‘You can’t look at the competition and say you’re going to do it better. You have to look at the competition and say you’re going to do it differently.’ Steve Jobs
Competition is a fact of life, especially in countries where the rule of law is backed up by political and social structures which the general population respects. As a now seasoned veteran of the business and investment community (hard to believe, but over 25 years of experience, sheesh), I have never seen a time where so many industries are so competitive, and brutally so. One of the comments you hear from the best CEO’s and leaders of outstanding companies is finding ways to make your business different. In today’s world, having one feature or one aspect of your business which makes it unique is not enough to provide a long lasting plan for sustainable growth. For example, let’s look at the internet wonderchild, Snap Inc (NYSE:SNAP), and it’s current predicament. Snap, formerly the artist known as Snapchat, built a massive audience on the back of a product which allowed people, usually of the younger generation, to take photos and add text which would then disappear after a short period of time. Winner, winner, chicken dinner you say, right? For a brief time, that appeared to be the case. However, Facebook Inc's (NASDAQ:FB) leader, the ever observant Mark Zuckerberg, no slouch in his own regard, recognized instantly the strategic threat of Snap and has integrated the same feature into it’s own property, that being Instagram. Over the last six months or so, Instagram’s growth has accelerated while many believe Snapchat is suffering the same fate as Twitter, the deadly disease of stagnant user growth. Capitalism is tough, brutually tough, especially over a long time frame, and finding ways to be distinct and building advantages relative to the competition might be the prime objective of any business.
As a case in point, let’s take a closer look at what Apple (NASDAQ:AAPL) reported this week. Apple sold over 41 million I-phones, saw growth in Ipad’s as well, and blew away analyst estimates. Apple’s broad platform of revenues is deeper than it’s ever been, phones, tablets, watches, desktops, accessories (think headphones and earpods),and services, which has grown into an enormous business. When you think about it’s possibilities for virtual and augmented reality, Apple has slowly created a more expansive product platform and a stronger business. The criticism of Apple in the markets is it is still too reliant on the I-phone for its revenues and profits and does not innovate. Sitting on $280 billion of cold hard cash, and adding 50 billion or more each year, Apple sits in the pole position of any market it wants to be in. Period.
Next, consider what took place with the largest generic pharmaceutical manufacturer, that being Teva Pharma Industries Ltd ADR (NYSE:TEVA), a company based in Israel with global operations. On Monday, Teva opened at $32.30 and it reported earnings on Wednesday which were dramatically below what was expected, and also guided down for the rest of the year. What reasons did they give for the shortfall? Competition in the generic area, some of it attributed to a more permissive Food and Drug Administration in approving competitors drugs, reducing it’s pricing power. Consolidation among wholesalers and Pharmacy Benefit Managers has given those entities negotiating power when dealing with Teva. It saw more products competing with it’s biggest revenue source, the Multiple Sclerosis drug Copaxone, as well. In addition, it faced issues with the continuing problems in Venezuela, and still needs to hire a permanent CEO. The root of the problems is the deal structure they used to buy Actavis, a large generic manufacturer, from Allergan (NYSE:AGN), for $40 billion. They borrowed $35 billion in an all cash deal, and at the time, with low interest rates, it made perfect sense. It still does, but with their operations weakening and Copaxone facing imminent threats, using more equity would have been prudent. Deal structure matters in any transaction, and over time the flaws in a deal can be dramatic. Still, even with the issues, Teva guided to over 7 billion of cash generation, and the Actavis non core assets can be shopped as a way to reduce debt. It will take some time to pay down the mountain of debt, certainly a challenge, but it can get done. First things first, hire a CEO, right? Teva closed on Friday at $20.60 (ouch).
Elsewhere in the markets, the July jobs report was better than expected (209k versus 183k) but on a Friday early in August investors yawned. Speaking of Venezuela, the oil world is following events there closely because whatever transpires will affect all participants. Venezuela needs the United States quite badly, despite what it’s mucho machismo (murdero?) Mudero says. The nationalized oil company, PdVSA, needs additives to help it’s heavy crude in order to export a lighter blend to the rest of the world, including the U.S. Guess what country it gets the majority of those additives from and buys 49% of it’s exports? Yes, say hello to senor Trumpe. If the United States decides to sanction Venezuela on either front, it is a biggo problemo for Mr. Mudero. Moreover, Venezuela faces $5 billion in debt payments between now and the end of the year. It is believed Venezeula has over $150 billion of debt, and if it chooses to skip a debt payment, its oil shipments and energy assets could be seized by creditors. The credit default swaps are pricing in a 70% chance of default as the money could be used to help feed the hungry and cure the sick, not that Mr. Mudero cares about that.
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