Stryking Wright

Yesterday there was a bit of a speed bump to the US and China signing phase one trade agreement. A meeting between Xi and Trump was meant to happen in November, where at the end of the meeting they would sign the agreement. That meeting may be pushed back to December now because there are still some details to be ironed out; one of the issues is where the deal will be signed. When the news broke at 11:40, US stocks immediately sank. As the day went on though, most of the lost ground was recovered.

Yesterday the JSE All Share closed up 0.71%, the S&P 500 closed up 0.07%, and the Nasdaq closed down 0.29%.


Company Corner

One thing, from Paul

Stryker stock has been a little weak lately. Our medical devices holding in New York had a great run to above $220 per share on good results, but sagged to below $200 in recent days, on news that they will spend up to $5.4 billion to acquire Wright Medical Group (share code WMGI).

Memphis, Tennessee based Wright Medical is a global medical device maker that was founded in 1950 and focuses on extremities and biologics. Stryker is offering $30.75 for each share of WMGI. That's nearly a 50% premium to Friday's closing price. This is probably the reason that Stryker's price fell. Deals of this nature raise the concern that they are overpaying?

The fit with Stryker seems to be good. Wright Medical's team, products and customer base will slot into Stryker's trauma and extremities business. They have annual sales approaching $1 billion a year, and is a leader in orthopaedic products to repair shoulders, elbows, wrists, hands, feet and ankles. The picture below shows the options for replacing an ankle joint. The biologic products are interesting too, and include consumables used in orthopaedic surgeries such as bone wedges, bone repairing putty, membranes, grafts and glues.

The boards of directors of both Stryker and Wright Medical have approved the transaction and the deal is expected to close in the second half of 2020. It is expected to have no impact on Stryker's earnings this year, and only a very modest impact in 2020.

I would not be overly concerned that Stryker is becoming too adventurous. $5.4 billion is a lot of money, but Stryker's market capitalisation (the best measure of their enterprise value) is $75.3 billion, so this is well within their financial comfort zone. On we go!

Byron's Beats

At a recent conference Reed Hastings, the Netflix CEO, committed to spend $15bn on content this year according to this Business Maverick (via Bloomberg) article. That is a lot of money. Many analysts have found a direct correlation to content spend and subscriber growth when it comes to Netflix.

In truth, the company has no choice. The competition is heating up and they need to stay ahead. What I found interesting in the article was the CEO's comments on new categories. Netflix is strong with series, now they want to push hard into movies. Has anyone seen The Laundromat yet? It stars Meryl Streep and it is all about the Panama Papers. I have heard it is brilliant. I will watch it after I am tired of watching the Rugby World Cup final on repeat.



They also want to get into animations. Children's movies are huge. I am starting to experience that first hand with a 20 month old boy ruling our household. Many of the kiddies movies appeal to adults. I am looking forward to seeing what Netflix can conjure up in that department.

Michael's Musings

I have spoken before about companies experimenting with reducing the workweek. The latest company to do it was Microsoft Japan, who shut shop on Fridays to see how that would impact on company output. In this case, working fours days instead of five resulted in workers not only matching the five day productivity level but improving productivity by another 40%!



Wow! Work 20% less and increase output by 40%. It shows the value of having rest, coupled with highlighting how much dead/ unproductive time people have at work. One of the reasons mentioned for the increase in productivity was reducing the number of meetings that people have.

Why is this important to investing? Well, if we have more leisure time, then sectors that benefit from leisure will see good growth in the future. The first business that comes to mind is Booking.com. Having a three day weekend will mean more weekend holidays.

You can read about the experiment here: Microsoft Japan's four-day week is new evidence that working less is good for productivity

Bright's Banter

Nike's biggest rival, the three striped German sportswear company Adidas, reported its earnings yesterday. The shares closed down 5.3% as earnings missed due to slowing sneaker sales. Maybe it was a lack of innovation when it comes to the perfect running shoe as they try to compete with the Nike Vaporfly Next?

Revenues for the quarter increased by 6% to $7.1 billion year-on-year beating analysts expectations. This was thanks to footwear sales growing by 1% as a whole. Still a little disappointing considering that there was a new Yeezy sneaker launch last year, but the company had a slow rollout to keep it "exclusive".

Their other top selling sneaker, the Superstars Stan Smiths have slowed in distribution and running shoe Ultra Boost 19 has disappointed due to a lack of innovation. The shoe is now 9 years old. Adidas running shoe has only won 2 marathons this year as compared to 8 marathons won by Nike's Vaporfly Next.

Demand for Adidas in North America is growing at a rate that is twice that of Nike where the company targets more growth in the holiday season. In return, Nike is growing revenues four times faster in Europe as Adidas loses market share. This game of top sportswear brand is not easy, you forget your home market and your rival picks up the slack.

The global sportswear market is a $360 billion market expected to grow at 7.7% this year. The pie is big enough for healthy competition as people hone in on their health and wellness. The Adidas Boost (shoe) business is now a $2.5 billion business that's still growing, including double digit growth for the Ultra Boost.

Adidas is betting big on soccer boots, old school Ozweego and its new line that will feature Beyonce . Adidas will be lifted by the same theme of nutrition, health, and wellness as people choose healthier lifestyles. We don't like to fight a rising tide here at Vestact, we pull out our surfboards and enjoy the ride!



Signing off

At 13:00 we will get a South African manufacturing update. Vestact holdings reporting in the US tonight are Booking.com and Walt Disney. The JSE All-share is lower this morning and the Rand is slightly weaker against the US Dollar.

Sent to you by Team Vestact.

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