Tag Archives: technology advances

Productivity Therapy

The IMF has sponsored another paper from staffers on the global productivity slowdown, with the catchy title “Gone with the Headwinds”. The paper reiterates many of the arguments concerning advanced economies referenced in this post, such as total factor productivity (TFP) hysteresis due to the boom-bust financial cycle and resulting capital misallocation, “an adverse feedback loop of weak aggregate demand, investment, and capital-embodied technological change”, elevated economic and policy uncertainty.

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Also cited are structural headwinds including a waning information and communication technology (ICT) boom, an aging workforce, slower human capital accumulation, and slowing global trade integration (including the maturing of China’s integration into world trade). An exhibit on the ICT trends from the report is reproduced below.

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The report highlights short term remedies such as boosting private sector demand, efficient spending on infrastructure, strengthening balance sheets, and reducing economic policy uncertainty. Longer term remedies cited include policies to boost technological progress, policies to mitigate the effects of aging, policies to encourage migration, advancing an open global trade system, exploiting policy synergies, structural reforms, raising the quantity and quality of human capital.

Now, how many of these remedies are likely to be pursued in the current populist political environment? Although Trump has shown signs recently of doing the opposite to what he fought the election on, overall it does look like we are merrily going down a policy dead-end for the next few years in important advanced economies. Hopefully the policy dead-end will be principally confined to the US and they wouldn’t take too long in figuring out the silliness of the current journey and the need to get back to trying to deal with the big issues intelligently. Then again….

Piddling Productivity

Walk around any office today and you will likely see staff on the internet or playing with their smartphones, the extent of which will depend upon the office etiquette. The rise of the networked society would intuitively imply increased productivity. Data analytics, the cloud, the ease with which items can be researched and purchased all imply a rise in efficiency and productivity. Or does it?

Productivity is about “working smarter” rather than “working harder” and it reflects our ability to produce more output by better combining inputs, owing to new ideas, technological innovations and business models. Productivity is critical to future growth. Has the rise of social media, knowing what your friends favourite type of guacamole is, made any difference to productivity? The statistics from recent years indicate the answer is no with the slowdown in productivity vexing economists with a multitude of recent opinion and papers on the topic. Stanley Fisher from the Fed stating in an interesting speech for earlier this month that “we simply do not know what will happen to productivity growth” and included the graph below in his presentation.

click to enlargeUS Average Productivity Growth 1952 to 2015

Martin Wolf in a piece in the FT on recent projections by the Office for Budget Responsibility (OBR) calls the prospects for productivity “the most important uncertainty affecting economic prospects of the British people”.

Some think the productivity statistics have misestimated growth and the impact of technology (e.g. the amount of free online services). A recent paper from earlier this month by Fed and IMF employees Byrne, Fernald and Reinsdorf concluded that “we find little evidence that the slowdown arises from growing mismeasurement of the gains from innovation in IT-related goods and services”.

The good news seems to be that productivity slumps are far from unprecedented according to a paper in September last year from Eichengreen, Park and Shin. The bad news is that the authors conclude the current slump is widespread and evident in advanced countries like the U.S. and UK as well as in emerging markets in Latin America, Southeast Europe and Central Asia including China.

A fascinating paper from December 2015 by staff at the Bank of England called “Secular drivers of the global real interest rate” covers a wide range of issues which are impacting growth, including productivity growth. I am still trying to digest much of the paper but it does highlight many of the economists’ arguments on productivity.

One of those is Robert Gordon, who has a new bestseller out called “The Rise and Fall of American Growth”. Gordon has long championed the view of a stagnation in technology advances due to structural headwinds such as an educational plateau, income inequality and public indebtedness.

click to enlargeAverage Annual Total Facor Productivity

Others argue that productivity comes in waves and new technology often takes time to be fully integrated into the production process (e.g. electricity took 20 years before the benefits showed in labour productivity).

Clearly this is an important issue and one which deserves the current level of debate. Time will tell whether we are in a slump and will remain there or whether we are at the dawn of a golden era of innovation led productivity growth…..

Wobbly Tooth

The onset of a wobbly tooth from a year old crown caused me to have a look at Sirona Dental Systems (SIRO) again. I last blogged on it in August 2014 here. SIRO has had a good run since then moving from around $80 to $109 today. The recent increase is due to the announcement in September of a merger of equals with DENTSPLY which is expected to close in Q1 2016.

SIRO, with 65% of its revenues outside of the US, felt the impact of the dollar strength with flat line revenue growth in 2015 (year ending in September). In local currencies, SIRO achieved 9.8% growth which was broad based across the US and international markets with respective growth at 9.2% and 10%. Despite the FX headwind, and a volatile Q2, operating margins were impressive, as the graph below shows. Operating cash-flow after capital expenditure has also been strong closely running at approximately 65% of operating income.

Click to enlargeSIRO Revenue Split & Op Margins YE2015

DENTSPLY (ticker XRAY) is a larger company in revenue terms with lower operating margins and a focus on dental consumable products. Dental specialty products such as endodontic (root canal) instruments and materials, implants and related products, bone grafting materials, 3D digital scanning and treatment planning software, dental and orthodontic appliances and accessories make up approximately 50% of revenues. Dental consumable products such as dental anesthetics, prophylaxis paste, dental sealants, impression materials, restorative materials, tooth whiteners and topical fluoride make up approx 30% of sales. The rest of sales are split between dental laboratory products and consumable medical device products. Geographically DENTSPLY also sells its products globally with 65% outside the US. DENTSPLY’s historical results (with assumed Q4 to December for 2015) are as below and the net cash-flow profile of DENTSPLY relative to operating income is similar to SIRO in recent years.

Click to enlargeXRAY Revenue Split & Op Margins YE2015

The investor presentation on the merger highlights further details. One interesting angle on the investment thesis is that the combined company is a good play on the aging population trend in the developed world. The $21 billion global dental market (of which the merged firm will have approximately 18%) is represented at increasing one to two times GDP. The plan also allows for a $500 million share buy-back programme post-closing with $125 million of operating costs savings (or approx 3% of operating margin based upon combined revenues) expected.

SIRO has approximately $500 million in cash with little debt. Goodwill and intangibles make up approximately 40% of SIRO’s total assets. DENTSPLY on the other hand has approximately $230 million in cash with $700 million in debt. Goodwill and intangibles make up nearly 60% of DENTSPLY’s total assets.

Based upon 5% top-line growth, my rough estimates for 2016 for the combined entity are a 21% operating margin post savings or approximately $830 million of operating income and $560 million of net income. Assuming 250 million shares (not taking the buy-back into account) I estimate an EPS of approximately $2.40. These are real back of the envelop calculations so I would caution against any rash conclusions. They do indicate a 25 times multiple of XRAY’s current share price around $60 which looks to me stretched given the integration risks. Still it’s a name for the watch list to monitor and wait for a better entry point.

In the meantime, it’s back to the dentist with this wobbly tooth.

Uniting Gamesters

BWIN’s on-going search to “create shareholder value” seems to be moving on with the announcement that it “has entered into preliminary discussions with a number of interested parties regarding a variety of potential business”. A previous post on a number of the main players in the European gambling sector highlighted that William Hill and Paddy Power were speculated to be potential bidders for all or parts of BWIN, a European online gaming firm with a concentration of approx 25% of revenues from Germany. Now press reports speculate the potential interested parties include the Canadian firm Amaya, who purchased PokerStars/Full Tilt earlier this year, and Playtech, a software gaming firm that are “seeking transformational M&A opportunities to take the business to the next level”.

Commentators raised an eyebrow about the speculated 45% premium on offer (from before discussions were reported) given BWIN’s operating metrics and the uncertainty over the key German market. Speculation involving Playtech focussed on their recent debt raising which brings their cash-pile to around €700 million. Playtech’s shareholders may not be too pleased if their new strategy moves too far away from the very profitable software business, particularly considering the alternative of continuing with their generous special dividends. Taking on businesses such as BWIN, or even another speculated target like Ladbrokes, is a far cry from what made Playtech such a star.

In fact, the best performer in the sector (in fact the only name that’s in positive territory!) is the reinvigorated Betfair under Breon Corcoran (see previous post on Betfair) as can be seen below (they also have cash to spend on potential M&A).

click to enlargeShare price YTD selected betting stocks

This is a fascinated sector that is in the midst of considerable change. Although I have no financial interest in the sector, I am an intrigued bystander. Bring on the next development.