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Although Las Vegas Remains the Core Presence, MGM’s Macao Assets Should Benefit From a 2022 Recovery

Business Strategy and Outlook

No-moat MGM Resorts is facing material near-term headwinds from COVID-19 as well as elevated operational risk in Macao from government plans to increase supervision of casinos. Still, we think MGM has a healthy liquidity profile to see it through this turmoil and remains positioned for the attractive long-term growth opportunities in Macao (22% of pre-pandemic 2019 EBITDAR), U.S. sports betting, and Japan (accounting for an estimated 10% of 2027 EBITDAR, the first year of likely operation). 

We see solid Macao industry visitation over the next 10 years, as key infrastructure projects that alleviate Macao’s congested traffic (Pac on terminal expansion and Hong Kong Bridge in 2018, light-rail transit at the end of 2019, and reclaimed land in 2020-25) come on line, which will expand the region’s constrained carrying capacity and add attractions, thereby driving higher visitation and spending levels. As MGM holds one of only six gaming licenses, it stands to benefit from this growth. Further, MGM Resorts has expanded its room share in Macao to 8% from 3% with its Cotai property, which opened in February 2018. That said, the Macao market is highly regulated, and as a result, the pace and timing of growth are at the discretion of the government.

In the U.S. (78% of pre-pandemic 2019 EBITDA), MGM’s casinos are positioned to benefit from a multi-billion-dollar sports betting market, generating an estimated mid-single-digit percentage of the company’s 2024 sales. That said, the U.S. doesn’t offer the long-term growth potential or regulatory barriers of Macao; thus, we do not believe the region contributes a moat to MGM. Still, there have been very minimal industry supply additions this decade, and this should support solid industry Strip occupancy, which stood at around 90% in pre-pandemic 2019.

We expect MGM to be awarded one of only two urban gaming licenses in Japan, with a resort opening in 2027, generating attractive returns on invested capital in the teens.

Financial Strength

MGM entered 2020 in its strongest financial health of the past 10 years, in our view. This was illustrated by its 3.7 times debt/adjusted EBITDA in 2019 versus 13 times and 5.7 times in 2010 and 2015, respectively. It was also buoyed by MGM having recently exited an investment cycle, where the company spent $1.6 billion on average annually during 2015-19 to construct and renovate U.S. and Macao resorts versus the $271 million it spent on capital expenditure in 2020. We believe MGM has sufficient liquidity to remain a going concern even with zero revenue for a few years. The recent sales of underlying casino assets (Bellagio in November 2019, Circus Circus in December 2019, and MGM Grand/Mandalay Bay in February 2020) provided it with around $6.9 billion in cash. The company recently entered into leaseback asset sales of Aria, Vdara, and Springfield, raising over $4 billion in cash in 2021. Also, MGM is set to receive $4.4 billion in cash for its ownership in MGM Growth Properties, which is scheduled to be acquired by Vici in the first half of 2022. The firm has taken further action to lift its liquidity profile by reining in expenses, tapping its $1.5 billion credit facility (which has since been paid), suspending dividends and repurchases (which have since been reinstated), and raising debt. MGM has $1 billion of debt scheduled to mature in 2022.

Bulls Say’s

  • We expect MGM to be awarded one of only two urban Japanese gaming concessions due to its strong experience operating leading resorts in Las Vegas and its successful record of working with partners 
  • MGM is positioned to participate in Macao’s long-term growth opportunity (22% of pre-pandemic 2019 EBITDAR) and has seen its room share expand (to 8% from 3%) with the opening of its Cotai casino in February 2018.
  • MGM’s U.S. properties are positioned to benefit from the expansion of the multi-billion-dollar domestic sports betting market

Company Profile 

MGM Resorts is the largest resort operator on the Las Vegas Strip with 35,000 guest rooms and suites, representing about one fourth of all units in the market. The company’s Vegas properties include MGM Grand, Mandalay Bay, Mirage, Luxor, New York-New York, and CityCenter. The Strip contributed approximately 49% of total EBITDAR in the pre-pandemic year of 2019. MGM also owns U.S. regional assets, which represented 29% of 2019 EBITDAR. We estimate MGM’s U.S. sports and iGaming operations will be a mid-single-digit percentage of its total revenue by 2024. The company also operates the 56%-owned MGM Macau casinos with a new property that opened on the Cotai Strip in early 2018. Further, we estimate MGM will open a resort in Japan in 2027.

(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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Global stocks Shares

PRICING AND SHRINKING TO STABALIZE AT  BED BATH AND BEYOND INC

Business Strategy and Outlook

In October 2020, Bed Bath & Beyond put forth an updated strategy to revitalize its brand and regain customer confidence by focusing on its core properties. As such, the company divested peripheral brands such as Cost Plus and Linen Holdings in order to focus on the Bed Bath & Beyond, Buy Buy Baby, Harmon Face Value, and Decorist labels. To help elevate its brand perception, it has combined its online and in-store inventory management with its new “omni-always” initiative in the hopes of capturing more e-commerce business and avoiding the long restock times and uneven inventories that previously plagued the firm. Additionally, it’s investing heavily in both its digital and brick-and-mortar platforms, with a revamp to the website for a more frictionless checkout process and a remodel of its physical stores to offer a cleaner and more enjoyable shopping experience. The firm has attempted to rely less on its iconic blue coupons by giving consumers a good everyday value (it is concluded discounts will persist to some degree over the long term). It also plans to right size by shuttering underperforming Bed Bath stores, shrinking the total store base to around 1,000 by the end of 2021 (from 1,500 at the end of 2019). In contrast, management expects 50% sales growth at the baby label by 2023 via new markets, with the brand already set to deliver $1.3 billion in sales in 2021. It is seen total sales declining in 2021 as the footprint continues to contract before stabilizing at a low-single-digit growth rate in 2023.

Longer term, it is conjectured the 2030 operating margin to reach 5%-6%. This improvement is primarily supported by gross margin gains (which reach 37.7%, below the 38%-plus corporate goal) from a greater focus on private label, including the introduction of 10 new owned brands. It also benefits from a lower promotional cadence thanks to SKU rationalization and the utilization of more robust inventory management processes. However, it is foreseen these gains to be offset by higher investment as the home furnishing landscape remains highly fragmented and competitive, limiting profitability to levels that are structurally lower than in the past.

Financial Strength

Bed Bath & Beyond’s cash position is solid and efforts to reduce the firm’s debt load resulted in a positive net cash position at fiscal year-end 2020. Before the firm’s $1.5 billion debt raise in 2014, it had been debt-free since 1996 (excluding acquired debt), using cash generated from operations to fund new store openings and a handful of small bolt-on acquisitions. The firm has access to liquidity through its $1 billion credit facility, which expires in 2026 and captured another $600 million-plus in cash through the sale of Personalizationmall.com, Linen Holdings, Christmas Tree Shops, One Kings Lane, and Cost-Plus World Market brands. It reduced gross debt in 2020 (with long-term debt at $1.2 billion at November 2021 versus $1.5 billion at the end of fiscal 2019) and plans to continue paying down its debt, aiming to reach a gross debt ratio of 3 times by 2023. There is ample cash on hand (roughly $509 million as of Nov. 27, 2021) to cover near-term expenses like operating lease obligations.

Over the past five reported fiscal years, the firm has produced cumulative free cash flow (cash from operations minus capital expenditures) of $2.1 billion. However, it is anticipated this level to be tempered over 2021-23 as Bed Bath spends around $375 million annually to improve new stores, existing stores, its supply chain, and technology in this time frame. Free cash flow to equity has averaged about 4% of revenue during the past five reported years, which is decent for a mature company that is still spending to remain competitive, but it is likely this level to decline as secular headwinds weigh on performance and necessary investment levels pick up. Despite the higher spending ahead, Bed Bath has a plan to complete its share $1 billion in shares buy back by the end of fiscal 2021.

Bulls Say’s

  • Less discretionary categories such as linens, towels, and cookware offer some resiliency amid macroeconomic cyclicality. Registries across bridal, baby, and gift have historically provided a steady stream of customers.
  • The closure of numerous underperforming stores by the end of 2021 could help lift the profitability of the business faster than it can be anticipated as better performing stores make up a greater proportion of the fleet.
  • With a push into expanding the representation of owned brands (already accounting for 20% of sales), gross margin metrics could expand faster than it can get forecast.

Company Profile 

Bed Bath & Beyond is a home furnishings retailer, operating just under 1,000 stores in all 50 states, Puerto Rico, Canada, and Mexico. Stores carry an assortment of branded bed and bath accessories, kitchen textiles, and cooking supplies. In addition to 809 Bed Bath & Beyond stores, the company operates 133 Buy Buy Baby stores and 53 Harmon Face Values stores (health/beauty care). In an effort to refocus on its core businesses, the firm has divested the online retailer Personalizationmall.com, One Kings Lane, Christmas Tree Shops and That (gifts/housewares), Linen Holdings, and Cost-Plus World Market.

(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

Regulatory-Advantaged Wynn Positioned to Benefit From a Macao Demand Recovery in 2022-23

Business Strategy and Outlook

COVID-19 continues to materially impact Wynn’s Macao operations (50% of estimated 2024 EBITDA), which Mmorningstar analyst view as transitory. But the Macao government’s plans to increase supervision of the region’s casinos now elevates long-term operational risk. Specifically, Wynn has outsized exposure to the expected long-term shift away from VIP gaming revenue toward non gaming and mass play. Still, Morningstar analyst see an attractive long-term growth opportunity in Macao, with Wynn Resorts’ high-end iconic brand positioned to participate

On a Long term basis, Morningstar analysts view solid visitation and gaming growth for Macao, aided over the next several years as key infrastructure projects to alleviate the region’s congested traffic continue to come on line, which should expand constrained carrying capacity, thereby driving higher visitation and spending levels. Also, analysts expect upcoming developments that add attractions and improve Macao’s accessibility will improve the destination’s brand. With Wynn holding one of only six gaming licenses and plans to develop further with its Crystal Pavilion project, it stands to benefit from this growth. That said, the Macao market is highly regulated, and as a result, the pace and timing of growth are at the discretion of the government.

Financial Strength 

Wynn’s financial health is more stressed than peers Las Vegas Sands and MGM, but the company has taken steps to lift its liquidity profile, including suspending its dividend, cutting discretionary expenses, tapping credit facilities, and issuing debt. As a result, the company has enough liquidity to operate at near-zero revenue through 2022. Should the pandemic’s impact last longer, Morningstar analysts expect the company’s banking partners will continue to work with Wynn, given its intact regulatory intangible advantage (the source of its narrow moat), which drives cash flow generation potential. This view is supported by narrow-moat Wynn Macau surviving through 2014-15 when its debt/EBITDA temporarily rose to around 8 times, above the 4.5-5.0 covenants in those years.Wynn entered 2020 with debt/adjusted EBITDA of 5.7 times, but the metric turned negative in 2020 and was elevated in 2021 (estimated at 15.4), as demand for leisure and travel collapsed during the this period due to the COVID-19 outbreak. As demand recovers in the next few years, Morningstar analysts expect leverage to reach 10.0 times, 7.8 times, and 6.6 times in 2022, 2023, and 2024, respectively.

Bulls Say 

  • Wynn is positioned to participate in the long-term growth of Macao (76% of pre-pandemic 2019 EBITDA) and has room share of 9% with the opening of its Cotai Palace property in 2016. 
  • Wynn has a narrow economic moat, thanks to possessing one of only six licenses awarded to operate casinos in China. 
  • A focus on the high-end luxury segment of the casino industry allows the company to generate high levels of revenue and EBITDA per gaming position in the industry.

Company Profile

Wynn Resorts operates luxury casinos and resorts. The company was founded in 2002 by Steve Wynn, the former CEO. The company operates four megaresorts: Wynn Macau and Encore in Macao and Wynn Las Vegas and Encore in Las Vegas. Cotai Palace opened in August 2016 in Macao, Encore Boston Harbor in Massachusetts opened June 2019. Additionally, we expect the company to begin construction on a new building next to its existing Macao Palace resort in 2022, which we forecast to open in 2025. The company also operates Wynn Interactive, a digital sports betting and iGaming platform. The company received 76% and 24% of its 2019 pre pandemic EBITDA from Macao and Las Vegas, 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

Welltower Poised to Take Advantage of Recovery of Senior Housing Fundamentals

Business Strategy and Outlook

The top healthcare real estate stands to disproportionately benefit from the Affordable Care Act. There is an increased focus on higher-quality care in lower-cost settings. The best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years and the 80-and-older population, which spends more than 4 times on healthcare per capita than the national average, should almost double over the next 10 years. Long-term, the best healthcare companies are well-positioned to take advantage of these industry tailwinds.

In our view, Welltower will benefit from these industry tailwinds because of its portfolio of high-quality assets connected to top operators in the senior housing, skilled nursing facilities, and medical office buildings segments. The company has also spent years forming and developing relationships with many of the top operators in each segment. These relationships allow Welltower to push revenue enhancing initiatives and cost-control efficiencies at the property level, creating net operating income growth above the industry average, and provide a natural pipeline of acquisition and development opportunities to meet the needs of its growing operating partners. Welltower’s management team is forward-thinking and should be able to produce strong internal growth and accretive external growth.

The coronavirus was a major challenge to Welltower over the past several quarters. The senior population was one of the worst hit from the virus, and a few cases led to quarantines of entire facilities, which dramatically impacted occupancy. However, month-over-month occupancy improved through 2021 as vaccination rates went up, and we remain optimistic about the sector’s longer-term prospects given that the industry should eventually recover from the impact of the virus, supply has started to fall below the historical average and will remain low for several years, and the demographic boon will create a massive spike in demand for senior housing.

Financial Strength

Welltower is in good financial shape from a liquidity and a solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which we believe will serve stakeholders well. Debt maturities in the near term should be manageable through a combination of refinancing, asset sale proceeds, and free cash flow. We expect 2021 net debt/EBITDA and EBITDA/interest to be roughly 7.2 and 3.8 times, respectively, both of which are outside of the company’s targeted range, though we expect the company to return to normal historical levels as the senior housing portfolio recovers. As a REIT, Welltower is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by the company’s cashflow from operating activities, providing Welltower plenty of flexibility to make capital allocation and investment decisions. We expect the company’s credit rating to remain stable through steady rental income growth in its existing portfolio, which should allow the company to continue to access the debt market in combination with equity issuance and asset dispositions to fund its debt maturities, acquisitions, and development activity

Bulls Say’s

  •  The firm’s intense focus on tenant and operator partnerships produces new off-market investment opportunities, benefiting shareholders. It should see same-store NOI growth above its peers in the senior housing sector due to its operational expertise and the strength of these relationships.
  • Welltower’s diverse strategy allows it to consider a range of opportunities across property types and business models as a means for growth.
  •  Welltower enjoys industry tailwinds, including an aging population and regulatory changes that expand the pool of participants in the healthcare system.

Company Profile 

Welltower owns a diversified healthcare portfolio of over 1,600 in-place properties spread across the senior housing, medical office, and skilled nursing/post-acute care sectors. The portfolio includes over 100 properties in both Canada and the United Kingdom as the company looks for additional investment opportunities in countries with mature healthcare systems that operate similarly to that of 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
Global stocks Shares

PRICING AND SHRINKING TO STABALIZE AT  BED BATH AND BEYOND INC

Business Strategy and Outlook

In October 2020, Bed Bath & Beyond put forth an updated strategy to revitalize its brand and regain customer confidence by focusing on its core properties. As such, the company divested peripheral brands such as Cost Plus and Linen Holdings in order to focus on the Bed Bath & Beyond, Buy Buy Baby, Harmon Face Value, and Decorist labels. To help elevate its brand perception, it has combined its online and in-store inventory management with its new “omni-always” initiative in the hopes of capturing more e-commerce business and avoiding the long restock times and uneven inventories that previously plagued the firm. Additionally, it’s investing heavily in both its digital and brick-and-mortar platforms, with a revamp to the website for a more frictionless checkout process and a remodel of its physical stores to offer a cleaner and more enjoyable shopping experience. The firm has attempted to rely less on its iconic blue coupons by giving consumers a good everyday value (it is concluded discounts will persist to some degree over the long term). It also plans to right size by shuttering underperforming Bed Bath stores, shrinking the total store base to around 1,000 by the end of 2021 (from 1,500 at the end of 2019). In contrast, management expects 50% sales growth at the baby label by 2023 via new markets, with the brand already set to deliver $1.3 billion in sales in 2021. It is seen total sales declining in 2021 as the footprint continues to contract before stabilizing at a low-single-digit growth rate in 2023.

Longer term, it is conjectured the 2030 operating margin to reach 5%-6%. This improvement is primarily supported by gross margin gains (which reach 37.7%, below the 38%-plus corporate goal) from a greater focus on private label, including the introduction of 10 new owned brands. It also benefits from a lower promotional cadence thanks to SKU rationalization and the utilization of more robust inventory management processes. However, it is foreseen these gains to be offset by higher investment as the home furnishing landscape remains highly fragmented and competitive, limiting profitability to levels that are structurally lower than in the past.

Financial Strength

Bed Bath & Beyond’s cash position is solid and efforts to reduce the firm’s debt load resulted in a positive net cash position at fiscal year-end 2020. Before the firm’s $1.5 billion debt raise in 2014, it had been debt-free since 1996 (excluding acquired debt), using cash generated from operations to fund new store openings and a handful of small bolt-on acquisitions. The firm has access to liquidity through its $1 billion credit facility, which expires in 2026 and captured another $600 million-plus in cash through the sale of Personalizationmall.com, Linen Holdings, Christmas Tree Shops, One Kings Lane, and Cost-Plus World Market brands. It reduced gross debt in 2020 (with long-term debt at $1.2 billion at November 2021 versus $1.5 billion at the end of fiscal 2019) and plans to continue paying down its debt, aiming to reach a gross debt ratio of 3 times by 2023. There is ample cash on hand (roughly $509 million as of Nov. 27, 2021) to cover near-term expenses like operating lease obligations.

Over the past five reported fiscal years, the firm has produced cumulative free cash flow (cash from operations minus capital expenditures) of $2.1 billion. However, it is anticipated this level to be tempered over 2021-23 as Bed Bath spends around $375 million annually to improve new stores, existing stores, its supply chain, and technology in this time frame. Free cash flow to equity has averaged about 4% of revenue during the past five reported years, which is decent for a mature company that is still spending to remain competitive, but it is likely this level to decline as secular headwinds weigh on performance and necessary investment levels pick up. Despite the higher spending ahead, Bed Bath has a plan to complete its share $1 billion in shares buy back by the end of fiscal 2021.

Bulls Say’s

  • Less discretionary categories such as linens, towels, and cookware offer some resiliency amid macroeconomic cyclicality. Registries across bridal, baby, and gift have historically provided a steady stream of customers.
  • The closure of numerous underperforming stores by the end of 2021 could help lift the profitability of the business faster than it can be anticipated as better performing stores make up a greater proportion of the fleet.
  • With a push into expanding the representation of owned brands (already accounting for 20% of sales), gross margin metrics could expand faster than it can get forecast.

Company Profile 

Bed Bath & Beyond is a home furnishings retailer, operating just under 1,000 stores in all 50 states, Puerto Rico, Canada, and Mexico. Stores carry an assortment of branded bed and bath accessories, kitchen textiles, and cooking supplies. In addition to 809 Bed Bath & Beyond stores, the company operates 133 Buy Buy Baby stores and 53 Harmon Face Values stores (health/beauty care). In an effort to refocus on its core businesses, the firm has divested the online retailer Personalizationmall.com, One Kings Lane, Christmas Tree Shops and That (gifts/housewares), Linen Holdings, and Cost-Plus World Market.

(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 ENJOYING STICKY MARKET SHARE THANKS TO CUSTOMER RELATIONSHIPS AND LONG TERM CONTRACTS

Business Strategy and Outlook

It is foreseen Aptiv’s average yearly revenue growth 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. 

It is seen, 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 favourable 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. 

New Car Assessment Programs are used by governments around the world to provide an independent vehicle safety rating. Legislators, especially in the United States and in Europe, have set NCAP guidelines that will progressively require the addition of ADAS features as standard equipment through the end of this decade. If automakers intend certain models to achieve a 4- or 5-star safety rating, some ADAS features must be part of that vehicle’s standard equipment to even qualify for certain rating levels.

Financial Strength

It is seen, Aptiv’s financial health is in good shape. Since 2015, pro forma for the spin-off of Delphi Technologies in 2017, total debt/total capital has averaged 16.9% while total debt/EBITDA has averaged 2.9 times. Furthermost 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 exemption 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’s

  • Owing to product segments with better-than-industry average growth prospects like safety, electrical architecture, electronics, and autonomous driving, it is projected 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 

Bed Bath & Beyond is a home furnishings retailer, operating just under 1,000 stores in all 50 states, Puerto Rico, Canada, and Mexico. Stores carry an assortment of branded bed and bath accessories, kitchen textiles, and cooking supplies. In addition to 809 Bed Bath & Beyond stores, the company operates 133 Buy Buy Baby stores and 53 Harmon Face Values stores (health/beauty care). In an effort to refocus on its core businesses, the firm has divested the online retailer Personalizationmall.com, One Kings Lane, Christmas Tree Shops and That (gifts/housewares), Linen Holdings, and Cost-Plus World Market.

(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

Equifax Is Best Known for Its Credit Bureau, but Workforce Solutions Segment Driving Profit Growth

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy and Outlook

Along with TransUnion and Experian, Equifax is one of the big three credit bureaus. Given the fixed costs inherent in a data-intensive business, Equifax has been able to enjoy strong operating leverage from incremental revenue. As the U.S. credit bureau market is relatively mature, the company has been adding new capabilities and expanding its geographic footprint, both organically and through acquisitions. As an example of its bolt-on acquisition strategy, Equifax announced in January 2021 that it will acquire e-commerce fraud prevention platform Kount for $640 million. Kount builds on Equifax’s existing antifraud products and we think acquiring unique data and software assets makes sense.

Equifax’s star in recent years has been its workforce solutions segment; we expect workforce solutions revenue in 2021 to eclipse U.S. credit bureau revenue. Workforce solutions includes income verification (primarily for mortgages), and we don’t believe Equifax has meaningful direct competition for this service. We expect Equifax’s competitive position to persist as the large amount of existing records and the difficulty of convincing employers to share employee information would be too tough for new entrants to overcome. In the years ahead, we expect Equifax to focus on expanding use cases of income verification beyond mortgage to auto, credit card, and government services. Workforce solutions also includes employers’ services, which consist of employee onboarding solutions, I-9 management, tax form services, and unemployment claims processing, the last of which provided a meaningful source of countercyclical revenue amid the COVID-19 pandemic.

Equifax’s reputation took a beating after a well-publicized data breach in September 2017. This wasn’t the first time Equifax suffered a data breach; however, the depth and the breadth of the breach created ire among the public and showed that the company wasn’t prepared to handle customers data securely. Following the breach, Equifax has invested heavily in cybersecurity ($292 million in 2019) and incurred significant legal and product liability costs. In our view, Equifax has largely put the episode behind it.

Financial Strength

Equifax management has historically been reasonably conservative with the balance sheet, with leverage ratios (net debt/adjusted EBITDA) between 1.5 and 3.0 times in the past several years. Management has shown a willingness to increase debt after an acquisition. Following the acquisition of Veda in 2016, the leverage ratio went to 3.5 times, but the firm quickly paid some of its debt to reduce

leverage. Following the data breach in 2017, leverage increased as the firm incurred significant costs related to the breach. At the end of 2020, Equifax disclosed that it had $4.4 billion in long-term debt and $1.7 billion of cash. On a net leverage basis, we calculate Equifax’s leverage at the

end of the fourth quarter of 2020 was 1.8 times. Given this and the fact that a significant subset of the company’s business is either not very economically sensitive or countercyclical, we believe Equifax is on strong financial footing amid the coronavirus-induced macroeconomic uncertainty.

Bulls Say’s

  • The workforce solutions segment is a fast-growing business built on unique data and can contribute meaningfully to earnings growth. Equifax can increase use cases in nonmortgage applications for income verification. 
  • Equifax’s businesses lines are capital-light, and incremental revenue tends to flow to the bottom line, generating high returns on invested capital and operating margin expansion
  • Equifax’s acquisitions can further solidify its moat and diversify its lines of business.

Company Profile 

Along with Experian and TransUnion, Equifax is one of the leading credit bureaus in the United States. Equifax’s credit reports provide credit histories on millions of consumers, and the firm’s services are critical to lenders’ credit decisions. In addition, about a third of the firm’s revenue comes from workforce solutions, which provides income verification and employer human resources services. Equifax generates over 20% of its revenue from outside 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
Global stocks

Equifax: one of the big three credit bureaus, taking the limelight is the Workforce

Business Strategy and Outlook

Along with TransUnion and Experian, Equifax is one of the big three credit bureaus. Given the fixed costs inherent in a data-intensive business, Equifax has been able to enjoy strong operating leverage from incremental revenue. As the U.S. credit bureau market is relatively mature, the company has been adding new capabilities and expanding its geographic footprint, both organically and through acquisitions. As an example of its bolt-on acquisition strategy, Equifax announced in January 2021 that it will acquire e-commerce fraud prevention platform Kount for $640 million. Kount builds on Equifax’s existing antifraud products and it is anticipated, acquiring unique data and software assets makes sense.

Equifax’s star in recent years has been its workforce solutions segment; and it is supposed workforce solutions revenue in 2021 to eclipse U.S. credit bureau revenue. Workforce solutions includes income verification (primarily for mortgages), and it is not in certain of Equifax to have meaningful direct competition for this service. It is believed Equifax’s competitive position to persist as the large amount of existing records and the difficulty of convincing employers to share employee information would be too tough for new entrants to overcome. In the years ahead, it is foreseen Equifax to focus on expanding use cases of income verification beyond mortgage to auto, credit card, and government services. Workforce solutions also includes employers’ services, which consist of employee onboarding solutions, I-9 management, tax form services, and unemployment claims processing, the last of which provided a meaningful source of countercyclical revenue amid the COVID-19 pandemic. 

Equifax’s reputation took a beating after a well-publicized data breach in September 2017. This wasn’t the first time Equifax suffered a data breach; however, the depth and the breadth of the breach created ire among the public and showed that the company wasn’t prepared to handle customers data securely. Following the breach, Equifax has invested heavily in cybersecurity ($292 million in 2019) and incurred significant legal and product liability costs. It is seen, Equifax has largely put the episode behind it

Financial Strength

Equifax management has historically been reasonably conservative with the balance sheet, with leverage ratios (net debt/adjusted EBITDA) between 1.5 and 3.0 times in the past several years. Management has shown a willingness to increase debt after an acquisition. Following the acquisition of Veda in 2016, the leverage ratio went to 3.5 times, but the firm quickly paid some of its debt to reduce leverage. Following the data breach in 2017, leverage increased as the firm incurred significant costs related to the breach. At the end of 2020, Equifax disclosed that it had $4.4 billion in long-term debt and $1.7 billion of cash. On a net leverage basis, we calculate Equifax’s leverage at the end of the fourth quarter of 2020 was 1.8 times. Given this and the fact that a significant subset of the company’s business is either not very economically sensitive or countercyclical, it is seen, Equifax is on strong financial footing amid the coronavirus-induced macroeconomic uncertainty

 Bulls Say’s

  • The workforce solutions segment is a fast-growing business built on unique data and can contribute meaningfully to earnings growth. Equifax can increase use cases in nonmortgage applications for income verification.
  • Equifax’s businesses lines are capital-light, and incremental revenue tends to flow to the bottom line, generating high returns on invested capital and operating margin expansion. 
  • Equifax’s acquisitions can further solidify its moat and diversify its lines of business.

Company Profile 

Along with Experian and TransUnion, Equifax is one of the leading credit bureaus in the United States. Equifax’s credit reports provide credit histories on millions of consumers, and the firm’s services are critical to lenders’ credit decisions. In addition, about a third of the firm’s revenue comes from workforce solutions, which provides income verification and employer human resources services. Equifax generates over 20% of its revenue from outside 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

JM Smucker Co: At Home Food giving Gains against Market Shares Stabilization still a Hindrance

Business Strategy and Outlook

Despite having leading positions in many categories (fruit spreads, peanut butter, dog treats, coffee, and cat food) it is seen Smucker lacks an economic moat, either via its brand intangible assets or entrenched retail relationships. It is anticipated that for most of its sales base, Smucker does not possess pricing power and its market shares are slipping. This dilemma cannot be attributed to a lack of support, as Smucker’s brand investments exceed that of its peers (with marketing and R&D averaging 7.4% of sales the last three years compared with 5.4% for peers). Rather, it is perceived these expenditures are not as productive as its competitors, a problem not easily resolved in long interpretation.

It is assumed Smucker’s organic sales growth will average 2% annually over the long term, slightly less than the growth that was seeming for the total at-home food and beverage industry. It was foreseen market share losses in coffee and dog food to persist (Smucker’s two largest categories, at 47% of sales), as Smucker struggles to compete with strong brands such as Starbucks (licensed by wide-moat Nestle) and BLUE (owned by narrow-moat General Mills). Further, the fruit and nut spread categories, another 15% of sales, exhibit minimal growth. Even so, 2% growth represents an improvement from the modest declines in organic sales the firm realized before the pandemic. It is contemplated Smucker will be one of the few packaged food companies to realize lasting benefits from the pandemic, given the high-single-digit increase in pets adopted during the crisis and the likelihood that more flexible work arrangements should result in higher consumption of at-home coffee. This impact will not be immaterial, as collectively, pet food and coffee compose nearly 70% of Smucker’s sales. Further, Smucker’s sales trajectory should improve as Uncrustables (5% of fiscal 2021 sales) becomes a greater portion of the mix, as the brand has grown double-digits in each of the past several years. In addition, recent and pending divestitures of slower-growing brands (Crisco, Natural Balance, private label dry pet food, juices, and grains) should further improve Smucker’s ability to accelerate its top-line growth

Financial Strength

After years of a conservatively leveraged balance sheet, with net debt/adjusted EBITDA consistently below 2 times, the Big Heart Pet Brands acquisition in 2015 increased the ratio to above 6. Smucker paid $5.9 billion for the business, 13 times EBITDA, it is believed to be rich, particularly considering the acquired brands’ poor positioning in the category. It is interpreted management was prudent in its decision to sell the nonstrategic canned milk business shortly thereafter for $194 million to free up capital in order to accelerate debt reduction. Share repurchases were also significantly curtailed in 2015, which could be seen as sensible. Net debt to adjusted EBITDA declined to a manageable 2.8 times by 2018, though it is anticipated, before the firm announced it was acquiring pet food producer Ainsworth for $1.9 billion, which increased leverage to 3.5 times in 2019 before falling to 2.4 times in fiscal 2021. Smucker’s free cash flow (CFO less capital expenditures) as a percentage of revenue has averaged high single digits to low double digits historically, and it is supposed similar results going forward. Smucker seeks to invest half of its capital in growth initiatives (capital expenditures and acquisitions) and return half to stakeholders via dividends, share repurchase, and debt reduction. While it is foreseen Smucker will invest 3.5% of annual sales in capital expenditures over the long term, we model an elevated level of investments in the next two years as the firm adds Uncrustables capacity. We think Smucker will continue to reshape its portfolio through acquisitions and divestitures, although we have not modeled unannounced transactions. We think Smucker’s dividend payout ratio will range between 40% and 50%, in line with management’s long-term targets, it is anticipated 2%-6% annual dividend increasing. It is estimated Smucker to repurchase 0%-5% of shares annually, which is seen as a prudent use of capital if the share price remains below fair value estimates.

Bulls Say’s

  • Smucker’s sales trajectory should improve over time due to the divestiture of slow-growing brands and the increasing mix of Uncrustables, which grows at a double-digit pace.
  • During the pandemic, consumers adopted 11 million pets and purchased 3 million coffee machines, which should provide a lasting benefit for categories representing nearly 70% of Smucker’s fiscal 2021 sales.
  • Executive leadership changes (newly created chief operating officer role, leadership changes for the U.S. sales organization and the pet food segment) should improve execution and enhance accountability.

Company Profile 

J.M. Smucker is a packaged food company that primarily operates in the U.S. retail channel (88% of fiscal 2021 revenue), but also in U.S. food-service (5%), and international (7%). Its largest segment is pet food and treats (36% of 2021 revenue), with popular brands such as Milk-Bone, Meow Mix, 9Lives, Kibbles ‘n Bits, Nature’s Recipe, and Rachael Ray Nutrish. Its second-largest category is coffee (33% across channels) with the number-two brand Folgers and number-six Dunkin’. Other large categories are peanut butter (10%), with number-one Jif, fruit spreads (5%) with number-one Smucker’s, and frozen hand-held foods (5%) with number-one Uncrustables.

(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
Shares Small Cap

Amidst Canadian Cannabis competition, Tilray seen to surpass

Business Strategy and Outlook

Tilray cultivates and sells cannabis in Canada and exports into the global medical market. It also sells CBD products in the U.S. The company is the result of legacy Aphria acquiring legacy Tilray in a reverse merger and renaming itself Tilray in 2021.

Canada legalized recreational cannabis in October 2018. Since then, recreational sales have come to represent an increasingly larger portion of sales for producers. Historically, legacy Aphria focused initially on flower and vape before expanding into edibles. In contrast, legacy Tilray focused on an asset-light, consumer-focused business model. Although the two strategies complement each other well, Tilray faces stiff competition to develop consumer brands that can lead to meaningful pricing power. 

Legacy Aphria had an extensive international distribution business, which generated the majority of its net revenue, a far larger portion than many of its Canadian cannabis peers. Legacy Tilray had also entered the global medical market. With both companies’ international capabilities intact, Tilray looks well positioned. The global market looks lucrative given higher realized prices and growing acceptance of the medical benefits of cannabis. Exporters must pass strict regulations to enter markets, which protects early entrants. It is forecasted roughly 15% average annual growth through 2030 for the global medicinal market excluding Canada and the U.S. 

In 2020, legacy Aphria acquired SweetWater, a U.S. craft brewery. Legacy Tilray previously acquired Manitoba Harvest to distribute CBD products in the U.S. It finally secured a toehold into U.S. THC when it acquired some of MedMen’s outstanding convertible notes. Upon U.S. federal legalization, Tilray would own 21% of the U.S. multistate operator. Furthermore, Tilray paid a great price while also getting downside protection as a debtholder. 

It is contemplated the U.S. offers the fastest growth of any market globally. However, the regulatory environment is murky with individual states legalizing cannabis while it remains illegal federally. It is supposed federal law will eventually be changed to allow states to choose the legality of cannabis within their borders.

Financial Strength

At the end of its second fiscal quarter 2022, Tilray had about $747 million in total debt, excluding lease liabilities. This compares to market capitalization of about $3 billion.  In addition, Tilray had about $332 million in cash, which will allow it to fund future operations and investments. Management has been deliberate with its SG&A spending given the slow rollouts and regulatory challenges the Canadian market has faced. Legacy Aphria was the first major Canadian producer to reach positive EBITDA, with legacy Tilray reaching positive EBITDA in the quarter immediately preceding its acquisition. However, the combined company continues to generate negative free cash flow to the firm, which pressures its financial health. With most of its development costs completed, it is alleged Tilray will have moderate capital needs in the coming years. As such, it is implied debt/adjusted EBITDA to decline. It is reflected Tilray is unlikely to require significant raises of outside capital. In September 2021, the company received shareholder approval for increasing its authorized shares in order to rely on equity for future acquisitions. This bodes well for keeping its financial health strong.

Bulls Say’s

  • Legacy Aphria’s acquisition of Legacy Tilray created a giant with leading Canadian market share, expanded international capabilities, and U.S. CBD and beer operations. 
  • Tilray’s management focuses on strategic SG&A spending and running a lean business model, benefiting its financial health in the early growth stage industry. 
  • Tilray management’s careful approach to expansion has allowed it to reach profitability faster than any of its Canadian peers.

Company Profile 

Tilray is a Canadian producer that cultivates and sells medical and recreational cannabis. In 2021, legacy Aphria acquired legacy Tilray in a reverse merger and renamed itself Tilray. The bulk of its sales are in Canada and in the international medical cannabis export market. U.S. exposure consists of CBD products through Manitoba Harvest and beer through SweetWater.

(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.