Stock in Focus: Fisher and Paykel Healthcare |
Fisher and Paykel Healthcare’s share price was down 6.5% to a 5-month low after reporting their 2023 financial result. While to the surprise of no-one Covid benefits started to ease with operating revenue down -6% from last year to $1.58 billion, while margin pressure and increased investment meant net profit after tax plunged 34% to $250.3m. Second half was encouraging with revenue up +14% over the second half as it returns to normality. Fisher and Paykel guided 2024 revenue to come in at $1.7billion which is light and inline with 2022 result, and expect normalisation of gross margins to return back to ~65%. Fisher and Paykel is a top-class company, with strong long-term growth potential which is why we continue to hold it in our portfolio and remain BUY-rated. We do caution investors that the stock is not cheap trading at x50 future price to earnings multiple and that this type of volatility is expected over the next year or two. At current levels, it is a buy-and-forget for 5-10 year type stock, like CSL, and buy on any weakness. |
The froth is what gets you in the end
If you are a Big Tech Company in 2023, maybe your P/E ratio looks a little like this.
Maybe you make a magical device – let’s say you make magical widgets. You endured a bit of a sell-off in ’22, but now you’re back, baby, and things are looking spicy. Your P/E ratio is now 202x earnings, meaning a buyer today would wait two hundred and two years to get their money back if this company never made another penny. But maybe the company grows: if it doubles its earnings in ten years, you end up with a P/E ratio of still 100x; if it quadruples its earnings in ten years, it still looks like 50x earnings. You know, maybe your company’s magical widgets are pretty good – but you have to ask yourself – are they that good?
Let’s now pretend you buy a basket of the best 500 widget makers in the world: they make all sorts of things – widgets, whizz-bangs, whatever. If you were to buy that basket of widget makers, you’d pay about 22x earnings right now, which is about fair. It’s not that cheap, but on a ten-year basis, it’s looking about average – it is trading roughly ten times cheaper than the first widget maker we talked about.
The first widget maker is, of course, Nvidia, which has spiked to sort of absurd levels. Much has been written about this: AI. People love AI! Nvidia makes the chips that go inside AI! AI is big! It is going to change the future! We don’t have any special understanding of AI, but we do look at the valuation and go – perhaps, maybe, this is a little expensive?
Another chart: the S&P 500 vs. Tech during the dot-com bubble: things got kind of out of hand, famously, and at its peak, the entire sector traded at 50x earnings. At its most frothy, the S&P represented an ~85% premium to simply buying the S&P. On the same basis, something like Nvidia trades at ~4x that 85% premium. It’s a lot! It feels a little “irrationally exuberant” as the bankers like to say.
You might say, ok, great, but AI is the future. We don’t disagree: it’s a big technology. But 200x earnings? Where, you might say, is the value in that? By this point we all know that bubbles tend to happen when a new technology occurs: the argument goes that the net result of a lot of investment is good for the progress of the world: the best chart for this is the railroad bubble of the 1800s: thousands of miles of track was laid over Britain; the stock went up until it didn’t. Most people investing in the bubble – no matter what it is – lose money.
The capital contributed is a sort of sacrifice to progress and the new technology – as Marx (!) writes, it is “the popping of a soap bubble” (people often forget that Marx was an astute economist). Marx writes: “To what extent does the accumulation of capital in the form of loanable money-capital coincide with actual accumulation, i.e., the expansion of the reproduction process?” and this is kind of the issue at hand with any new technology – how does the accumulation of said capital (i.e., Nvidia’s stock price) coincide with the actual expansion of the reproduction process (i.e., AI).
The answer usually is somewhere in between – there is, of course, an expansion – AI means you can ‘reproduce’ at a greater efficiency than before, like the railroad or the internet. But in terms of capital expansion – as with Nvidia right now – there is a gap between the output and the “capital expansion”. The net benefit of the technology right now is a lot less than the predicted increase in Nvidia’s actual earnings. It’s something to think about. As Seth Klarman likes to say “At the root of all financial bubbles is a good idea carried to excess.”