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PHILLIP NARROWING IT’S BUSINESS FOCUS, 50 FACTORIES TO LESS THAN 35 IN 5 YEARS

Business Strategy and Outlook

Philips is a one-stop shop for imaging-related devices with an established footprint in many hospitals, which positions it to benefit from long-term healthcare trends like the transition to nonor minimally invasive procedures, increased hospital demand for efficiencies or detection of sleep apnea. Through several divestitures and acquisitions Philips has transformed itself from an industrial-medical conglomerate into a healthcare company and primary supplier across hospitals, which facilitates the introduction of new products and the displacement of smaller suppliers with more depth in a single product line, but lack of breadth. In many of its underlying markets the company operates an oligopoly where significant market share is controlled by a few players. Several of the company’s products require proprietary software or service, which provide stability to cash flows and help to lock in the customer. In addition the company has carried out several divestments and acquisitions, which is supposed to have reinforced the company’s positioning. The company continues to narrow its business focus, with the sale of its domestic appliances business in 2021. 

It is alleged the company has room to improve its margins through improved operations management and cost efficiencies. Philips has made inroads on this front with a manufacturing footprint consolidation, where it has moved from 50 factories to less than 35 in five years. In D&T Philips has a large installed base built during many decades, which is suspected, has potential for improved service retention rates through remote monitoring, product sophistication and risk-sharing agreements. In connected care, Philips had a significant product recall on its sleep apnea installed base in 2021, which is assumed will result in a permanent loss of market share against Resmed. It is foreseen a long-term conversion pathway in toothbrushes from manual to electric, as a large percentage of the population still brushes manually. It is expected.6 the monitoring market will be a long-term beneficiary of COVID-19 due to hospitals realizing the need for efficiencies in patient management when hospital occupancy is high.

Financial Strength

As of September 2021, Philips had EUR 3.8 billion in net debt, which represented a 1.3 net debt/EBITDA ratio. Debt is denominated in euros and U.S. dollars, with an average interest rate of 2.0% and an average duration of around eight years. It is counter thought, Philips’ indebtedness level will be problematic given its relatively stable cash flow generation, and it is alleged, the company will have additional room for acquisitions, investments and dividends/buybacks. In the first quarter of 2021 Philips announced the sale of its domestic appliances business for EUR 4.4 billion. The proceeds will strengthen Philips’ balance sheet even more, giving the company more room to reinvest in the healthcare business, where it holds a stronger competitive position.

Bulls Say’s

  • Philips’ large installed base in imaging devices and existing footprint in many hospitals is an advantage that allows them to cross-sell and introduce new products with less effort than other smaller players.
  • Philips is a market leader in large unpenetrated markets such as sleep obstructive apnea and electric toothbrushes, where there are significant growth opportunities ahead.
  • The firm’s divestments are reducing the conglomerate perception Philips has among investors, which will provide more visibility on cash flows and future growth opportunities.

Company Profile 

Philips is a diversified global healthcare company operating in three segments: diagnosis and treatment, connected care, and personal health. About 48% of the company’s revenue comes from the diagnosis and treatment segment, which features imaging systems, ultrasound equipment, image-guided therapy solutions and healthcare informatics. The connected care segment (27% of revenue) encompasses monitoring and analytics systems for hospitals and sleep and respiratory care devices, whereas the personal health business (remainder of revenue) includes electric toothbrushes and men’s grooming and personal-care products. In 2020, Philips generated EUR 19.5 billion in sales and had 80,000 employees in over 100 countries.

(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

IN CALIFORNIA BUDGET, NOTHING BUT GROWTH FOR  EDISON INTERNATIONAL

Business Strategy and Outlook

California will always present political, regulatory, and operating challenges for utilities like Edison International. But California’s aggressive clean energy goals also offer Edison more growth opportunities than most utilities. Policymakers know that meeting the state’s clean energy goals, notably a carbon emissions-free economy by 2045, will require financially healthy utilities. 

It is foreseen, Edison will invest at least $6 billion annually, resulting in 6% annual earnings growth at least through 2025. Edison has regulatory and policy support for most of these investments, but the timing of the investments could shift from year to year depending on regulatory delays, wildfire issues, and California energy policy changes. 

Growth opportunities at Southern California Edison address grid safety, renewable energy, electric vehicles, distributed generation, and energy storage. Wildfire safety investments alone could reach $4 billion during the next four years. 

It is alleged state policies will force regulators to support Edison’s investment plan and earnings growth. In August 2021, regulators approved nearly all of Edison’s 2021-23 investment plan. Regulatory proceedings in 2022 will address wildfire-specific investments and Edison’s $6 billion investment plan for 2024. 

Operating cost discipline will be critical to avoid large customer bill increases related to its investment plan. Edison faces regulatory scrutiny to prove its investments are producing customer benefits. It also must resolve the balance of what could end up being $7.5 billion of liabilities related to 2017-18 fires and mudslides. 

Large equity issuances in 2019 and 2020–in part to fund the company’s $2.4 billion contribution to the state wildfire insurance fund and a higher equity allowance for ratemaking–weighed on earnings the last two years. Edison now has most of its financing in place to execute its growth plan, and it is anticipated minimal new equity needs in the coming years. 

It is projected Edison to retain a small share of unregulated earnings, but those are more likely to come from low-risk customer-facing or energy management businesses wrapped into Edison Energy.

Financial Strength

Edison’s credit metrics are well within investment-grade range. California wildfire legislation and regulatory rulings in 2021 removed the overhang that threatened Edison’s investment-grade ratings in early 2019.Edison has kept its balance sheet strong with substantial equity issuances since 2019. It is not forestalled Edison will have any liquidity issues as it resolves 2017-18 fire and mudslide liabilities while funding its growth investments. Edison issued $2.4 billion of new equity in 2019 at prices in line with the fair value estimate. This financing supported both its growth investments and half of its $2.4 billion contribution to the California wildfire insurance fund. The new equity also allowed Southern California Edison to adjust its allowed capital structure to 52% equity from 48% equity for rate-making purposes, leading to higher revenue and partially offsetting the earnings dilution. Edison’s $800 million equity raise in May 2020 at $56 per share was well below the fair value estimate but was necessary to support its growth plan in 2020 and early 2021. In addition to Edison’s $1.25 billion preferred stock issuance in March 2021, it is projected it will need about $700 million of new equity in 2022-24 to support its investment plan. Edison will remain a regular new debt issuer but has few refinancing needs for the next few years. Beyond 2021, it is anticipated dividends to grow in line with SCE’s earnings. The board approved a $0.15 per share annualized increase, or 6%, for 2022, up from $0.10 per share annualized increases in 2020 and 2021. Management has long targeted a 45%-55% payout based on SCE’s earnings, but the board 

appears to be comfortable going above that range based on the 2021 and 2022 dividends that implied near-60% payout ratios. As long as Edison continues to receive regulatory support, it is alleged the board will keep the dividend at the high end of its target payout range.

Bulls Say’s

  • With Edison’s nearly $6 billion of planned annual investment during the next four years, it is  projected 6% average annual average earnings growth in 2022-25.
  • Edison has raised its dividend from $1.35 annualized in 2013 to $2.80 in 2022, an 8% annualized growth rate. Management now appears comfortable maintaining a payout ratio above its 45%-55% target.
  • California’s focus on renewable energy, energy storage, and distributed generation should bolster Edison’s investment opportunities in transmission and distribution upgrades for many years.

Company Profile 

Edison International is the parent company of Southern California Edison, an electric utility that supplies power to 5 million customers in a 50,000-square-mile area of Southern California, excluding Los Angeles. Edison Energy owns interests in nonutility businesses that deal in energy-related products and services. In 2014, Edison International sold its wholesale generation subsidiary Edison Mission Energy out of bankruptcy to NRG Energy.

(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

Crown Draws Blood From a Blackstone

Business Strategy and Outlook

Morningstar analyst expect Crown Resorts to deliver strong earnings growth over the next decade, buoyed by the recovery from current coronavirus-induced lows as restrictions ease, the opening of Crown Sydney during calendar 2022 and continued solid performance from the core assets in Melbourne and Perth. Crown Melbourne and Crown Perth underpin the firm’s narrow economic moat. Crown is the sole operator in both jurisdictions, with long-dated licences. These properties have performed strongly, thanks to Crown’s solid track record of reinvestment, resulting in consistently high property quality, stable visitor growth, and earnings resilience. The quality of these assets, particularly Crown Melbourne, has driven strong growth in VIP gaming.

Indeed, the strong performance of Crown Melbourne helped the firm secure the second licence in Sydney to compete with The Star. As per Morningstar analyst view, the New South Wales government only issued the second licence because The Star’s performance significantly lagged Crown Melbourne in both revenue and EBITDA, depriving the state of taxation revenue. The Star Sydney’s EBITDA is roughly 60% of Crown Melbourne’s, despite Sydney being Australia’s largest city and the international gateway into Australia.

Morningstar analyst estimate Crown Sydney will not only take share from incumbent rival The Star, but will also grow the size of local casino gaming market–particularly in VIP. Morningstar analyst estimate VIP gaming will be a negligible share of revenue in fiscal 2022 amid border closures. However, it is expected that the segment to recover as border restrictions ease and tourism recovers. But VIP gaming can be highly volatile, ranging from over 30% of revenue in fiscal 2015 to 17% in fiscal 2017. Morningstar analysts estimate VIP gaming represents less than 20% of revenue at Crown Melbourne, less than 10% of revenue at Crown Perth, and will constitute more than half Crown Sydney’s sales-albeit at a lower margin than table gaming.

Crown Draws Blood From a Blackstone

Morningstar analyst have raised its fair value estimate for narrow-moat Crown by 8% to AUD 12.20 per share after directors supported an increased bid from narrow moat asset manager Blackstone. New York-based Blackstone, already Crown’s second largest shareholder with a stake of 10%, has been pursuing the beleaguered casino since March 2021 with prior bids unable to pique the interest of the Crown board. 

Crown had formally rejected Blackstone’s previous bid of AUD 12.35 and  the 1% improvement to AUD 12.50 would be unlikely to move the needle-particularly given regulatory uncertainty had eased with the Victorian Royal Commission stopping short of cancelling Crown Melbourne’s licence, instead providing Crown a roadmap to redemption. The AUD 13.10 offer is more compelling, representing a 16% premium to our standalone fair value estimate and a 32% premium to the undisturbed price on Nov. 18, 2021. Crown’s board flagged its unanimous intention to recommend shareholders vote in favour of the proposal, should a formal bid eventuate.

The increased offer is nonbinding and remains conditional on completion of due diligence, support from shareholders, unanimous approval from the board, final approval from Blackstone’s investment committees, and approvals from state gaming regulators. While Blackstone is prepared to proceed while Crown’s various regulatory investigations and consultations remain underway, negative outcomes arising in the meantime (such as the loss or suspension of a casino licence) could thwart the bid.

For the transaction to proceed, support from 37% shareholder Consolidated Press Holdings, or CPH, will be crucial. Via CPH, former executive chair James Packer’s major shareholding remains a headache for regulators. But the Blackstone deal could be seen as taking risk off the table for regulators, given the scrutiny on the relationship between Crown and CPH/James Packer since the commencement of the Bergin casino inquiry. Indeed, the Victorian commissioner’s report has since recommended CPH have until September 2024 to sell down its holding to less than 5%. 

Financial Strength

Despite near-term earnings weakness, Crown’s balance sheet remains robust. Debt levels have increased with the construction of the Crown Sydney casino and forced venue closures due to COVID-19. Crown’s net debt/EBITDA peaked at 3.7 in fiscal 2021, from 1.8 as at the end of June 2020, but still below the precarious 5.0 level (the covenant limit on Crown’s subordinated notes). We expect significant deleverage in fiscal 2022, aided by around AUD 450 million in further apartment sales from the Crown Sydney project and earnings recovery. We forecast fiscal 2022 net debt/EBITDA to fall to 0.5, and with an improved balance sheet, expect the firm to reinstate dividends from the second half of fiscal 2022 at around 75% of underlying earnings

Bulls Says

  • Long-dated licences to operate the only casino in Melbourne and Perth allow Crown to enjoy positive economic profitability in a regulated environment. 
  • Crown Sydney provides a long-term growth opportunity to capture share and expand gaming in Australia’s most populous market. 
  • Crown is well positioned to benefit from the emerging middle and upper class in China.

Company Profile

Crown Resorts is Australia’s largest hotel-casino company. Its flagship property is Crown Melbourne, an integrated complex with more than 2,600 electronic game machines, or EGMs, 540 tables, and three hotels. Crown also operates Crown Perth, a property with more than 2,500 EGMs, 350 tables, and three hotels. Crown has also obtained a licence to operate Sydney’s second casino, Crown Sydney, centred on the VIP and premium gaming market. The company also operates Aspinall’s, a boutique, premium-focussed casino in London.

(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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Technology Stocks

Wipro’s Q3 Aided by Inorganic Growth, but EPS Falls Short; Maintaining INR 495 FVE

Business Strategy and Outlook

Wipro is a leading global IT services provider with the typical menu of offerings, from software implementation to digital transformation consulting to servicing entire business operations teams. Wipro benefits from switching costs and intangible assets, although Morningstar analyst also see it benefiting from a cost advantage. Forays into the higher-value realm of industrial engineering will help ensure that Wipro does not miss out on substantial growth trends in the overall IT services industry.

In many regards, there’s uncanny resemblance between Wipro and its Indian IT services competitors, Infosys and TCS, such as in its offerings, offshore leverage mix (near 75%), or attrition rates (near 15%). However, Wipro has pockets of solutions where it distinguishes itself. 

Wipro isn’t unusual for being an IT services provider with switching costs and intangible assets. These are founded on the intense disruption that customers would experience when changing their IT services provider as well as Wipro’s specialized knowledge of the industry verticals it caters to and the distinct knowledge of its customers’ web of IT piping. But besides these two moat sources, Morningstar analyst think Wipro benefits more from a cost advantage (which we only allot to Indian IT services companies) based on its labor arbitrage model. Morningstar analyst also thinks that benefits from such a cost advantage will diminish over time as the gap between Indian wage growth and GDP growth in primary markets narrows, analyst view that Wipro’s moat is secure as the company’s foray into higher-value offerings and increasingly automated solutions offsets this trend.

Wipro’s Q3 Aided by Inorganic Growth, but EPS Falls Short; Maintaining INR 495 FVE

Wipro gave guidance of 2%-4% sequential revenue growth in its IT services segment for the quarter ahead. All in all, Morningstar analyst maintaining  INR 495 fair value estimate for Wipro and  believe Wipro is overvalued even with shares down 8% upon results–much like other Indian IT services giants Tata Consultancy Services and Infosys.

Third-quarter revenue grew 30% year over year to INR 203 billion due to year-over-year growth in all seven of its sectors led by 50% year-over-year revenue growth in its largest sector, banking, financial services, and insurance, indicating continued strong results from its previous Capco acquisition. Wipro continues to see a large portion of revenue growth stemming from inorganic acquisitions completed earlier in 2021. . Still, IFRS EPS came in at INR 5.42 which missed our expectations of INR 5.64 due to salary increases and additional headcount.

Financial Strength 

Wipro’s financial health is in good shape. Wipro had INR 350 billion in cash and cash equivalents as of March 2021 with debt totalling INR 83 billion. Morningstar analyst expect that Wipro’s cash cushion will remain healthy, as it is expected that free cash flow to grow to INR 118 billion by fiscal 2026. This should allow for continued share buybacks and acquisitions. Morningstar analyst expect that share buybacks over the next five years will average INR 50 billion each year and forecast that acquisitions over the next four years following fiscal 2022 will average INR 9 billion each year. While analyst don’t explicitly forecast dividend increases over the near term, and think Wipro will have more than enough of a cash cushion to undergo any dividend raises as desired without needing to take on debt.

Bulls Say

  • Wipro could benefit from greater margin expansion than expected in our base case as more automated tech solutions decrease the variable costs associated with each incremental sale.
  • Wipro should profit from a wave of demand for more flexible IT infrastructures following the COVID-19 pandemic, as more companies seek to be prepared for similar events. 
  • As European firms become more comfortable with outsourcing their IT workloads offshore, Wipro should expand its market share in the growing geography

Company Profile

Wipro is a leading global IT services provider, with 175,000 employees. Based in Bengaluru, the Indian IT services firm leverages its offshore outsourcing model to derive over half of its revenue (57%) from North America. The company offers traditional IT services offerings: consulting, managed services, and cloud infrastructure services as well as business process outsourcing as a service.

 (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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Dividend Stocks Expert Insights

Ferguson’s coverage to the RMI market enhanced from 31% to 60%

Business Strategy and Outlook

In the United States, Ferguson primarily serves three major end markets: repair, maintenance, and improvement, new construction, and civil infrastructure. Between 2008 and 2020, Ferguson’s exposure to the RMI market increased from 31% to 60%, while new construction decreased from 58% to 32%. Increased exposure to the U.S. RMI market will benefit the company because elevated demand for repair and remodel services due in part to aging housing stock. While the repair and remodel market are less cyclical than new construction, it still tracks housing construction activity. It is projected total housing starts to average approximately 1.6 million units annually this decade, which is above the historical long-run average. 

Ferguson has built leading positions in many different end markets through its roll-up acquisition strategy. The company typically acquires local competitors, gaining access to new brands, suppliers, regions, and customers. Ferguson is projected to continue this strategy, which should augment its scale-driven competitive advantage. Ferguson’s pricing strategy has transformed from being primarily localized to more standardized across the group over the past decade. In the past, branch managers had more discretion over pricing to react to local competitive dynamics. Today, the company employs a more disciplined approach to pricing, allowing it to take better advantage of its economies of scale. 

Ferguson sold its Wolseley U.K. business for approximately $420 million in February 2021. This business struggled to generate value for the group despite being one of the largest distributors in the United Kingdom. There were very few synergies between geographies and little overlap in suppliers. Ferguson’s strategic shift to the United States will be a tailwind for the firm’s prospects, and the listing on the New York Stock Exchange (shares began trading in March 2021) could increase interest from U.S. investors. Shareholders will vote on a U.S. primary listing in spring 2022.

Financial Strength

Ferguson set out to clean up its balance sheet following the great financial crisis, and it improved net debt/EBITDA from 3.5 times before the 2008 crisis to 0.6 times as of Oct. 31, 2021. Net debt at the end of the first quarter of fiscal 2022 (October 2021) was $1.4 billion. Ferguson’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy that augments growth with acquisitions but also returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations, given its strong cash balance. Its cash position at the end of the first quarter of fiscal 2022 stood at $2.2 billion. Ferguson’s ability to tap available lines of credit to meet any short-term needs is making the scenario comforting. The countercyclical nature of industrial distributors’ free cash flow generation, which results from the ability to drawdown inventory during times of economic malaise is also encouraging. Ferguson generated over $1 billion of free cash flow during the great financial crisis, and we expect current economic weakness to push free cash flow levels materially higher as working capital requirements ease. In our view, Ferguson enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  • Ferguson’s roll-up strategy in the U.S. should lead to market share gains, boosting revenue growth more than the market average. 
  • Ferguson’s strategic shift to the U.S. away from international markets has strengthened group operating margins. 
  • Ferguson generates strong free cash flow throughout the economic cycle despite serving cyclical end markets

Company Profile 

Ferguson distributes plumbing and HVAC products primarily to repair, maintenance, and improvement, new construction, and civil infrastructure markets. It serves over 1 million customers and sources products from 34,000 suppliers. Ferguson engages customers through approximately 1,600 North American branches, over the phone, online, and in residential showrooms. In fiscal 2021, Ferguson derived 94% of its nearly $23 billion of sales in the U.S. According to Modern Distribution Management, Ferguson is the largest industrial and construction distributor in North America. The firm sold its U.K. business in 2021 and is now solely focused on the North American 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
Dividend Stocks

Fastenal Co.: To fund a shareholder-friendly capital allocation strategy

Business Strategy and Outlook

Since opening its first fasteners store in 1967, Fastenal has built one of the largest industrial distribution businesses in the United States. For many years, Fastenal’s growth story was driven by its branch count, which now stands at approximately 1,900. While this expansive footprint is still an important component of Fastenal’s business model, other strategies–including expanding its product portfolio, its vending and inventory management services, and most recently, its on-site program–have become increasingly important growth drivers. 

The benefits of Fastenal’s vending, inventory management, and on-site services are twofold: Not only do these services drive incremental revenue, but they also embed Fastenal in its customers’ procurement processes, which supports higher retention rates and pricing power. Fastenal has a first-mover advantage in both vending and on-site services, introducing the former in 2008 and the latter in 1992 (although the on-site strategy did not become a focused strategy until the past few years), and we see long growth runways for both offerings. In addition to growth through its vending and on-site initiatives, Fastenal is well positioned to benefit from customer consolidation trends. In recent years, customers have been consolidating their maintenance, repair, and operations, or MRO, spending with large distributors to leverage their purchasing power and increase operational efficiency. With its national scale, broad product portfolio, and inventory management services, Fastenal can capitalize on this trend and take market share from smaller and less capable distributors. 

Because Fastenal’s sales mix is increasingly skewing more toward large national accounts, on-site programs, and more price-competitive MRO products, the company’s gross margins are likely to come under pressure. However, the combination of higher sales volume and containment of selling, general, and administrative costs provide Fastenal the opportunity to realize strong operating leverage and expand operating margins. It is forecasted Fastenal’s operating margin to reach 21% by our midcycle year.

Financial Strength

Fastenal has an outstanding debt balance of approximately $405 million. It is leveraged at only 0.3 times 2021 EBITDA, which is very conservative relative to the other industrial distributors. Fastenal’s earnings provide substantial headroom to service debt obligations. During fiscal 2020, Fastenal incurred only about $10 million of interest expense and generated about $1.3 billion of EBITDA, which equates to an extremely comfortable interest coverage ratio. Even with its expansive store footprint and cyclical end markets, Fastenal has a proven ability to generate free cash flow (defined as operating cash flow less capital expenditures) throughout the cycle. Indeed, it has generated positive free cash flow every year since 2003. Given its conservative balance sheet and consistent free cash flow generation, we believe Fastenal’s financial health is satisfactory.

Bulls Say’s

  • Vending and on-site programs should provide a long growth runway for Fastenal. 
  • Fastenal can capitalize on its national scale, broad product portfolio, and inventory-management services to take market share from smaller and less capable distributors. 
  • Despite serving cyclical end markets, Fastenal’s business model generates strong free cash flow throughout the cycle. Fastenal is likely to continue to use its cash flow to fund a shareholder-friendly capital allocation strategy.

Company Profile 

Fastenal opened its first fastener store in 1967 in Winona, Minnesota. Since then, Fastenal has greatly expanded its footprint as well as its products and services. Today, Fastenal serves its 400,000 active customers through approximately 1,900 branches, over 1,300 on-site locations, and 14 distribution centers. Since 1993, the company has added other product categories, but fasteners remain its largest category at about 30%-35% of sales. Fastenal also offers customers supply-chain solutions, such as vending and vendor-managed inventory.

(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

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.

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
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.