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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.

Categories
Funds Funds

BNY Mellon Global Stock Fund: A solid strategy led by an impressive, long-tenured team

Process:

The Walter Scott investment team executes a patient investment process, undertaking rigorous fundamental research to identify quality names that can deliver superior long-term returns. It earns an Above Average Process rating. The process starts with an initial screen of businesses that can deliver at least 20% cash flow return on investment over a full market cycle. The managers have an active watchlist of approximately 250 companies they closely monitor, and the team undertakes fundamental bottom-up analysis, assessing factors such as competitive position, industry dynamics, profitability, balance-sheet strength, financial model, and quality of management. 

Portfolio:

The team constructs a relatively concentrated portfolio that usually has 40-60 names. Adequate diversification is maintained by limiting position sizes to a maximum of 5 percentage points, but typically they don’t exceed 4% of the portfolio. The group’s long-term quality focus results in the strategy exhibiting a bias toward mega-cap stocks, though it does hold some mid-cap names. Historically, the strategy has exhibited significant country-level bets. It is typically underweighted in the United States relative to the MSCI World Index. At the sector level, the strategy favours tech, healthcare, and consumer cyclical stocks, while having a large underweighting in financial services.

People:

An experienced, stable team that works together well leads to a High People rating. Investment decision-making at subadvisor Walter Scott is team-based. All investments, new and existing, are discussed and debated until there is unanimous agreement by the research team. Stability and experience characterize Walter Scott’s investment team, with members boasting impressive experience and tenures with the firm. More than half of the investment team members have spent their entire investment careers at the company. In 2021, one of the joint portfolio managers, Yuanli Chen, left, a rare departure. Long-term cohead of research Alan Edington moved to a new position, Responsible Investment.

Performance:

The strategy has sported strong results from its late-December 2006 launch through 2021. The I shares’ 9.4% annualized gain exceeded its MSCI World Index prospectus benchmark’s 7.4% and edged the typical world large-stock growth peer. However, it’s lost a bit of an edge against a more growth-oriented benchmark, with the MSCI World Growth Index up 10% annualized during the period.

(Source: Morningstar)

Price:

Analysts find it difficult to analyse expenses since it comes directly from the returns. Analysts expect that it would be able to deliver positive alpha relative to its category benchmark index.


(Source: Morningstar)                                                                     (Source: Morningstar)

About Funds:

With a focus on investing for the long term, the portfolio consistently favors technology, healthcare, and consumer discretionary names while being significantly underweight in financial services and energy. The strategy won’t always lead the way in buoyant markets. It landed behind the MSCI World Index benchmark in 2021. The investment seeks long-term total return. To pursue its goal, the fund normally invests at least 80% of its net assets, plus any borrowings for investment purposes, in stocks. The fund’s investments will be focused on companies located in the developed markets. Examples of “developed markets” are the United States, Canada, Japan, Australia, Hong Kong and Western Europe. It may invest in the securities of companies of any market capitalization. The fund’s sub-investment adviser, Walter Scott & Partners Limited (Walter Scott), seeks investment opportunities in companies with fundamental strengths that indicate the potential for sustainable growth.

(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

Dollar Tree’s Price Hike Should Help, but Long-Term Competition Remains a Concern

Business Strategy and Outlook:

Dollar Tree’s namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but, before the pandemic, its Family Dollar unit (acquired in 2015) struggled to generate top-line and margin growth. Dollar Tree banner is better positioned long-term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results.

Accounting for around half of sales, the Dollar Tree banner’s wide assortment of products at $1.25 or less has appealed to customers, drawing a broad range of low to middle-income consumers. We believe the concept has room to grow (with square footage rising by a low- to mid-single-digit percentage long term), expanding in new markets while also increasing density. The chain’s fast-changing assortment creates a treasure hunt experience that has a history of drawing customers (posting nearly 3% same-store sales growth on average over the past five years) and has been hard for online retailers to match.

Financial Strength:

Though it took on considerable debt to fund its 2015 purchase of Family Dollar, Dollar Tree’s leverage-reduction efforts have left it on sound financial footing. Its strong balance sheet and free cash flow generation should suffice to fund growth and investments necessary to maintain low price points and respond to competitive pressure. The firm ended fiscal 2020 with net debt at less than three-quarters adjusted EBITDA, the latter of which covered interest expense more than 17 times. Furthermore, capital expenditures to fuel store growth are fairly discretionary, so Dollar Tree should be able to curb targets if needed in the event of financial strain.

Bulls Say:

  • Dollar Tree’s $1.25 price point concept is differentiated, holding absolute dollar costs low for customers while allowing the retailer to realize higher margins than conventional retailers. 
  • Small ticket sizes make it difficult for online retailers to contend with Dollar Tree’s single-price-point model as shipping costs weigh on their ability to compete profitably. 
  • As its two banners become more closely integrated and the store network expands, Dollar Tree should leverage its supply chain and distribution infrastructure investments, generating resources to fuel its low-price model.

Company Profile:

Dollar Tree operates discount stores in the U.S. and Canada, including over 7,800 shops under both its namesake and Family Dollar units (nearly 15,700 in total). The eponymous chain features branded and private-label goods, generally at a $1.25 price. Nearly 50% of Dollar Tree stores’ fiscal 2020 sales came from consumables (including food, health and beauty, and household paper and cleaning products), just over 45% from variety items (including toys and housewares), and 5% from seasonal goods. Family Dollar features branded and private-label goods at prices generally ranging from $1 to $10, with over 76% of fiscal 2020 sales from consumables, 9% from seasonal/electronic items (including prepaid phones and toys), 9% from home products, and 6% from apparel and accessories.

(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

We Like Intel’s Appointment of Micron CFO Dave Zinsner as its New CFO; No Change to FVE

Business Strategy and outlook

Intel is the leader in the integrated design and manufacturing of microprocessors found in PCs and servers. Intel historically differentiated itself first and foremost via the execution of Moore’s law, which predicts transistor density on integrated circuits will double about every two years, meaning subsequent chips have substantial power, cost, and size improvements. This scaling advantage was perpetuated through higher-than-peer-average R&D and capital expenditure budget that allows it to control the entire design and manufacturing process in an industry .

As cloud computing continues to garner significant investment, Intel’s data center group will be an indirect beneficiary. Mobile devices have become the preferred device to perform computing tasks and access data via cloud infrastructures that require large-scale server build-outs. This development has provided strong tailwinds for Intel’s lucrative server processor business. Morningstar analyst believe Intel will experience continued growth in the data center, though we note competition from AMD and customers designing their own ARM-based silicon are potent risks.

The proliferation of mobile devices has come at the expense of the mature PC market, Intel’s historic stronghold, with ARM and its cohorts joining AMD as chief rivals. The rise of artificial intelligence has also unleashed a new competitor in Nvidia for specialized chips to accelerate AI-related workloads. Consequently, Intel has built a broad accelerator portfolio via the acquisition of Altera for FPGAs, Mobileye for computer vision chips used in cars, and Habana Labs for AI chips.

We Like Intel’s Appointment of Micron CFO Dave Zinsner as its New CFO; No Change to FVE

On Jan. 10, Intel announced it appointed David Zinsner as CFO, thus filling the vacancy created by current CFO George Davis’s planned retirement in May 2022. Morningstar analyst think that Zinsner is the right CFO to manage this lofty spending budget, as Micron has successfully executed its new technology ramps on an average capex of $9.2 billion over the past four years. Morningstar analyst  are maintaining our $65 fair value estimate for wide-moat Intel; shares appear undervalued and present an attractive buying opportunity for long-term, patient investors.

Financial Strength

Intel typically operates with ample liquid cash reserves. At the end of 2020, the firm held about $36.4 billion in total debt and nearly $24 billion in cash and cash equivalents, short-term investments, and trading assets. Morningstar analyst expects the firm generates sufficient cash flow and has ample resources to meet its debt obligations, capital expenditure requirements, potential acquisitions, and shareholder returns. 

Bulls Say 

  • Intel is one of the largest semiconductor companies in the world and holds the lion’s share of the PC and server processor markets. The firm has sustained its position at the forefront of technology by investing heavily in R&D, and this trend should continue. 
  • Intel has made a string of savvy acquisitions to build its Artificial Intelligence and automotive offerings, including Altera, Mobileye, Habana Labs, and Movidius. 
  • The data center group has indirectly benefited from the proliferation of mobile devices. Server processor sales will be the main driver of growth in the near future

Company Profile

Intel typically operates with ample liquid cash reserves, which we believe is justified as an offset to the semiconductor industry’s cyclical nature in general and Intel’s higher capital intensity in particular. At the end of 2020, the firm held about $36.4 billion in total debt and nearly $24 billion in cash and cash equivalents, short-term investments, and trading assets. We think the firm generates sufficient cash flow and has ample resources to meet its debt obligations, capital expenditure requirements, potential acquisitions, and shareholder returns.Intel’s dominant manufacturing operations require massive capital outlays for expensive equipment, fab construction, and the maintenance of a clean room environment. Morningstar analyst estimates utilize historical patterns and the expected progression of Moore’s law to attain an average annual capital expenditure of $14 billion over the next five years. Of this outlay, 70% is for maintaining existing capacity, with the remainder used for process development for the 7-nanometer process node and beyond.

 (Source: Morning Star)

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

Dollar Tree Inc: Distinguished by its $1.25 price point concept

Business Strategy and Outlook

Dollar Tree’s namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but, before the pandemic, its Family Dollar unit (acquired in 2015) struggled to generate top-line and margin growth. It is suspected the Dollar Tree banner is better positioned long-term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results. We expect the pandemic’s effects to be confined to the near term, leaving the long-term competitive dynamic intact. 

Accounting for around half of sales, the Dollar Tree banner’s wide assortment of products at $1.25 or less has appealed to customers, drawing a broad range of low to middle-income consumers. The concept has room to grow (with square footage rising by a low- to mid-single-digit percentage long term), expanding in new markets while also increasing density. The chain’s fast-changing assortment creates a treasure hunt experience that has a history of drawing customers (posting nearly 3% same-store sales growth on average over the past five years) and has been hard for online retailers to match. With basket sizes small and the average transaction resulting in a modest bill, we consider the segment relatively well insulated from the digital threat. 

Prospects are murkier at Family Dollar, which has struggled since its acquisition, though the pandemic has provided a fleeting sales lift. Evenly distributed between urban and rural areas, it is anticipated that the chain’s presence in cities is especially susceptible to competitive pressures from a bevy of convenience stores, mass merchandisers, and grocers. While its mix of low prices and convenience carries appeal, particularly among customers that do not have nearby alternatives, It is expected that the benefits of operational improvements and tighter integration with Dollar Tree will largely be offset by competitive strain.

Despite the headwinds, both chains should deliver long-term top-line and margin growth in aggregate, capitalizing on consumers’ desire for convenience and value even as the landscape becomes more challenging.

Financial Strength

Though it took on considerable debt to fund its 2015 purchase of Family Dollar, Dollar Tree’s leverage-reduction efforts have left it on sound financial footing, in our view. Its strong balance sheet and free cash flow generation should suffice to fund growth and investments necessary to maintain low price points and respond to competitive pressure. With the stores remaining open and catering to essentials, we expect little difficulty with navigating the challenges presented by the pandemic. The firm ended fiscal 2020 with net debt at less than three-quarters adjusted EBITDA, the latter of which covered interest expense more than 17 times, neither mark troubling. Despite aggressive growth in the Dollar Tree banner (from under 4,000 stores at the start of fiscal 2010 to more than 7,800 at the end of fiscal 2020) and performance improvement investments at Family Dollar, cash generation has been strong. It is expected to have free cash flow to the firm to average 5% of sales over our explicit forecast. Furthermore, capital expenditures to fuel store growth are discretionary, so Dollar Tree should be able to curb targets if needed in the event of financial strain. Annual outlays to average 3%-4% of sales over the next decade, or just over $1 billion. We do not anticipate Dollar Tree will introduce a dividend. Instead, we expect it to direct excess funds to share repurchases, consistent with its practice before the Family Dollar purchase (the firm bought back an average of just under $500 million in shares annually from fiscal 2010 to 2014, adding $200 million in fiscal 2019 and $400 million in fiscal 2020). In the long term, we assume the company uses around 60% of its cash flow from operations to buy shares.

Bulls Say’s

  • Dollar Tree’s $1.25 price point concept is differentiated, holding absolute dollar costs low for customers while allowing the retailer to realize higher margins than conventional retailers. 
  • Small ticket sizes make it difficult for online retailers to contend with Dollar Tree’s single-price-point model as shipping costs weigh on their ability to compete profitably. 
  • As its two banners become more closely integrated and the store network expands, Dollar Tree should leverage its supply chain and distribution infrastructure investments, generating resources to fuel its low-price model.

Company Profile 

Dollar Tree operates discount stores in the U.S. and Canada, including over 7,800 shops under both its namesake and Family Dollar units (nearly 15,700 in total). The eponymous chain features branded and private-label goods, generally at a $1.25 price. Nearly 50% of Dollar Tree stores’ fiscal 2020 sales came from consumables (including food, health and beauty, and household paper and cleaning products), just over 45% from variety items (including toys and housewares), and 5% from seasonal goods. Family Dollar features branded and private-label goods at prices generally ranging from $1 to $10, with over 76% of fiscal 2020 sales from consumables, 9% from seasonal/electronic items (including prepaid phones and toys), 9% from home products, and 6% from apparel and accessories.

(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.