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Global stocks Shares

Nike’s Powerful Brand and E-Commerce Position It Well Despite Some Short-Term Issues

Business Strategy and Outlook

We view Nike as the leader of the athletic apparel market and believe it will overcome the challenge of COVID-19 despite near-term supply issues. Morningstar analyst think Nike’s strategies allow it to maintain its leadership position. In mid-2017, Nike announced a consumer-focused realignment. It is investing in its direct-to-consumer network while reducing the number of retail partners that carry its product. In North America and elsewhere, the firm is reducing its exposure to undifferentiated retailers while increasing distribution through a small number of retailers that bring the Nike brand closer to consumers, carry a full range of products, and allow it to control the brand message. Nike’s consumer plan is led by its Triple Double strategy to double innovation, speed, and direct connections to consumers. Triple Double includes cutting product creation times in half, increasing membership in Nike’s mobile apps, and improving the selection of key franchises while reducing its styles by 25%. We think these strategies will allow Nike to hold share and pricing.

Although its recent results in China have been inconsistent due to supply issues and a political controversy, Morningstar analyst still believe Nike has a great opportunity for growth there and in other emerging markets. Moreover, with worldwide distribution and huge e-commerce that totaled about $9.3 billion in fiscal 2021, Nike should benefit as more people in China, Latin America, and other developing regions move into the middle class and gain broadband access.

Financial Strength

 Nike is in excellent financial shape to weather the COVID-19 crisis. At the end of fiscal 2021’s second quarter, Nike had $9.4 billion in long-term debt but $15.1 billion in cash and short-term investments.Nike does not have any long-term debt maturities until May 1, 2023, when its $500 million in 2.25% senior unsecured debt matures, but it does have significant endorsement commitments that, as of the end of fiscal 2021, totaled at least $5.5 billion over the ensuing five fiscal years. The firm produced nearly $19 billion in free cash flow to equity over the past five years, and Morningstar anlayst estimate it will generate more than $38 billion in free cash flow to equity over the next five. Nike issued $1.6 billion in dividends in fiscal 2021 and analyst forecast an average annual dividend payout ratio of about 30% over the next decade. Over the next five fiscal years, Morningstar analyst forecast that Nike will repurchase about $19 billion in stock and issue $11 billion in dividends. 

Bull Says

  • Nike has a great opportunity in fast-growing markets like China. More than 70% of Nike’s growth over the next five years may come from outside North America. 
  • Nike’s Triple Double strategy of increased innovation, direct-to-consumer sales, and speed may improve margins and share. Membership growth in its digital channel has exceeded expectations. 
  • Nike’s gross margins may expand by a couple dozen basis points per year through automation, ecommerce, and higher prices. Nike is actively shifting sales to differentiated retail in North America to increase full-priced sales

Company Profile

Nike is the largest athletic footwear and apparel brand in the world. It designs, develops, and markets athletic apparel, footwear, equipment, and accessories in six major categories: running, basketball, soccer, training, sportswear, and Jordan. Footwear generates about two thirds of its sales. Nike’s brands include Nike, Jordan, and Converse (casual footwear). Nike sells products worldwide and outsources its production to more than 300 factories in more than 30 countries. Nike was founded in 1964 and is based in Beaverton, Oregon

 (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

Raising Moderna’s FVE to $182 on Pipeline Progress and Additional 2022 COVID-19 Vaccine Sales

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Business Strategy and Outlook

Moderna’s mRNA technology has gained rapid validation as sales of its COVID-19 vaccine soar in 2021, but we think the firm has yet to secure a narrow economic moat around its business, largely due

to uncertainties tied to an evolving virus and the changing competitive landscape for innovative vaccines.

In a record-breaking span of just 11 months, Moderna created, developed, manufactured, and got regulatory authorization for mRNA-1273, a two-dose COVID-19 vaccine that is one of the first two mRNA vaccines ever authorized (alongside Pfizer/BioNTech’s BNT162b2). The pandemic accelerated Moderna’s evolution into a commercial-stage biotech, and we expect that the firm’s ramp-up in manufacturing and clinical know-how will pave the way for faster timelines for additional programs. Moderna’s mRNA platform, involving rapid design and similar manufacturing across programs, allows the company to pursue multiple programs in parallel. Moderna also retains full rights to most of its programs, although key partnerships with Merck and AstraZeneca help support its efforts in oncology.

We expect the firm to report $17 billion in COVID-19 vaccine sales in 2021, with $20 billion in sales in 2022 as demand for first doses begins to decline but demand for boosters expands. We see potential for sustained revenue in the low-single-digit billions annually if higher-risk populations continue to receive annual vaccines beyond the pandemic, although there is high uncertainty around the number of long-term competitors (including new mRNA players) and pricing.

Moderna’s most advanced program outside COVID-19 is for cytomegalovirus, a leading cause of birth defects, but several other vaccines are in earlier trials, targeting other respiratory viruses like RSV and influenza. We see each of these as more than $1 billion annual sales opportunities. Moderna is also pursuing therapeutic cancer vaccines with Merck, as well as regenerative therapeutics and intratumoral immuno-oncology therapies with AstraZeneca, which we include in our valuation. We recently included Moderna’s leading secreted or intracellular protein programs in our valuation, as they have entered early-stage development.

Financial Strength

Moderna raised $1.85 billion through two equity offerings in 2020, ending the year with cash and investments of $5.25 billion. This added substantially to the firm’s IPO proceeds in 2018 of $563 million. Given Moderna’s massive expected COVID-19 vaccine sales in 2021 and lack of debt, the firm’s

financial strength looks solid.

Bulls Say’s

  • The stellar efficacy and safety profile of Moderna’s COVID-19 vaccine offered rapid validation of the firm’s mRNA technology
  • Its mRNA technology could allow the firm to compete in a wide range of therapeutic areas, ranging from other prophylactic vaccines (like influenza and other viruses) to enzyme replacement (various rare diseases) to cancer
  • Moderna’s cash infusion from COVID-19 vaccine sales in 2021, as well as newly established large-scale manufacturing facilities, positions the firm to accelerate timelines for new pipeline programs

Company Profile 

Moderna is a commercial-stage biotech that was founded in 2010 and had its initial public offering in December 2018. The firm’s mRNA technology was rapidly validated with its COVID-19 vaccine, which was authorized inthe United States in December 2020. Moderna had 24 mRNA development programs as of early 2021, with 13 of these in clinical trials. Programs span a wide range of therapeutic areas, including infectious disease, oncology, cardiovascular disease, and rare genetic diseases.

(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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Fixed Income Fixed Income

TCW Emerging Markets Local Currency Income Fund Class

Approach

A combination of flexibility and caution, as well as a thoughtful approach to country and currency analysis, continue to support a High Process Pillar rating. This strategy’s approach combines fundamental analysis and top-down research with an aim to manage downside risk. Analysts are responsible for setting three-, six-, and 12-month targets for local rates positions, and the team actively trades around currency positions. There is evaluation of interest rates and currencies on a country-by-country basis, and its higher-conviction positions aren’t usually more than a few percentage points off the JPMorgan GBI-Emerging Markets Global Diversified Index’s, a sensible guardrail given the exchange-rate volatility inherent here. 

In addition, it isn’t typically, complete avoid an index constituent, either taking a small position in that country’s rates or currency, which makes sense given the small number of names (roughly 20) in the sovereign bond benchmark. The strategy also allows up to 20% in U.S.-dollar-denominated debt and cash. Still, the process allows plenty of room to manoeuvre. When it’s found that emerging-markets currencies are extremely undervalued, it can take that exposure up to 125%, and when they are expensive it can hedge it to 75%. The portfolio is further diversified by off-index plays, which have included frontier markets (Egypt) and developed markets (Greece). 

Portfolio

The process allows for ample movement in the strategy’s overall emerging-markets currency exposure, which has been dialled up and down in a tactical fashion based on valuations and its market outlook. The portfolio’s overall emerging-markets currency exposure was light (around 75% of assets) following 2012’s big market runup, which served the strategy well when things got tough in 2013. The managers brought that exposure up to the 90% range at the end of the sell-off in 2015 and then let it run in the 110%-120% range as it rallied in 2016 and 2017. Since the pandemic-riled markets in February 2020, the team has kept the portfolio’s overall emerging-markets currency exposure between 93% and 100%, given it has been concerned about U.S. dollar strength. The strategy sticks close to the benchmark, but at times its high-conviction and tactical nature is on full display. In 2020, the team was overweight in longer Brazilian debt based on valuations and favorable real rates, which hurt early on during that year. But off-benchmark moves have helped combat the concentration risk associated with this bogy. The portfolio’s positioning in Egypt was a prime example in 2020: That stake sat at 5% to start the year, and the team cut it completely by the end of March to redeploy to more attractively priced opportunities before building it back to 4% at the end of September. As of September 2021, the team continued to hold a 4% stake in local Egyptian debt given its attractive yield and pending inclusion into the JPMorgan GBI-Emerging Markets Global Diversified Index.

People

This remains one of the more-experienced teams that works well together, but its size hasn’t kept pace with some larger peers. This underpins its People Pillar downgrade to Above Average from High.

Emerging-markets bond veterans Penny Foley and David Robbins took over here in December 2009. Foley cofounded an institutional emerging-markets debt and equity strategy in 1987; Robbins joined her there in 2000 after running emerging-markets trading at Lehman Brothers and Morgan Stanley. Alex Stanojevic, a trader with the team since 2005, was named comanager in mid-2017, helping build ample transition time for when Foley eventually retires. 

The managers’ supporting cast is experienced and works together well, but it’s half the size of some peers, which can leave the team stretched in an ever-expanding investment universe. The managers are supported by five sovereign analysts led by Blaise Antin, who joined TCW in 2000. Longtime team member Javier Segovia leads a group of three emerging-markets corporate analysts including Stephen Keck, who has focused on this sector for TCW since 2003, and two more experienced analysts who joined in 2011 and 2015. This corporate cast, while experienced, is much leaner than some peers. Additionally, their relative inexperience with Asian corporate credit was partly to blame for 2021’s disappointing performance. As the emerging-markets debt market grows, this midsized team will need to stick to what it knows best to maintain its edge.

Performance 

This strategy’s Institutional share class gained 0.6% annualized from its mid-December 2010 inception through December 2021, ranking third out of 14 distinct strategies in the emerging-markets local-currency bond Morningstar Category. It also outpaced the JPMorgan GBI-Emerging Markets Global Diversified Index by roughly 10 basis points annualized. Though the strategy isn’t likely to reach the heights of its more aggressive competitors in strong rallies, it’s been no slouch. It edged out its typical peer and benchmark in 2016 and 2017, for example, through smart positioning with larger index constituents such as Brazil and Russia, as well as picking out-of-benchmark winners such as the Indian rupee and Egyptian pound. The strategy has held up better than peers and the index in some tough markets thanks to the team’s valuation discipline and smart allocation moves. Taking emerging-markets currency exposure down to 75% of assets and raising cash to around 11% helped going into 2013’s taper tantrum, as did some better performing off-index investments in China and Uruguay. Still, lately there have been a few bumps in the road. The strategy’s 9.3% loss in 

2021 lagged its typical rival by 110 basis points and its benchmark by 90 basis points. Much of this underperformance owed to the team’s overweighting in emerging-markets local-currency exposure, as the U.S. dollar outperformed for most of the year. From a country perspective, an overweighting and long-duration positioning in Mexico and Columbia were painful.

(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

Walgreens Raises Guidance After Strong First Fiscal Quarter Results; Increasing our FVE to $48

Business Strategy and Outlook

Founded in 1901, Walgreens Boots Alliance is a leading global retail pharmacy chain. In fiscal 2020, the company generated approximately $140 billion in revenue and dispensed over a billion prescriptions annually, representing just under a quarter of the U.S. drug market. The firm’s over 9,000 domestic stores are strategically located in high-traffic areas to generate over $13 million per store, which drives scale and remains a critical consideration in an increasingly competitive market that has witnessed rationalization. The core business is centred around the pharmacy, which accounts for about three fourths of revenue and is considered the main driver of traffic.

Despite Walgreens’ scale as a leading purchaser of prescription drugs and competitive advantage over smaller retail pharmacy chains, gross margins have come under pressure in recent years as a result of pharmacy benefit managers’ negotiation leverage and market power. These pressures have affected margins across the entire retail pharmacy industry, pushing the largest players (Walgreens, CVS, Walmart) to branch into other healthcare services. Walgreens has been focused on leveraging scale to foster strategic partnerships to increase traffic and cross-selling opportunities with a long-term focus to improve coordinated care. 

While Walgreens has expanded into omnichannel offerings, we think the company’s high-traffic brick-and-mortar locations and convenience-oriented approach is less susceptible to pressures from e-commerce and mass merchandisers, particularly in the health and wellness categories, than other retailers. Historically the company’s strategy was based on footprint expansion but having established a scalable infrastructure, the focus has evolved and the concentration has shifted to improving store utilization and strategically aligning with healthcare partners to address the macro trend of localized community healthcare. The company’s partnership with VillageMD to establish primary-care clinics in

select Walgreens locations further establishes the drugstore as a one-stop shop for care.

Financial Strength

As of fiscal first-quarter 2022, cash and equivalents were over $4.1 billion, offset by $13.8 billion in debt, with $2.0 billion due over the next three years. The company continues to focus on its core assets, and the recent divestiture of its international wholesale business should allow the company to pay down debt and fund strategic initiatives to improve its long-term positioning. We believe the firm will be able to rebuild its cash balance through the normal course of business. Free cash flow generation was over $4 billion in fiscal 2020 and is expected to normalize at these levels in the near term.

Bulls Say’s

  • As a leading retail pharmacy with around 9,000domestic locations, Walgreens is able to reach 80% of U.S. consumers.
  • Strategic partnerships focused on increasing store utilization through the addition of clinical partners to localize community healthcare should be a natural extension in providing coordinated care that will increase community engagement and offset reimbursement pressures. 
  • An increase in higher-margin health and beauty merchandise sales bolsters front-end store performance

Company Profile 

Walgreens Boots Alliance is a leading retail pharmacy chain, with over 13,000 stores in 50 states and 9 countries. Walgreens’ core strategy involves brick-and-mortar retail pharmacy locations in high-traffic areas, with nearly 80% of the U.S. population living within 5 miles of a store. Currently, the company has a leading market share of the domestic prescription drug market at about 20%. In 2021, the company sold off a majority of its Alliance Healthcare wholesale business to AmerisourceBergen for $6.5 billion, doubling down on its core pharmacy efforts and ventures in strategic growth areas in primary care (VillageMD) and digital offerings. The company also has equity stakes in AmerisourceBergen (29%) and Sinopharm Holding Guoda Drugstores (40%).

(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

CMS plans net-zero carbon emissions by 2040

Business Strategy and Outlook

CMS Energy’s transformation during the past decade into a mostly regulated utility has set it up for a long runway of growth during the next decade. In addition, CMS’ work with Michigan regulators and politicians has turned the state into one of the most constructive areas for utility investment. These constructive relationships will be critical as CMS pursues an aggressive clean energy growth plan. 

With regulatory and political backing, CMS plans more than $13 billion of investment the next five years and potentially as much as $25 billion during the next 10 years. Its goal to reach net-zero carbon emissions by 2040 is a key part of its growth plan, supporting 6%-8% annual earnings growth for many years. 

Michigan’s 2008 energy legislation and additional reforms in the state’s 2016 Energy Law transformed the state’s utility regulation. As a result of those changes, CMS Energy has achieved a series of constructive regulatory decisions. 

CMS has secured regulatory approval for almost all its near-term capital investment as part of the state’s 10-year integrated resource plan framework. We expect regulators to support CMS’ updated 10-year plan filed in mid-2021. If CMS can keep rate increases modest by controlling operating costs, it is expected to continue to get regulatory support and could even add as much as $1 billion of investment on top of its current plan. 

CMS’ growth strategy focuses on investment in electric and gas distribution and renewable energy, which aligns with Michigan’s clean energy policies and is likely to earn regulatory support. CMS plans to retire the Palisades nuclear plant and all its coal fleet by 2025, keeping it on track to cut carbon emissions 60% by 2025 and reach net-zero carbon emissions by 2040. Proceeds from its EnerBank sale in 2021 will help finance growth investment. 

CMS carries an unusually large amount of parent debt, which has helped boost consolidated returns on equity, but investors should consider the refinancing risk if credit markets tighten.

Financial Strength

Although CMS has trimmed its balance sheet substantially, its consolidated 70% debt/capital ratio remains high primarily because of $4 billion of parent debt. Accordingly, the company’s EBITDA/interest coverage ratio is lower than peers, near 5 times. CMS has reduced its near-term financing risk with opportunistic refinancing. It is projected CMS to maintain its current level of parent debt and take advantage of lower interest rates as it refinances. This should enhance returns for shareholders. Management appears committed to maintaining the current balance sheet and improving its credit metrics through earnings growth. We expect CMS’ consolidated returns on equity to top 13% for the foreseeable future, among the best in the industry due to this extra leverage. CMS has taken advantage of favourable bond markets to extend its debt maturities, including issuing three series of 60-year notes in 2018 and 2019. CMS now has $1.1 billion of parent notes due in 2078-79 at a weighted-average interest rate near 5.8%. CMS also has been able to issue 40- and 50-year debt at the utility subsidiary. Regulators thus far have not imputed CMS’ parent debt to the utilities, but that’s a risk that ultimately could end up reducing CMS’ allowed returns, customer rates and earnings. We don’t expect the company to issue large amounts of equity after pricing a $250 million forward sale at an average $51 per share in 2019 and issuing $230 million of preferred stock in 2021 at a 4.2% yield. We expect the $930 million aftertax cash proceeds from the EnerBank sale will offset new equity needs through 2024. With constructive regulation, we expect CMS will be able to use its cash flow to fund most of its investment plan during the next five years.

Bulls Say’s

  • Regulation in Michigan has improved since landmark reforms in 2008 and 2016. Support from policymakers and regulators is critical to realizing earnings and dividend growth. 
  • CMS’ back-to-basics strategy has focused on investment in regulated businesses, leading to a healthier balance sheet and more reliable cash flow. 
  • CMS’ board has more than doubled the dividend since 2011. We expect 7% annual dividend increases going forward even if the pay out ratio remains above management’s 60% target.

Company Profile 

CMS Energy is an energy holding company with three principal businesses. Its regulated utility, Consumers Energy, provides regulated natural gas service to 1.8 million customers and electric service to 1.8 million customers in Michigan. CMS Enterprises is engaged in wholesale power generation, including contracted renewable energy. CMS sold EnerBank in October 2021.

(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

Magellan Is Buying Back Units More Aggressively Than Most Midstream Player

Business Strategy and Outlook

Magellan’s refined product pipelines are high-quality assets that have contributed to earnings stability as well as steady increases in distributions over time. As both supply and demand are remarkably steady over time, Magellan has been able to extract modest inflation-linked price increases. However, investment opportunities have been more limited in the refined products segment. As a result, Magellan has invested more than $5 billion largely elsewhere since 2010 and has built up a respectable but ultimately more volatile and lower-quality crude oil pipeline, which now contributes about a third of operating margin.While the competitive intensity of the new businesses is higher than the core refined product pipelines.

Magellan’s current growth capital program is expected to wind down in 2021 with only $80 million in planned expenditures given the difficult environment. In 2022, Morningstar analyst focus remains on capital allocation. Growth spending is expected to be minimal. With a newly expanded $1.5 billion unit buyback in place, the partnership has already bought back $750 million in units in 2020 and 2021. Asset sales have contributed with $271 million completed in 2021, and another $435 million awaiting regulatory approvals and expected to be completed in 2022. 

Magellan Midstream Sees Stronger Volume Recovery in 2021, Expands Buyback Program

Magellan’s capital spending program remains quite muted, as it plans to spend $80 million in 2021 and $20 million in 2022 on growth projects presently, it has devoted much more capital toward buybacks recently. The partnership bought back $391 million in units during the quarter, wrapping up its $750 million program initiated in 2020. The board has added another $750 million in buybacks and extended the program to 2024. With the stock trading below our fair value estimate, Morningstar analyst view both the historical repurchases and future program as good capital allocation and supportive of our Exemplary capital allocation rating.

Financial Strength

Magellan remains among the most prudent managers of capital in our MLP coverage. Three factors support this partnership’s exceptional level of financial health. First, the lack of general partner sponsorship keeps Magellan’s cost of equity lower than peers. Second, conservative leverage (far below its maximum ratio of 4 times debt/EBITDA) has kept its cost of debt low and provided considerable flexibility in financing growth projects. Third, ample distribution coverage has allowed management to fully fund its growth initiatives through retained distributable cash flow without needing to tap equity markets.

Magellan was one of the first MLPs to buy out its general partner interests in 2010. Better aligning interest of its holders, the deal also lowered the partnership’s cost of equity capital. Its stable, largely contracted sources of revenue and low leverage relative to peers also support among the lowest cost of debt in the industry. Combined, this cost of capital advantage and low leverage allows Magellan to more opportunistically engage in growth initiatives. Magellan has about $1 billion in liquidity compared and no debt maturities until 2025. The firm has flexed capital spending as needed to address any financial issues.

Bulls Say

  • Magellan has been highly discerning with regards to capital allocation and invested in a number of attractive projects at excellent prices. 
  • Magellan supplies more than 40% of the refined products to 7 of the 15 states it serves. 
  • Magellan only undertakes profitable butane blending opportunities when spreads warrant it, meaning this is a low-risk endeavour.

Company Profile

While Magellan’s capital spending program remains quite muted, as it plans to spend $80 million in 2021 and $20 million in 2022 on growth projects presently, it has devoted much more capital toward buybacks recently. The partnership bought back $391 million in units during the quarter, wrapping up its $750 million program initiated in 2020. The board has added another $750 million in buybacks and extended the program to 2024. With the stock trading below our fair value estimate, we view both the historical repurchases and future program as good capital allocation and supportive of our Exemplary capital allocation rating.

(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

Wesfarmers’ Bid for API Stands After Woolworths Withdraws

Business Strategy and Outlook

To diversify from regulated PBS revenue, API acquired the Priceline chain of health and beauty stores in 2004.Priceline contributes around one quarter of API’s revenue but over 40% of gross profit. Priceline’s key growth strategies are increasing its contribution from online sales and leveraging its loyalty scheme, the Sister Club. However, Morningstar analyst have concerns regarding these endeavours. Market statistics suggest the Australian health and beauty retail market is growing at a mid-single-digit pace, which provides an attractive opportunity for API at first blush. However, Morningstar analyst believe the market growth opportunity is skewed to the premium end rather than Priceline’s mass-middle positioning and consequently forecast below-market average revenue growth for the retail business. This is despite its loyalty program that differentiates Priceline from key competitors .

Similarly, Priceline’s growing online sales will likely lead to a subdued outlook for in-store sales. Morningstar analyst forecast same-store sales climbing at just 1% per year, less than inflation. Moreover, the shift of sales from physical stores to online places pressure on margins due to challenges in evolving the cost base at the same rate.

Offsetting these challenges, API’s acquisition of the Clear Skincare clinics in fiscal 2018 offers significantly higher profitability. With gross margins above 80%, Morningstar analyst expect the rollout of Clear Skincare clinics to help API’s earnings recover in the short term and permanently reduce its exposure to the PBS.

Woolworths’ Offer for API Has Been Withdrawn but Wesfarmers’ Offer Still Stands

In yet another unexpected turn, Woolworths has withdrawn its non-binding proposal to acquire no-moat Australian Pharmaceutical Industries, or API, for AUD 1.75 per share made on Dec. 2, 2021. Following completion of due diligence, Woolworths was not convinced it could achieve the financial returns it requires. However, the takeover offer from Wesfarmers remains in place and is not subject to due diligence, which completed in October 2021. Accordingly, Morningstar analyst have decreased  API fair value estimate by 13% to AUD 1.53, back in line with  standalone assessment of API and Wesfarmers’ takeover offer.

Financial Strength

API is in a sound financial position with net debt/adjusted EBITDA of 0.6 times at fiscal 2021. We forecast leverage to remain under 1.0 over our forecast period, with API comfortably able to afford a 70% dividend payout ratio and continue to expand its retail footprint. We forecast a total of AUD 250 million in capital expenditures over the next five years, and also factor in the final AUD 32.9 million payment for Clear Skincare still outstanding.Working capital management has improved over a number of years, almost halving the net investment in working capital to 5.6% of sales over the 10 years to fiscal 2021. We forecast investment to be roughly maintained at an average of 6.2% of sales.

Bull Says

  • The Priceline and Clear Skincare offerings are relatively high-margin segments and pitched in the beauty and personal-care market which is growing at a mid-single-digit pace. 
  • API’s corporate Priceline stores offers higher margin and more product opportunity than the purely franchise business model of peers Sigma and EBOS. 
  • Management has demonstrated that it is opportunistic and having deleveraged the balance sheet, is looking to invest for growth. Value-additive acquisitions could present upside to our fair value estimate.

Company Profile

Australian Pharmaceutical Industries, or API, is a major Australian pharmaceutical wholesaler and distributor. In addition, it is the franchisor of the Priceline Pharmacy network and directly owns and operates stand-alone Priceline stores which sell personal care and beauty products. In an effort to diversify away from the highly regulated low growth and low margin pharma distribution business which contributes 74% of revenue, API is actively growing a consumer brands portfolio and also acquired Clear Skincare, a skin treatment chain. These two emerging businesses each contribute approximately 1% of revenue but are higher margin than the core distribution segment.

 (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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ETFs ETFs

Goldman Sachs Activebeta U.S Large Cap ETFs: Mild Factor exposure provides an edge

The Goldman Sachs ActiveBeta U.S. Large Cap Index underpinning this fund spins a broad portfolio that pursues four factors: value, quality, momentum, and low volatility. This fund’s mixing approach–which combines four equally weighted distinct sleeves, each focused on a different factor–is simple and transparent.

Approach

While this portfolio’s factor exposure is modest, it is well-diversified and boasts low turnover. This index constructs four separate factor sleeves that start with the Solactive U.S. Large Cap Index, a broad, market-cap-weighted portfolio of large-cap stocks. Each factor sleeve adjusts stocks’ weight based on the strength of their exposure to value, quality (gross profits/total assets), momentum (11-month risk-adjusted return), or low volatility (12-month standard deviation of returns). Stocks with pronounced traits may see their weight materially increase within each sleeve, while those with poor exposure may be eliminated. After the index establishes each sleeve, it weights each of them equally at the portfolio level.

Portfolio

This broad portfolio looks very similar to the S&P 500. The market’s largest stocks receive the most investment, but the fund bends toward those that score well in several of its intended factors. Many stocks carry factor traits that offset, which leaves this fund with mild overall factor exposure. Its quality tilt has been the most defined. In profitability measures like return on invested capital, this fund has outshined the S&P 500. Momentum exposure has been quiet but detectable. The fund’s value tilt has been the weakest of the factors, likely because its quality and momentum sleeves pull it toward more richly valued companies.

Top Holdings

top holdings .png

People

Goldman Sachs ActiveBeta® ETFs are managed by our Quantitative Investment Strategies team, comprised of over 95 Portfolio Management and Research professionals, with an average of over 15 years of experience. Raj Garigipati and Jamie McGregor are the named managers on this fund. Gagrigipati has managed this fund since its inception in September 2015, while McGregor joined in April 2016, replacing Steve Jeneste. Garigipati is the head of ETF portfolio management at Goldman Sachs. McGregor was a portfolio manager at Guggenheim for a year prior to joining Goldman Sachs as a portfolio manager in July 2015.

Performance

The fund has come alive recently, outpacing its category benchmark by more than 2 percentage points from May 2021 through December 2021. Its value-oriented consumer discretionary stocks picked up steam, and highly profitable firms like Visa V and Mastercard MA helped it outperform in the tech arena. Steady portfolio management has kept this fund in line with its benchmark index. Over the trailing five years through December 2021, it trailed its benchmark by 13 basis points annualized, a margin slightly wider than its 0.09% expense ratio.

Performance.png

(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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Expert Insights Technology Stocks

Change in elective surgery restrictions have minimal long-term impact for Ramsay

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

Business Strategy and Outlook

Ramsay’s strong Australian business enabled its global acquisitions but the market fundamentals offshore are far less attractive. The key differentiator is the proportion of private health insurance, or PHI, coverage of the population. According to data from the Australian Prudential Regulation Authority, 45% of the Australian population have PHI resulting in roughly 80% of Ramsay’s Australian revenue flowing from PHI versus 20% or less in its other geographies. This has a direct impact on profits earned as providers are price-takers in publicly outsourced work.

Despite various pandemic pressures weighing on Ramsay, the firm is increasing its capital expenditure to better position itself for long-term growth. The key areas of investment are brownfield and greenfield expansions in Australia, and digital overseas. Ramsay is focusing on increasing its day surgery capacity as the proportion of day surgeries at Australian private hospitals has increased to roughly 65% from 60% in the last 10 years. The firm also sees opportunity for integrated care and higher-margin non-surgical ancillary services such as rehabilitation and mental health.

Financial Strength

Ramsay’s planned acquisition of Spire Healthcare in 2021 didn’t eventuate leaving the company in a stronger financial position as a result with pro forma net debt/EBITDA pre-AASB 16 of 0.7 at July 2021. However, due to the pandemic weighing on earnings, the acquisition of Elysium, and sustained elevated planned capital expenditures, it is forecasted leverage to peak at 3.3 in fiscal 2022 but fall under 2.0 by fiscal 2026. As Ramsay Australia owns most of its properties, the group has extra optionality if ever capital constrained. While free cash flow conversion of earnings averaged 98% over the last five years, it was boosted in fiscal 2020 due to the French government prefunding all outsourced work which contributed to a working capital inflow of AUD 526 million.

The dividend is largely underpinned by the Australian business.The capital structure includes AUD 252 million of Convertible Adjustable Rate Equity Securities, or CARES, on which Ramsay pays a fully franked dividend equivalent to a margin of 4.85% over the 180-day bank bill swap rate after tax which is high in the current funding environment. The CARES funding is not material in terms of the capital structure of the business overall, but it is unclear to us why the securities were allowed to step up to this high rate rather than being refinanced given the availability of cheaper debt. Review of the largest CARES holders doesn’t reveal any material related parties.

Bulls Say’s 

  • Ramsay boasts leading market positions in most of its geographies and benefits from negotiating power with payers and cost advantage derived from scale. 
  • Ramsay is a stable compounder with its healthcare services being highly defensive and underpinned by strong demographic factors. 
  • Its premium Australian business is being diluted by lower-margin and lower-return businesses overseas with higher exposures to publicly outsourced work and associated regulatory risk.

Company Profile 

Ramsay Health Care is one of the largest private healthcare providers in the world, with over 460 facilities across 10 countries. The key markets in which it operates are Australia, France, the U.K., and Sweden. It is the largest private hospital group in each of these markets except for the U.K. where it ranks fifth. Ramsay Sante, which operates the European regions other than the U.K., is a 52.5%-owned subsidiary of Ramsay Health Care. The company typically earns about 60% of consolidated earnings in Australia and 30% in France. Ramsay Health Care undertakes both private and publicly funded healthcare.

(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
ETFs ETFs

Goldman Sachs Activebeta U.S Large Cap ETFs: Mild Factor exposure provides an edge

The Goldman Sachs ActiveBeta U.S. Large Cap Index underpinning this fund spins a broad portfolio that pursues four factors: value, quality, momentum, and low volatility. This fund’s mixing approach–which combines four equally weighted distinct sleeves, each focused on a different factor–is simple and transparent.

Approach

While this portfolio’s factor exposure is modest, it is well-diversified and boasts low turnover. This index constructs four separate factor sleeves that start with the Solactive U.S. Large Cap Index, a broad, market-cap-weighted portfolio of large-cap stocks. Each factor sleeve adjusts stocks’ weight based on the strength of their exposure to value, quality (gross profits/total assets), momentum (11-month risk-adjusted return), or low volatility (12-month standard deviation of returns). Stocks with pronounced traits may see their weight materially increase within each sleeve, while those with poor exposure may be eliminated. After the index establishes each sleeve, it weights each of them equally at the portfolio level.

Portfolio

This broad portfolio looks very similar to the S&P 500. The market’s largest stocks receive the most investment, but the fund bends toward those that score well in several of its intended factors. Many stocks carry factor traits that offset, which leaves this fund with mild overall factor exposure. Its quality tilt has been the most defined. In profitability measures like return on invested capital, this fund has outshined the S&P 500. Momentum exposure has been quiet but detectable. The fund’s value tilt has been the weakest of the factors, likely because its quality and momentum sleeves pull it toward more richly valued companies.

Top Holdings

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People

Goldman Sachs ActiveBeta® ETFs are managed by our Quantitative Investment Strategies team, comprised of over 95 Portfolio Management and Research professionals, with an average of over 15 years of experience. Raj Garigipati and Jamie McGregor are the named managers on this fund. Gagrigipati has managed this fund since its inception in September 2015, while McGregor joined in April 2016, replacing Steve Jeneste. Garigipati is the head of ETF portfolio management at Goldman Sachs. McGregor was a portfolio manager at Guggenheim for a year prior to joining Goldman Sachs as a portfolio manager in July 2015.

Performance

The fund has come alive recently, outpacing its category benchmark by more than 2 percentage points from May 2021 through December 2021. Its value-oriented consumer discretionary stocks picked up steam, and highly profitable firms like Visa V and Mastercard MA helped it outperform in the tech arena. Steady portfolio management has kept this fund in line with its benchmark index. Over the trailing five years through December 2021, it trailed its benchmark by 13 basis points annualized, a margin slightly wider than its 0.09% expense ratio.

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(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.