with over 40% of NYSE companies and over 50% of Fortune 500 companies incorporated there. What the G20 leaders are trying to do is to stop the East becoming the international Delaware with very lax rules on incorporation that favour managerial and shareholder interests over those in the West, therefore taking away a large amount of money that was originally going to the Governments in the West.

    Difficulty- separate corporate personality

    Another problem that regulators have when trying to regulate MNCs is that of corporate personality. It is a very strong founded principle stemming from the UK case of Salomon v Salomon that stated that subsidiaries of a parent company are a different legal entity and have a different legal personality from their parent. This has a profound impact on the regulation of multinational companies as they can escape the consequences of negligence and liability to great extents by using many subsidiaries. An example of this can be seen in the case of Adams v Cape Industries where a victim of asbestos related cancer tried to sue the parent for 20m as the subsidiary only had 5m in assets. It was held he could not claim from the parent, as it was a separate legal entity. However, an important point was made in the Amoco Cadiz case, which came before the Adams case, which held that basically if the subsidiaries are wholly exercised and controlled by the parent company, the parent company will be liable for the actions of it's subsidiaries.

    "Creative compliance" idea

    It has been apparent that when national regulators try to impose certain regulations this can cause lobbying between the MNCs and politicians, or they reorder their business by shifting resources to other, more favourable jurisdictions. In turn they are, in the view of Professor Doreen McBarnet, avoiding regulations by following the letter of the law but are conflicting with the spirit of the law. This is what she calls "creative compliance".. It involves practices that might be illegal, indeed criminal, if legally structures in one way could be legally repackaged and claimed to be lawful.

    Self Regulation has become increasingly active among MNCs. Self-regulation or self-monitoring involves internally produced company codes of conduct and industry codes for groups of MNCs in the same industry, for example, the Code of Marketing Practices developed by the International Federation of Pharmaceutical Manufacturers and Associations. This type of regulation is distanced from the existing centres of law-making such as national parliaments, global legislative institutions and inter-governmental agreements.

    To conclude, multinational companies are particular target for regulation as nations try to strike a balance. They do this by having incentives to entice them to incorporate and produce jobs and bring wealth to their country. While at the same time, they try to protect the rights of their citizens and to bring wealth in through taxes. MNCs have been able to cause difficulty to the regulators as they have bargaining power from the wealth they offer and the competition from the East. The future ability of multinational company's to do this may disappear with international talks in the G20 and such proposals in the UK. These are highlighted by Professor Fiona MacMillan such as the UK Corporate Responsibility Bill, which proposes that companies with more than 5m in revenue are obliged to carry out its activities in accordance with laws and administrative practices of the countries within it operates.

    Dec 08 12:08 PM | Link | Comment!
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