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Dividend Stocks Expert Insights

New Jersey Resources Starts Fiscal Year with Good Momentum

Business Strategy and Outlook

New Jersey Resources remains primarily a regulated gas utility even as it invests heavily in nonregulated energy businesses such as solar and natural gas midstream. NJR’s regulated utility business will continue to produce more than two thirds of earnings on a normalized basis for the foreseeable future as New Jersey’s need for infrastructure safety and decarbonization investments provide growth opportunities. 

NJR’s constructive regulation and customer growth has produced an impressive record of earnings and dividend growth. The expected NJR’s regulated distribution utility can grow earnings 6% annually based on 1% customer growth and planned infrastructure investments. NJR’s clean energy business should grow even faster, leading to consolidated earnings growth near the top half of management’s 7%-9% annual growth target.

 New Jersey’s historically constructive regulation allows NJR to support a high payout ratio and dividend growth in line with the utility’s earnings growth. That regulatory support was confirmed in November 2021 when regulators approved a settlement that raises rates to account for NJR’s infrastructure investments and maintains its 9.6% allowed return on equity from NJR’s 2016 and 2019 rate cases. Although this allowed ROE is lower than other utilities, NJR enjoys other rate mechanisms that support good cash flow generation. 

NJR’s gas distribution business faces a potential long-term threat from carbon-reduction policies. To address that threat, NJR plans to invest $850 million in its solar business in 2022-24 and pursue hydrogen and renewable natural gas projects. These projects support aggressive clean energy goals in New Jersey and other states. NJR’s $367.5 million acquisition of the Leaf River (Mississippi) Energy Center in late 2019 paid off big in early 2021 when extreme cold weather allowed NJR to profit from its gas in storage. However,  don’t expect windfalls like this to continue as management derisks its energy-services business, reducing the earnings sensitivity to volatile gas prices, basis spreads, and winter weather.

Financial Strength

NJR has maintained one of the most conservative balance sheets and highest credit ratings in the industry. We don’t expect that to change even with its large capital investment plans. The is forecast an average debt/total capital ratio around 55% and EBITDA/interest coverage near 5 times on a normalized basis after a full year of earnings contributions from its midstream investments. Management has a history of using large cash inflows during good years at its non-utility businesses to offset equity needs at the utility. NJR’s $260 million equity raise in fiscal-year 2020 will primarily go to fund the Leaf River acquisition and midstream investments. We don’t expect NJR will need any new equity through at least 2024. In mid-2019, it issued $200 million of 30- and 40-year first mortgage bonds at interest rates below 4%, among the lowest rates of any large U.S. investor-owned utility at the time. It has raised two low-cost green bonds to support solar investments. Up until 2020, NJR had been able to avoid issuing equity in part due to cash it has collected from its unregulated businesses. Extreme winter conditions in 2014 and 2018 provided a timely source of cash ahead of NJR’s uptick in utility and midstream investments. The success of the nonutility businesses and divesture of the wind investments also brought in cash to fund what is expected will be more than $2 billion of investment in 2022-24 without new equity. NJR’s board took a big step by raising the dividend 9% to $1.45 per share annualized in late 2021. The expected dividend growth to follow at least in line with earnings now that NJR has reached a pay-out ratio near 65%, which is reasonable for a mostly regulated utility.

Bulls Say’s

  •  NJR’s customer base continues to grow faster than the national average and includes the wealthier regions of New Jersey. 
  • NJR raised its dividend 9% for 2022 to $1.45 per share, its 26th consecutive increase. It is expected that streak to continue. 
  • NJR’s distribution utility has received three constructive rate case outcomes and regulatory approval for nearly all of its investment plan since 2016.

Company Profile 

New Jersey Resources is an energy services holding company with regulated and nonregulated operations. Its regulated utility, New Jersey Natural Gas, delivers natural gas to 560,000 customers in the state. NJR’s nonregulated businesses include retail gas supply and solar investments primarily in New Jersey. NJR also is an equity investor and owner in several large midstream gas projects.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares Small Cap

Virgin Money Margins on the Rise, but the Loan Books a Little Lighter

Business Strategy and Outlook

Virgin Money UK consists of the CYBG business (demerged from National Australia Bank, or NAB), and the more recently acquired Virgin Money UK. In 2016, NAB demerged its U.K.-based operations in Clydesdale Bank and Yorkshire Bank, collectively known as CYBG. The CYBG merger with Virgin Money UK virtually doubled the size of the bank’s loan book and provided a foothold in the larger and faster growing London region. The bank’s loan book is split 80% mortgages, 12% business loans, and 8% personal (including cards) as at September 2021. 

Acquiring Virgin Money in 2018 was transformative for CYBG. A larger and more geographically diverse mortgage book lowers risk and presents cost saving opportunities, but also presents the opportunity to grow its business loan book under the Virgin Money banner. Aiming to maintain its share of the mortgage market, the bank wants to reduce its weighting to mortgages to 75% as it grows its business loan book.

Financial Strength

The capital structure and balance sheet are sound. Common equity Tier 1 capital was 15.2% as at Dec. 31, 2021, well above the 9.5% minimum capital benchmark. The bank has a longer-term dividend payout goal of up to 50%. The percentage of funding sourced by customer deposits was 83% as at Sept. 30, 2021, the elevated savings rate in 2021 helped the bank increase the weight of funds to cheaper business and personal current accounts materially. These current accounts and linked savings increased 19% in the fiscal 2021, making up 38% of funding as at Sept. 30, 2021 and up from 31% at end of fiscal 2020. Virgin Money UK received internal ratings-based, or IRB, accreditation from the U.K. regulator for its mortgage and SME/corporate loan portfolios mid-October 2018. Virgin Money UK is now authorised to use its own risk models in determining risk weighted assets, resulting in a reduction in risk weighted assets for the two portfolios and thereby improving its capacity to grow share.

Bulls Say’s 

  • Virgin Money UK is a well-capitalised and well-funded retail and small-business bank with long-established franchises in core regional markets. 
  • Management’s ability to successfully integrate the merger with Virgin Money is critical to our thesis. 
  • Legacy conduct issues have caused pain for shareholders despite balance sheet provisions and conduct indemnities provided by National Australia Bank. It have made no allowance for large penalties or customer remediation in our forecasts.

Company Profile 

Virgin Money UK was formed through the merger between CYBG PLC and Virgin Money. After being divested by National Australia Bank in 2016, CYBG went through a restructuring and recapitalisation process, with mortgages accounting for around 75% of its loan book. Following CYBG’s merger with Virgin Money, the loan book has been reshaped again, with mortgages now accounting for more than 81% of total loans, personal loans around 7%, and SME and business loans around 12%. The merger with Virgin Money does provide upside earnings potential, but operating conditions are tough, with business momentum slowing. An upturn in the earnings outlook is needed after several years of disappointment.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Marathon Petroleum’s Strong Performance Leads to Greater Shareholder Returns, Increased FVE

Business Strategy and Outlook

The combination of Marathon and Andeavor created the U.S.’ largest refiner with facilities in the Midcontinent, Gulf Coast, and West Coast. Through the combination, Marathon planned to leverage this geographically diverse footprint to optimize its crude supply from North America to reduce feedstock cost, while also improving its operating cost structure. It delivered $1.1 billion of a planned $1.4 billion in synergies by year-end 2019, but its focus shifted to capital and cost reductions in 2020 when the pandemic hit. These efforts proved successful with the company delivering over $1 billion in operating expense reductions. In the near term, its focus remains on delivering more cost and capital improvements.

Financial Strength

Cash flow has been sufficient to cover capital spending while allowing for share repurchases and dividend increases in recent years. Based on our current forecast, however, we expect operating cash flow to sufficiently cover capital spending and the dividend. Marathon received $17.2 billion in after-tax proceeds from sale of its Speedway segment in second-quarter 2021. As of the year 2021, it has retired $3.75 billion in debt and repurchased $4.5 billion shares. It plans to repurchase another $5.5 billion shares by year-end 2022 at the latest and repurchase another $5 billion of shares beyond then. 

The large amount of repurchases have reduced the dividend burden, and as such it is expected that  management to return to dividend growth at some point given the company’s strong cash flow. It’s possible management returns to its previous shareholder return target of 50% of discretionary free cash flow including dividend growth and share repurchases. Our fair value estimate to $79 from $68 per share after updating our near-term margin forecast with the latest market crack spreads and incorporating management’s guidance, and the latest financial results.

Bulls Say’s 

  • Marathon Petroleum’s high-complexity facilities in the midcontinent and Gulf Coast leave it well-positioned to capitalize on a variety of discount crude streams, endowing it with a feedstock cost advantage. 
  • Closure of lower-quality refineries and investment in renewable diesel leaves Marathon in a better competitive position in the long term. 
  • Current repurchase plans amount to 20% of the current market cap, with potentially more coming if market conditions remain strong.

Company Profile 

Marathon Petroleum is an independent refiner with 13 refineries in the midcontinent, West Coast, and Gulf Coast of the United States with total throughput capacity of 2.9 million barrels per day. The firm also owns and operates midstream assets primarily through its listed MLP, MPLX.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Aptiv Sees Q4 Results Take Chip Crunch Hit, Sets New Revenue Growth Target

Business Strategy and Outlook:

Aptiv’s average yearly revenue growth is expected to exceed average annual growth in global light-vehicle demand by high-single-digit percentage points. The company provides automakers with components and systems that are in high demand from consumers and that government regulation requires to be installed. Aptiv’s high-growth technologies include advanced driver-assist systems, autonomous driving, connectivity, data services, and high-voltage electrical distribution systems for hybrids and battery electric vehicles.

Aptiv’s ability to regularly innovate and commercialize new technologies bolsters sales growth, margin, and return on investment. A global manufacturing presence enables Aptiv to serve customers around the globe, capitalizing on the economies of scale inherent in automakers’ plans to use more global vehicle platforms. Lean manufacturing discipline and a low-cost country footprint enable more favorable operating leverage as volume increases. Aptiv enjoys relatively sticky market share, supported by integral customer relationships and long-term contracts. The design phase of a vehicle program can last between 18 months and three years depending on the complexity and extent of the model redesign. The production phase averages between five and 10 years. Engineering and design for the types of products that Aptiv provides necessitate highly integrated, long-term customer relationships that are not easily broken by competitors’ attempts at market penetration.

Financial Strength:

Aptiv’s financial health is in good shape. Total debt/total capital has averaged 16.9% while total debt/EBITDA has averaged 2.9 times. Most of Aptiv’s capital needs are met by cash flow from operations. However, the COVID-19 pandemic necessitated the drawdown of the company’s $2.0 billion revolver on March 23, 2020. The revolver was repaid after the company raised capital through share issuance and a mandatory convertible preferred in June 2020. Aptiv’s liquidity remains healthy at $5.2 billion, with around $2.8 billion in cash and equivalents at the end of December 2020. The company was also granted covenant relief, with a debt/EBITDA ratio of 4.5 times through the second quarter of 2021, up from 3.5 times. With the exception of the credit line that includes the revolver and a term loan, which expires in August 2021, the company has no other major maturities until 2024. The company has approximately $4.1 billion in senior unsecured note principal outstanding with maturities that range from 2024 to 2049, at a weighted average stated interest rate of 3.2%. Aptiv issued $300 million in 4.35% senior notes due in 2029 and $300 million 4.4% notes due in 2046 in March 2019 to redeem senior notes due in 2020 with an interest rate of 3.15%. The bonds and bank debt are all senior unsecured, pari passu, and have similar subsidiary guarantees.

Bulls Say:

  • Owing to product segments with better-than-industry average growth prospects like safety, electrical architecture, electronics, and autonomous driving, we expect Aptiv’s revenue to grow mid- to high-single digit percentage points in excess of the percentage change in global demand for new vehicles. 
  • The ability to continuously innovate and commercialize new technologies should enable Aptiv to generate excess returns over its cost of capital. 
  • A global manufacturing footprint enables participation in global vehicle platforms and provides penetration in developing markets.

Company Profile:

Aptiv’s signal and power solutions segment supplies components and systems that make up a vehicle’s electrical system backbone, including wiring assemblies and harnesses, connectors, electrical centers, and hybrid electrical systems. The advanced safety and user experience segment provides body controls, infotainment and connectivity systems, passive and active safety electronics, advanced driver-assist technologies, and displays, as well as the development of software for these systems. Aptiv’s largest customer is General Motors at roughly 13% of revenue, including sales to GM’s Shanghai joint venture. North America and Europe represented approximately 38% and 33% of total 2019 revenue, respectively.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Arrow Stands Out Among Distributors for Efficiency and Profitability

Business Strategy and Outlook:

Arrow Electronics is one of the premier global value-adding distributors of electronics. Arrow uses its excellent sales, marketing, and net working capital management expertise to provide its supplier partners with a long tail of small customers while using its partnerships to service customers with a broad semiconductor selection—increasing profits for both ends of the supply chain in the process. Arrow is a more efficient operator than many of its distributor peers, which, along with its differentiated engineering expertise and design generation, leads to it holding among the best operating margins in the business.

Arrow is such an effective and streamlined operator that it earns an economic moat, while none of its peers under our coverage do. Arrow’s cash conversion cycle and average inventory days lead other top global distributors, which allows it to earn slim, but reliable, excess returns on invested capital. A focus on high-value semiconductors for transportation and industrial applications augments its returns. Its proficiency in chip distribution has led to it offering the broadest line card of any global chip distributor and the top market share in North America, including several high-profile exclusive supplier relationships, like with Texas Instruments and Analog Devices.

Financial Strength:

Arrow Electronics to remain leveraged and to use its available capital to invest in working capital and returning capital to shareholders. As of Dec. 31, 2021, Arrow had $222 million in cash and $2.6 billion in gross debt. The firm will easily service its obligations over the next five years, with an average of roughly $350 million maturing each year through 2025 while forecast has been on an average of over $1 billion in free cash flow over the same period. If the firm runs into a liquidity crunch, it has an untapped $2 billion revolver. Arrow will eventually finance more debt to remain leveraged and invest in the business. The firm needs to maintain a debt/EBITDA ratio under 3 times to keep its debt investment-grade and currently sits comfortably below 2 times. The firm’s greatest investment over the next five years will be in working capital. Finally, Arrow is a strong generator of cash, though it exhibits modest countercyclical cash flow generation. In semiconductor upcycles, the firm will invest heavily in inventory and extend more credit, trimming free cash flow. In downcycles, these activities get reined in and the firm can see over 100% free cash flow conversion. Still, when looking at operating cash flow as a proportion of non-GAAP net income (management’s preferred metric) over a cycle, Arrow has averaged 79% conversion, cumulatively, over the last five years. 

Bulls Say:

  • Arrow is one of the most efficient and value additive distributors in the world, resulting in some of the highest operating margins of its peer group. 
  • Arrow is entrenching its competitive advantage with exclusive supplier relationships that give it the broadest semiconductor selection of any distributor—covering over a third of global chipmakers. 
  • Arrow returns a significant amount of capital to shareholders in the form of repurchases, for which it used 95% of its free cash flow between 2017 and 2021.

Company Profile:

Arrow Electronics is a global distributor of electronics, connecting suppliers of semiconductors, components, and IT solutions to more than 180,000 small and midsize customers in 85 countries. Arrow is the second-largest semiconductor distributor in the world, and the largest for North American chip distribution, partnering with a third of global chipmakers.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

Schroder Fixed Income Fund – Client Class: Above par on multiple counts

Fund Objective

To outperform the Bloomberg AusBond Composite 0+Yr Index after fees over the medium term.

Approach 

Schroders begins by formulating long-term (10-year) risk/reward forecasts using a building-block approach that includes current yield, long-cycle economic growth, and inflation. These figures are adjusted to shorter term forecasts (three years) based on a proprietary three-factor model that considers valuation, cycle, and liquidity characteristics to identify best- and worst-case risk-adjusted opportunities. Broad risk allocations between cash, bonds, and credit are consequently generated. The team then determines the appropriate trades and physical securities. Risk/reward forecasts dictate positions in duration and curve (domestic and other yield curves), cross-market trades (spread compression between assets in varying geographies), and credit selection (investment-grade, securitised, high yield, and emerging markets). Credit assessment focuses on market position, management quality, firm profitability, and capital structure. The strategy is mostly process-driven, and the long-term capital preservation mindset is a point of differentiation.

Portfolio 

A wide remit of securities can be held, including government, semigovernment securities, investment-grade credit, high-yield, emerging-markets bonds. Derivatives can be used to express credit, rate, and curve views. The team’s caution over valuations saw it hold more cash than most of its cohorts with a short duration bias through most of 2010-18, sizeable at times. Schroders has long held an underweighting in government and government-related securities in lieu of corporate credit, inflation-linked bonds, and cash. As spreads compressed, investment-grade credit fell steadily to 12% in April 2017 from 42% in August 2010. Schroders waded back in to capitalise on more-attractive valuations as global policy support followed in early 2020. It shortened interest-rate duration significantly in early 2021 as concerns over inflationary pressures bubbled to the surface, before softening this stance amid questions over its persistence. By the third quarter of the year, Schroders’ view that higher inflation was more structural saw it re-enter a more-entrenched short-duration stance. Holdings in non-Australian bonds has tended to be about 10%-15%. This vehicle can be used as a core exposure given it mostly holds high-grade bonds. Schroders managed about AUD 2.8 billion in this strategy at 30 June 2021

Performance 

The strategy has had its share of ups and downs over the years, with strong results during 2019-20 offsetting a fallow run that preceded it. The absolute return focus and cautious posture cost relative performance as yields and spreads broadly tightened during 2014-18, notably its short-duration position particularly in the US and preference for cash. An average cash weight of about 20% from 2009 to 2019 was a major drag, though this weighting declined noticeably after 2016. By contrast, the move to a long-duration position in early 2019 helped as yields declined and Schroders handled the volatile conditions in 2020 adeptly. Its long duration position in early 2020 helped it navigate the initial phase of the pandemic, supported by a reduction in credit risk. Its quick reallocation to credit as spreads widened helped sustain outperformance through the rest of the year. An indexlike result over the majority of 2021 saw the team navigate the choppy moves in yields particularly well over the first half of the year before being stung as shorter-maturity yields leapt exponentially higher after the RBA suddenly decided to exit yield-curve control in the third quarter. The strategy has done well in down markets because of the higher-quality portfolio and focus on downside protection. Its high-conviction approach can contribute to meaningful and lengthy deviations from its cohort.

Top Holdings

About the fund

The Fund is an actively managed, low volatility strategy that invests in a range of domestic and international fixed income assets with the objective of outperforming the Bloomberg AusBond Composite 0 Yr Index, whilst delivering stable absolute returns over time. The Fund adopts a Core-Plus investment approach whereby a core portfolio comprising Australian investment grade bonds is complemented by investments in a diverse range of global and domestic fixed income securities.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Essential Management Reaffirms Growth Trajectory In Line With Our Outlook

Business Strategy and Outlook

For more than 50 years, Essential Utilities–formerly Aqua America–was one of the few pure-play water utilities in the United States. But its $4.3 billion acquisition of Peoples Gas in March 2020 made the company nearly 50% larger and diversified its earnings mix. It is expected that the new gas business to contribute about 30% of earnings on a normalized basis.

 Essential’s gas and water utility earnings are mostly rate regulated. The management will have to prioritize infrastructure investment growth and a robust dividend, like most other utilities. Essential’s water utility acquisition strategy lifts our earnings-growth rate to 8% annually during the next five years, a little higher than most other utilities’ growth outlook.

 Although efficiency savings have reduced retail water use for several decades, Essential has been able to grow earnings and the dividend by replacing and upgrading infrastructure that is decades old. It is also expected that  Essential will grow by acquiring small, typically municipal-owned water systems. In the U.S., 85% of the population is served by a municipal water utility, offering a long runway of acquisition growth opportunities. 

Similarly,  expect little natural gas usage growth at Peoples Gas, which had been owned by a private equity group. But the gas business still should produce steady earnings growth as Essential replaces and upgrades the system infrastructure. 

Fair market value laws in several states support Essential’s water business acquisition strategy. These laws require Essential to pay municipalities at least the assessed value of the system it acquires and allow Essential to add these assets to rate base at the assessed value rather than historical cost. The municipalities benefit by ensuring they get fair prices, and Essential shareholders benefit by ensuring the company doesn’t overpay for growth. In many cases, these deals are immediately value-accretive. Recent FMV legislation in Kentucky and West Virginia opens acquisition opportunities near areas Essential already serves.

Financial Strength

Essential maintains a capital structure in line with its regulatory allowed capital structure for ratemaking purposes and leverage metrics in line with high investment-grade credit ratings and doesn’t expect that to change. It is expected Essential to issue new debt to fund growth investments and acquisitions in the coming years. It is not expecting any material new equity needs after raising $300 million in 2021. With constructive regulation, expect Essential will be able to use its cash flow to fund most of its equity investment needs during the next five years. Essential has paid an annual dividend since 1945 and increased it at least 5% for each of the last 25 years.  Essential will be able to continue growing the dividend at this rate or higher while staying below management’s 65% maximum pay-out ratio threshold, which is in line with Essential’s peer utilities.

Bulls Say’s

  •  Constructive regulation allows Essential to raise rates through surcharges or rate cases to reduce regulatory lag and enhance cash flow available to pay the dividend and invest in growth projects. 
  • Fair market valuation state laws allow Essential to make municipal water utility acquisitions immediately value-accretive for shareholders. 
  • Essential has raised its dividend 31 times in the last 30 years, including 29 consecutive increases of more than 5%.

Company Profile 

Essential Utilities is a Pennsylvania-based holding company for U.S. water, wastewater, and natural gas distribution utilities. The company’s water business serves 3 million people in eight states. Nearly three fourths of its water earnings come from Pennsylvania, primarily suburban Philadelphia. It also has a small market-based water business that provides water and water services to third parties, notably natural gas producers. Its $4.3 billion Peoples Gas acquisition that closed in March 2020 adds 750,000 gas distribution customers in Pennsylvania, West Virginia, and Kentucky.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks Philosophy Technical Picks

Ingredion’s Specialty Ingredients Are Positioned for Long-Term Growth Despite Near-Term Volatility

Business Strategy and Outlook

Ingredion manufactures starches and sweeteners by wet milling and processing corn and other starch-based raw materials. The company steeps these raw materials in a water-based solution before separating the ingredients from co-products (animal feed and corn oil). The company’s long-term goal is for specialty ingredients to generate 38% of sales and nearly 60% of profits. Core ingredients are typically commodity-grade, providing no pricing power for Ingredion. Ingredion sells roughly half of its core products on a cost-plus basis. Specialty ingredients are value-added, requiring additional processing and, in many cases, proprietary formulations. 

Financial Strength

Ingredion is in good financial condition. As of Dec. 31, the company had just under $2.2 billion of debt and a little less than $0.7 billion in cash and cash equivalents on its balance sheet. On the M&A front, the company will probably continue to target smaller, tuck-in acquisitions rather than pursuing large, transformative deals. These acquisitions would likely focus on companies that offer new product lines and cater to small and midsize customers, as Ingredion aims to both expand its specialty ingredient portfolio and avoid being beholden to the strong bargaining power of large consumer packaged goods customers. The company should be able to finance these size acquisitions largely from free cash flow, which should allow Ingredion to maintain its solid financial position.

Ingredion shares fell nearly 10% on the day as the market responded negatively to the company’s results and management’s guidance. However, with shares now trading less than 10% above our bear case fair value estimate of $80 per share, the bad news is priced into the stock. Our bear case assumes average annual revenue growth of 1% over the next five years and midcycle operating margins of 11%, versus the 11.5% averaged by the company over the past decade.  

Bulls Say’s 

  • Ingredion benefits from its growing proportion of specialty ingredients that carry some degree of pricing power and generate higher profit margins. 
  • Through its investment in plant-based proteins and natural non-corn-based sweeteners, Ingredion is well positioned to capture growth from increasing consumer demand for alternative meat and reduced sugar products. 
  • Management has a strong record of managing growth and acquisitions and returning cash to shareholders.

Company Profile 

Ingredion manufactures ingredients for the food, beverage, paper, and personal-care industries. Sweeteners (syrups, maltodextrins, dextrose, and polyols) account for about 35% of sales, starches (for food and industrial use) around 45%, and co-products the balance. Value-added, specialty ingredients account for roughly one third of sales, with the balance being commodity-grade ingredients. With the majority of sales outside the U.S., Ingredion is a global player with good exposure to developing markets, including Latin America and Asia-Pacific.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Strong Demand and Pricing Power Persist for D.R. Horton Despite Higher Mortgage Rates

Business Strategy and Outlook

D.R. Horton is the largest U.S. homebuilder (by volume) with an extensive geographic footprint, wide product breadth, value focus, and financial flexibility. Management is focused on continuing to expand the business while generating sustainable returns on invested capital and positive cash flows throughout the housing cycle. Residential construction has been a bright spot of the U.S. housing market during the pandemic, and we expect continued housing market strength over the next decade with housing starts averaging 1.6 million units annually. While affluent urban dwellers migrating to the suburbs was a key source of demand in 2020-21, we expect first-time buyers to be a main contributor to future housing demand.

Recognizing the importance of the price-conscious first-time buyer in the continued recovery, D.R. Horton launched Express Homes, its true entry-level product, in spring 2014. This bet has paid off thus far as Express Homes has outperformed initial expectations and now accounts for over 30% of homes sold. Although competing products have entered the market, we believe D.R. Horton has a first-mover advantage that will boost its growth over the coming years. With ample land supply and product offerings catering to entry-level, move-up, higher-end, and active adult homebuyers, D.R. Horton is well positioned to capitalize on the demographic tailwinds driving the recovery.

Financial Strength

The average selling price of new orders increased 22% year over year to $383,600, and the average 30-year fixed mortgage rate has increased 50 basis points (to 3.55%) since the end of December 2021. While higher home prices and mortgage rates have worsened affordability, we think Horton offers more affordable homes than many of its competitors. Furthermore, Horton’s ASPs are not far from the median sales price of existing single-family homes ($364,300 in December). The company has $4 billion in total homebuilding liquidity, including $2 billion of unrestricted homebuilding cash and $2 billion capacity on a revolving credit facility.

D.R. Horton’s goal is to have at least $1.0 billion of liquidity at any given quarter-end, but is more likely to have $1.5-$2 billion available to ensure an adequate level of financial flexibility. The homebuilder has $3.3 billion of outstanding homebuilding debt with maturities staggered through fiscal 2028: $350 million is due in 2022, $700 million is due in 2023, $500 million is due in 2025, $500 million is due in 2026, $600 million is due in 2027, and $500 million is due in 2028.

Bulls Say’s

  • Current new-home demand is still robust and inventory of existing homes remains tight. The supply/ demand imbalance will take years to address and will support pricing power for homebuilders.
  • Demand for entry-level housing should remain strong as the millennial generation forms households. D.R. Horton’s Express Homes brand is positioned to capitalize on this underserved market.
  • D.R. Horton’s strategic relationship with publicly traded land developer Forestar and its growing property rental businesses should help fuel future growth.

Company Profile

D.R. Horton is a leading homebuilder in the United States with operations in 98 markets across 31 states. D.R. Horton mainly builds single-family detached homes (over 90% of home sales revenue) and offers products to entry-level, move-up, luxury buyers, and active adults. The company offers homebuyers mortgage financing and title agency services through its financial services segment. D.R. Horton’s headquarters are in Arlington, Texas, and it manages six regional segments across the United States.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks Expert Insights

Littelfuse is a small but differentiated electrical protection supplier with semiconductor exposure

Business Strategy and Outlook:
Littelfuse is a differentiated supplier of electrical protection into cars and industrial applications. While the firm is a smaller player than other competitors in the components market under our coverage, it has aligned its portfolio toward secular themes of safety, efficiency, and connectivity to pursue growth. Littelfuse’s best organic growth opportunities will come from vehicle electrification; battery electric vehicles require five times
the circuit protection content of an internal combustion counterpart, and charging infrastructure presents a lucrative opportunity for the firm’s growing power semiconductor business.
Littelfuse’s passive components are small and inexpensive, yet vitally important to the safe and continuous function of mission-critical systems in end applications. Circuit protection products safeguard against
electrostatic discharge and overcurrent to prevent component failure and/or fire in cars, power grids, data centers, and manufacturing plants. Even though individual parts like fuses and relays don’t carry a hefty price
tag, Littelfuse’s application expertise helps the firm stave off commoditization and creates sticky customer
relationships.
Financial Strength:
Littelfuse is in good financial shape. As of Jan. 1, 2022, the firm held $637 million in total debt and $478 million in cash on hand. The firm is expected to satisfy its financial obligations with ease. Littelfuse has no more than $150 million coming due in a single year through 2026, and the firm averaged $226 million in free cash flow from 2017 to 2021. The firm has been forecasted to average $471 million in free cash flow per year over our explicit forecast. Littelfuse’s debt/adjusted EBITDA ratio of 1.29 times at the end of 2021 places it solidly at the low end of management’s long-term range of 1 times-2.5 times.
Bulls Say:
 Secular trends toward renewable energy and electric vehicles should boost demand for Littelfuse’s
products.
 Littelfuse has a foot in the door of the emerging silicon carbide semiconductor market, which could fuel
future rapid growth for the firm.
 Littelfuse’s sticky customer relationships have helped it earn excess returns on invested capital for 11
straight years, even in the face of cyclical downturns in 2019 and 2020.
Company Profile:
Littelfuse is a leading provider of circuit protection products (such as fuses and relays) and other passive
components, selling billions of units into the transportation, industrial, telecommunications, and consumer electronics end markets. The firm is also increasing its power semiconductor business, where it predominantly
serves industrial end markets and is breaking into electric vehicle charging infrastructure.
(Source: Morningstar)

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