by Jason Norris, CFA
Executive Vice President of Research
Money Talks
Earlier this week, Facebook anted up close to $20 billion (with a capital B) to purchase WhatsApp, a mobile texting company. The company is estimated to gross $300 million in revenues this year and $500 million in 2015 by charging $0.99 per year to allow users to by-pass texting fees from their wireless provider. One can argue if the price will be “worth it” for Facebook, but we do know that WhatsApp’s 50 employees are pleased.
This deal is just one of the several major merger and acquisition (M&A) deals we have seen this year. On top of the Facebook deal, over the last week we saw a major take-out for Forest Labs, talk of Safeway going private, and Comcast bidding for Time Warner Cable. Corporate America is flush with cash and, as we forecasted, is putting it to work. Industry analysts have yet to declare that we are off to the races for M&A, but confidence is improving.
Modern Day Cowboy
Move over Henry Ford, here comes Elon Musk, the CEO and Chief Product Architect for Tesla Motors. The high-end electric car maker continues to push the limits on manufacturing and innovation. While global demand is picking up and Tesla has been ramping up production to meet these needs, profitability and valuation are key determinants of a good stock, on top of a good company. One can get caught up in the hype of the revolutionary envelope Tesla pushes on a manufacturing basis (check out this video for a demonstration). Is a good company necessarily a good stock? When you look at the value investors are giving Tesla, it is $817k per vehicle sold. The auto average is $13k. One could argue that Tesla should command a premium, but the current premium may be a little too rich for our taste.
Baby, It’s Cold Outside
The recent polar vortex that has affected most of the U.S. the last few weeks has impacted several economic indicators (as highlighted last week by Ralph Cole) as well as commodity prices, specifically natural gas. Natural gas prices in mid-January hovered around $4.00/btu. Since then, gas has spiked to over $6.00/btu. While this may have a short-term impact on the cost of energy, we do not foresee much more upside pressure to gas prices. At these levels, we are likely to see some shift in exploration and production from oil to gas since the cash flows at these prices can be very attractive. Therefore, as demand slows with warmer weather and more supply comes online, we would expect gas prices to trend lower.
This phenomenon in the U.S. has led to an energy/manufacturing renaissance. Low energy prices have allowed manufacturers to “on shore” their production because the costs have become more attractive. Especially those industries where natural gas is a major feedstock: chemicals, fertilizer, etc. There are plans for 10 new ethane facilities (or crackers) in the U.S. due to the increased supply of energy and natural gas. This will result in a major increase in polyethylene supply, which is a major input for plastic, thus, lowering the cost for thousands of consumer and commercial products, while increasing jobs in the U.S.
Takeaways for the Week
- M&A deals are starting to pick up and companies are paying premiums for growth
- Low commodity prices and technological innovation is a boom for the U.S. economy, thus benefitting the U.S. consumer