Author: lvc-admin

Categories
Global stocks Shares

Deere’s Prospects for Fiscal 2022 Look Bright to Us, Given Strong End Market Demand

Business Strategy and Outlook

Deere’s strong brand is underpinned by its high-quality, extremely durable, and efficient products. Customers in developed markets also value Deere’s ability to reduce the total cost of ownership. The company’s strategy focuses on delivering a comprehensive solution for farmers. Deere’s innovative products target each phase of the farming process, which includes field preparation, planting and seeding, applying chemicals, and harvesting. The company also embeds technology in its products, from guidance systems to seed placement and spacing and customized spraying applications. Deere is committed to expanding customer offerings and providing value-added services. Additionally, we believe the management team will look to reduce the company’s cost structure as some markets have matured, providing an opportunity to rethink its footprint and create a leaner organization.

Financial Strength 

Deere maintains a sound balance sheet. On the industrial side, the net debt/adjusted EBITDA ratio was relatively low at the end of fiscal 2021, coming in at 0.4. Total outstanding debt, including both short- and long-term debt, was $10.4 billion. Deere’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and also returns cash to shareholders. The company’s cash position as of fiscal year-end 2021 stood at $7.2 billion on its industrial balance sheet. We also find comfort in Deere’s ability to tap into available lines of credit to meet any short-term needs. Deere has access to $5.7 billion in credit facilities.

Additionally, management is determined to rationalize its footprint by reducing the number of facilities in mature markets. If successful, this will put Deere on much better footing from a cost perspective, further supporting its ability to return cash to shareholders. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total debt stood at $38 billion in fiscal 2021, along with $38 billion in finance receivables and $829 million in cash. In our view, Deere enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  • Higher crop prices encourage farmers to grow more crops and will lead to more farming equipment purchases, substantially boosting Deere’s revenue growth. 
  • Deere will benefit from strong replacement demand, as uncertainty around trade, weather, and agriculture commodity demand has eased, encouraging farmers to refresh their machine fleet. 
  • Increased infrastructure spending in the U.S. and emerging markets will lead to more construction equipment purchases, benefiting Deere.

Company Profile 

Deere is the world’s leading manufacturer of agricultural equipment, producing some of the most recognizable machines in the heavy machinery industry. The company is divided into four reportable segments: production and precision agriculture, small agriculture and turf, construction and forestry, and John Deere Capital. Its products are available through a robust dealer network, which includes over 1,900 dealer locations in North America and approximately 3,700 locations globally. John Deere Capital provides retail financing for machinery to its customers, in addition to wholesale financing for dealers, which increases the likelihood of Deere product sales.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks Philosophy Technical Picks

AUB Group Ltd. visions to boost EPS growth with acquisition strategies

Business Strategy and Outlook

AUB operates the second-largest general insurance broker network in Australia and New Zealand. AUB brokers derive revenue from commissions paid by insurers, based on gross written premiums. AUB owns or has equity stakes in each broking business within the network. Post the exit of rehabilitation services in 2021, around 85% of group EBITA is delivered by the broker network, while the underwriting agencies generate about 15%.

A key value proposition over smaller brokers is AUB’s ability to negotiate more favourable policy wording and pricing. Scale also provides the capacity to spend more on technology, which helps facilitate greater analytical and processing capabilities, and marketing to help attract and retain customers. Other services such as claims support and premium funding support the value proposition.

AUB’s underwriting agencies distribute insurance products but take no underwriting risk. Underwriting agencies act on behalf of insurers to design, develop, and provide specialised insurance products and services.

The earnings outlook is positive. It is expected further insurance price rises over the medium term as insurers seek to cover claims inflation and weak investment income. This follows a weak pricing environment due to excess global reinsurance capacity, soft economic conditions, and elevated competition.

Financial Strength

AUB is in sound financial health. It has strong cash flow generation with a high conversion of earnings to operating cash flow and a relatively high dividend pay-out ratio. Gearing as reported by the company (corporate, subsidiary and look through share of associate debt/debt plus equity) ratio is reasonable, at 28.5% and below the firm’s maximum 45% ratio. Excluding customer cash for premium held by AUB but payable to insurers, AUB holds AUD 90 million in cash, which when included lowers gearing further. The current debt load looks manageable, with EBITDA interest cover of over 16 times and the nature of its businesses being relatively low risk. It is assumed AUB will use operating cash flows to fund increased positions in existing broker partners, with headroom to fund small acquisitions from cash on hand.

Bulls Say’s

  • AUB’s scale and expertise in insurance products and services leave it well placed to benefit from higher insurance pricing. 
  • BizCover and the Kelly+Partners partnership see AUB placed to take market share in the smaller end of the SME market. 
  • The firm’s acquisition strategy, both new investments and increased equity stakes, likely boosts EPS growth.

Company Profile 

AUB Group is the second-largest general insurance broker network in Australia and New Zealand. It has an ownership in 55 brokerage businesses, which collectively write over AUD 3 billion in premiums. It also owns equity stakes in 27 underwriting agencies. AUB derives revenue from commissions (from insurers, ultimately paid for by AUB’s customers) based on gross written premium, or GWP, from agencies it owns, and a share of profits from associates and joint ventures. GWP is split between personal (6%), small to medium enterprises (68%), and corporates (26%).

(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

REA Group reports strong FY21 earnings driven by growth in Australia segment

Investment Thesis:

  • Clear #1 market position in online property classifieds, with consumers spending over more time on realestate.com.au app than the number two website. 
  • Growth opportunities via expansion into Asia and North America. 
  • Recent strategic partnerships with National Australia Bank (property finance) could potentially be positive in the long term. 
  • Upside in key markets – particular in areas where REA is under-penetrated and could potentially win market share from competitors. 
  • New product developments to increase customer experience. 
  • Regular price increases help offset listing pressure.

Key Risks:

  • Competitive pressures lead to a further de-rating of the PE-multiple. 
  • Volume (listings) outlook remains subdued in the near term. 
  • Execution risk with Asia/North America strategy. 
  • Failing to get an adequate return on the recent acquisition of iProperty. 
  • Value/EPS destructive acquisitions. 
  • Decline in Australian property market. 
  • Given REA trades on a very high PE-multiple, underperforming to market estimates can exacerbate a share price de-rating. 
  • Recent tightening of lending practices by banks would affect Financial services business.

Key highlights:

  • REA reported strong FY21 results, with core operations revenue of $928m, up +13%, or excluding acquisitions, up +11%, on strong performance in its Australia segment.
  • EBITDA (incl. associates) was up +19% to $565m, on strong cost management with core operating cost growth (excluding acquisitions) contained to 3% over the pcp.
  • Margin of 60% was flat relative to the pcp. Net profit of $318m was up +18% equating to EPS of 247 cents, up +21%.
  • The Board declared a final dividend of 72cps fully franked which brings the full year dividend to 131cps, up +19%. 
  • Following several acquisitions, REA retained a strong balance sheet, with debt of $414m and a cash balance of $169m at year end.
  • REA refinanced syndicated debt facilities and funded the Mortgage Choice acquisition via a bridge facility with NAB for $520m. The bridge facility matures in July 2022, with management stating they expect to replace this with a new syndicated facility in 1Q22
  • Australia segment highlights:
    • Residential: revenue increased by +18%, on higher national listings (up +15% over the pcp, with Melbourne, up +11% and Sydney, up +25%), improved depth and Premiere penetration, increased subscription revenues and continued growth in add-on products.
    • Commercial and Developer: revenue was up +5% with Developer benefiting from a +17% increase in new project commencements, driven in part by Government stimulus, an increase in project profile duration and higher subscriptions, partially offset by lower Commercial revenues as the impact of Covid dampened listing volumes.
    • Media, Data & Other: revenues were broadly flat over the pcp, as growth in Data and Media revenues were offset by lower revenues in Other.
    • Financial Services: revenue was up +9% driven by higher settlements, increased broker recruitment and improved productivity, which was offset by lower partnership revenue as the current NAB agreement performance payments reached maturity in September 2020.

Company Description: 

REA Group (REA) provides online property listings, web management, financial services and data analytics to the real estate industry via advertising services. For consumers, REA offers the largest online real estate search engine in Australia. The Company also has operations and growing presence in Asia and other parts of the world.

(Source: Banyantree)

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
LICs LICs

Plato Income Maximiser Limited raises $139.5m

Plato Income is Financial Industry with sub- industry is Asset Management. Market Capitalization is 657.126m. Their 5 years Monthly Beta is 0.78. 

Plato Income’s NTA values shows below are before the dividend of $0.005 per share payable on 31 December 2021. The ex-date of the dividend is 16th December 2021. 

Plato Income Maximiser limited Pre – Tax NTA $1.101 while Post – tax NTA is 1.105. Per – tax NTA Includes tax on realised gains/losses and other earnings but excludes any provision from tax on unrealised gains/losses. Post – Tax NTA includes tax on realised and unrealised gains/losses and other earnings. 

During November, PL8 raised $139.5m in total through a Placement to wholesale investors and a Share Purchase Plan (SPP). The Placement to wholesale investors raised $71.3m with the issue of 64.3m fully paid ordinary shares at $1.11 per share. 

The SPP raised $68.2m through the issue of 62m new shares at $1.10 per share. The SPP was oversubscribed with the Company targeting $50m, however the Company decided not to scale back any applications.

The proceeds from the Placement and the SPP will be invested via the Plato Australian Shares Income Fund in accordance with the Company’s structure and investment strategy.

PL8 took the opportunity to raise capital when the Company was trading at a premium. The share price closed at $1.285 on 2 November, the day prior to the capital raising announcement, an 11.7% premium to the pre-tax NTA and a 15% premium to the post-tax NTA. 

The issue of new shares through the Placement and SPP has seen the share price decline to be trading closer to the pre-tax NTA at November-end.

Portfolio Performance as at 30th November 2021

PORTFOLIO PERFORMANCE¹1M%3M%1YR% P.A.3YRS% P.A.INCEPTION% P.A.
Total return²-0.7-2.114.813.59.6
Income³0.61.66.08.37.4
Bench. total return²-0.4-2.017.014.010.1
Excess total return²-0.3-0.1-2.2-0.5-0.5
Excess Income³0.0-0.11.13.42.2
Excess franking³0.00.00.51.20.9

Company Profile 

Plato Income Maximiser Limited is a listed investment company incorporated in Australia. The Company has been established to provide investors with the opportunity to benefit from an investment in an actively managed, well-diversified portfolio of Australian listed equities by investing in an the unlisted scheme Plato Australian Shares Income Fund.

(Source: BanyanTree)

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
LICs LICs

Twilio’s Software Building Blocks Are Constructing a Cloud Communications Empire

Business Strategy and Outlook

Twilio is a cloud-based communication-platform-as-a-service, or CPaaS, company offering communication application programming interfaces, or APIs, and prebuilt solution applications aimed at improving customer engagement. Through these APIs, Twilio’s platform allows developers to integrate messaging, voice, and video functionality into business applications. In a go-to-market model that focuses on empowering developers to utilize the APIs to build products in a highly customized fashion, Twilio has been able to expand into use-cases that would be difficult to penetrate otherwise. For widely sought after use-cases, Twilio has developed solution applications, like Flex Contact Center, which combine various channel APIs into a unified interface to create use-case-specific solutions.

The communication channel APIs are deployed through the Programmable Communications Cloud and then are combined and expanded into application platforms in the Engagement Cloud to offer higher level functionality for specific use-cases. In this view full stack as best-in-breed in the CPaaS space, enabling deeply integrated, sticky communication solutions. Twilio has stellar customer metrics, with churn consistently below 5% and net dollar expansion in excess of 130% in recent years.

Financial Strength

Twilio is in a healthy financial position. Revenue is growing rapidly, and the company is beginning to scale, while the balance sheet is in good shape. As of September 2021, the company had cash and short-term investments of $5.4 billion and a debt balance of $985.5 million. In March 2021, Twilio issued $1.0 billion of senior notes, consisting of $500 million of 3.625% notes due 2029, and $500 million of 3.875% notes due 2031. In June 2021, the company redeemed its prior convertible notes, due March 2023, in their entirety. Since raising approximately $150 million in its IPO in 2016, Twilio has completed several secondary offerings, recently announcing a $1.8 billion offering of its Class A common stock in 2021. Twilio has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company, both on an organic and inorganic basis, to build out the platform and enhance future growth prospects.

Our fair value estimate for Twilio is $356 per share, down from $388 as we model slightly more muted long-term growth. It is expected that Twilio to grow at a 38% CAGR through 2025 from the combination of an expanding customer base and increasing usage of the platform by existing customers, evidenced by a stellar 131% net dollar expansion rate in the third quarter. Investors are discouraged by the combination of the third-quarter slowdown in organic growth, which we still view as healthy at a 38% increase year over year, and the widening loss expected for full-year 2021 after management’s fourth-quarter guidance.

Bulls Say’s 

  • The addition of SI partnerships and solution APIs should lead to increasing success in winning enterprise customers, which not only offer a greater lifetime value for a proportionally smaller acquisition cost, but also tend to be stickier customers. 
  • Twilio has stellar user retention metrics, with churn consistently below 5% and net dollar retention north of 130% in recent years. 
  • As Twilio focuses on developing more solution APIs and growth shifts from usage-based messaging to SaaS-like priced solutions, there should be a natural uptick in both gross margins and recurring revenue.

Company Profile 

Twilio is a cloud-based communication platform-as-a-service company offering communication application programming interfaces, or APIs, and prebuilt solution applications aimed at improving customer engagement. Through these APIs, Twilio’s platform allows software developers to integrate messaging, voice, and video functionality into new or existing business applications. The company leverages its Super Network, Twilio’s global network of carrier relationships, to facilitate high speed cost-optimized global messaging and voice-based communications.

(Source: FN Arena)

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

Accenture Posts Stellar Results as Compressed Transformations Accelerate Demand; Raising FVE to $258

Young woman trading stock market by touching.

Business Strategy and Outlook

Accenture is one of the largest IT-services companies in the world, providing both consulting and outsourcing capabilities. It is expected that Accenture’s growth will remain at a healthy and gradual pace, rather than a massive uptick. 

As a consultant, Accenture provides solutions for specific enterprise problems as well as broad-scope strategies in addition to integrating software for more than 75% of the global top 500 companies. As an outsourcer, Accenture offers business process outsourcing like procurement services as well as application management. 

As per the opinion of Morningstar analyst, there is always something new in the realm of enterprise technology to keep Accenture relevant and engaged with its most important customers. It’s wide moat stems from intangible assets associated with a stellar reputation for reliability and strategic and technological know-how, especially with large, risk-averse enterprise customers. It is also believed that  Accenture benefits from high customer switching costs as its key customers are loath to switch service providers for large or ongoing contracts. Further, as per Morningstar analyst Accenture generates industry-leading returns on capital because of its scale, given that there are only so many blueprints and software partners that an IT-services company needs to solve enterprise problems. Plus, with Accenture having one of the largest IT workforces (at half a million) and an industry-leading number of diamond accounts (typically $100 million annually or more), smaller IT-services companies may find it hard to keep up with the increasing innovation and know-how required to service enterprise technology.

Accenture Posts Stellar Results as Compressed Transformations Accelerate Demand; Raising FVE to $258

Wide-moat Accenture reported excellent first-quarter results, with the top and bottom line exceeding both management’s and our expectations. Accenture experienced broad-based growth in the quarter, benefiting from accelerating digital transformations throughout all end markets. Outperformance was industry, geography, and deal-size agnostic–reflective of the tremendous demand environment Accenture is experiencing. It is  believed that Accenture is uniquely positioned to address compressed transformation, a demand phenomenon that reflects enterprises requiring all-comprehensive digital and cloud transformations in a faster time span. This broad-market trend toward clients taking on more change at once will accelerate and continue to build an impressive pipeline. On the back of increasing alignment of Accenture’s end markets with its business transformation backed value proposition, Morningstar analysts increased our fair value estimate to $258 per share from $236. 

Financial Strength

Accenture’s financial model requires very little debt and generates significant cash flow. The company has an extremely low debt/capital ratio of 0.3% and produced slightly over $3 billion in free cash flow in fiscal 2021. Morningstar analysts are confident that it will be able to deliver on significant share repurchases, dividend expansion, and acquisitions going forward, as it is expected that free cash flow to the firm will expand to over $8 billion by fiscal 2026. Most important is Accenture’s returns on new invested capital. While Accenture has similar operating margins to peers like Cognizant and Capgemini, it is able to achieve much greater returns on new invested capital than its peers because of its size, as per Morningstar analyst. This is possible in the industry because most major consulting/IT-services companies need the same partnerships with major software companies and all need blueprints to solve common enterprise problems. 

Bull Says

  • Accenture will increase wallet share with its enterprise customers as the technology landscape becomes increasingly complex. 
  • Accenture will rely more on automation to handle some of its business process outsourcing, allowing for margin expansion. 
  • Accenture’s mix shift away from more commoditized offerings should boost profitability.

Company Profile

Accenture is a leading global IT-services firm that provides consulting, strategy, and technology and operational services. These services run the gamut from aiding enterprises with digital transformation to procurement services to software system integration. The company provides its IT offerings to a variety of sectors, including communications, media and technology, financial services, health and public services, consumer products, and resources. Accenture employs just under 500,000 people throughout 200 cities in 51 countries.

(Source: Morningstar)

General Advice Warning

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

Categories
Funds Funds

JP Morgan Investment Funds: A collection of top picks from diversified industries

He also tends to add and trim positions aggressively as they become more or less attractive according to analyst models, a tendency that benefits when stock prices mean revert. While Davis’ artful approach has some appeal, it doesn’t have a discernible edge relative to its competition.

Portfolio:

This portfolio finds a balance between differentiation and careful risk management. It held 51 stocks at the end of September 2021, significantly less than the 140-180 it used to have when it had three independently managed sleeves. However, manager Scott Davis’ desire to let stock selection drive results leads to only modest sector and industry tilts relative to its S&P 500 benchmark. Davis also considers factor exposure when building the portfolio. For instance, he increased the portfolio’s stake in financials companies toward the end of 2020 to bolster its exposure to cheaper, more cyclical stocks to help offset its lack of exposure to the energy sector.

The portfolio has historically leaned a bit more toward a growth style, and that still rings true. It displayed a slight growth bias relative to the benchmark as of October, sporting higher valuation metrics such as price/ sales and faster trailing revenue- and earnings-growth rates.

People:

This strategy continues to rely heavily on J.P. Morgan’s core research team, but it is now led exclusively by Scott Davis, who oversaw the strongest-performing sleeve of this formerly multi-managed offering. Davis became a named manager in August 2014, inheriting a 10% slice of the strategy, but quickly saw his share grow, most notably after manager Thomas Luddy stepped down at the end of 2017. Davis continues to leverage the ideas of J.P. Morgan’s core research team, which consists of 23 analysts with extensive industry experience.

Performance:

A good portion of the fund’s success came in 2020, which skews the trailing return figures a bit. Its 26.7% gain in 2020 outpaced the benchmark by over 8 percentage points, the best calendar year since Davis debuted. The fund’s case over other time periods is weaker: It outperformed the bogy about 51% of the time on a rolling one-year basis since Davis joined.

(Source: jpmorgan.com)

Price:

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


(Source: Morningstar)                                                                      (Source: Morningstar)

About Funds:

The investment objective of this fund is to achieve a return in excess of the US equity market by investing primarily in US companies. It uses a research-driven investment process that is based on the fundamental analysis of companies and their future earnings and cash flows by a team of specialist sector analysts.

(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
Commodities Trading Ideas & Charts

FMG reported a solid FY21 result reflecting the highest ever annual shipments

Investment Thesis 

  • Improving sales mix towards higher grade products should continue to narrow the price discount FMG achieves to the market benchmark Platts 62% CFR Index. 
  •  Global stimulus measures – fiscal and monetary policies – are positive for global growth and FMG’s products. 
  •  Capital management initiatives – increasing dividends, potential share buybacks given the strength of the balance sheet. 
  •  Strong cash flow generation. 
  • Quality management team. 
  •  Continues to be on the lower end of the cost curve relative to peers; with ongoing focus on C1 cost reductions should be supportive of earnings.

Key Risks

  • Decline in iron ore prices
  •   Cost blowouts/ production disruptions. 
  • Cost out strategy fails to yield results. 
  • Company fails to deliver on adequate capital management initiatives. 
  •  Potential for regulatory changes. 
  • Vale SA supply comes back on market sooner than expected. 
  • Growth projects delayed.

FY21 Results Highlights : Relative to the pcp: 

  • Underlying EBITDA of US$16.4bn, was up +96% as Underlying EBITDA margin increased to 73% (from 65% in the pcp). 
  •  NPAT of US$10.3bn, was up +117% and represents a return on equity of 66%. EPS was US$3.35 (A$4.48). 
  • FMG achieved net cashflow from operating activities of US$12.6bn and free cashflow of US$9.0bn after investing US$3.6bn in capex. 
  • Fully franked final dividend of A$2.11 per share, increasing total dividends declared in FY21 to A$3.58 per share, equating to A$11.0bn and an 80% payout of NPAT. 
  •  FMG had cash on hand of US$6.9bn and net cash of US$2.7bn at year-end. Balance sheet remains strong with 19% gross gearing (below 30 to 40% target). Gross debt to EBITDA of 0.3x, was lower than 0.6x in FY20 and remains below target of 1-2x. 
  •  FMG revised its target to achieve carbon neutrality by 2030 (ten years earlier than previous target).

Operational performance highlights. Relative to pcp: 

  • Ore mined of 226.9m tonnes, was up +11%. 
  • FMG shipped a record 182.2m tonnes, up +2%; and sold 181.1mt, up 2%. 
  •  Average revenue of US$135.32/dmt, was up +72%. 
  •  FMG saw C1 cost of US$13.93/wmt, increase +8% but remains industry leading.

Company Profile

Fortescue Metals Group Ltd (FMG) engages in the exploration, development, production, processing, and sale of iron ore in Australia, China, and internationally. It owns and operates the Chichester Hub that consists of the Cloudbreak and Christmas Creek mines located in the Chichester Ranges in the Pilbara, Western Australia; and the Solomon Hub comprising the Firetail and Kings Valley mines located in the Hamersley Ranges in the Pilbara, Western Australia. The Company was founded in 2003 and is based in East Perth, Australia.

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

Threat-prevention Solution providing robust growth for Palo Alto Network Inc

Graphic of investment stock market data analysis business

Business Strategy and Outlook

Palo Alto Networks became a leading cybersecurity provider through its next-generation firewall appliance altering the requirements of an essential piece of networking security. The firm’s portfolio has expanded outside of network security into areas such as cloud protection and automated response. Looking ahead, Palo Alto’s nascent threat-prevention solutions will provide robust growth along with a significantly improved margin profile.

Core to Palo Alto’s technology is its security operating platform, which provides centralized security management. The ability to add technologies via subscriptions in the Palo Alto framework can alleviate complications by providing more holistic security, which can generate sustainable demand. Palo Alto will continue to outpace its security peers by focusing on providing solutions in areas like cloud security and automation. Palo Alto’s concerted efforts into machine learning, analytics, and automated responses could make its products indispensable within customer networks. Although it is expected that Palo Alto will remain acquisitive and dedicated to organic innovation, significant operating leverage will be gained throughout the coming decade as recurring subscription and support revenue streams flow from its expansive customer base.

Financial Strength 

Palo Alto is financially stable and would generate strong cash flow as it expands its operating margin profile. The company has historically operated at a loss (excluding fiscal 2012), and we expect it to turn profitable by fiscal 2023 on a GAAP basis. Palo Alto ended fiscal 2021 with $2.9 billion in cash and cash equivalents and total debt of $3.2 billion in 2023 and 2025 convertible senior notes. The $1.7 billion 2023 notes mature in June 2023 and have a 0.75% fixed interest rate per year paid semiannually, while the $2.0 billion of notes that mature June 2025 have a 0.375% interest rate paid semiannually. Palo Alto issued note hedges for both maturity dates to alleviate potential earnings per share dilution. The company announced a $1.0 billion share-repurchase authorization in February 2019, which was increased to $1.7 billion the following year with an expiration at the end of 2021, and has subsequently extended the program. Palo Alto continues to use share buybacks to return capital to shareholders, and believe that it will not pursue any dividend payouts.

The fair value estimate of $585 per share is consistent with a fiscal 2022 enterprise/sales ratio of 11 times and 4% free cash flow yield and upgraded its moat to wide.

Bulls Says 

  • Adding on modules to Palo Alto’s security platform could win greenfield opportunities and increase spending from existing customers. 
  • Palo Alto could showcase great operating margin leverage as it moves from brand creation into a perennial cybersecurity leader. Winning bids should be less costly as the incumbent, and we think Palo Alto is typically on the short list of potential vendors. 
  • The company is segueing into high-growth areas to supplement its firewall leadership. Analytics and machine learning capabilities could separate Palo Alto’s offerings.

Company Profile

Palo Alto Networks is a pure-play cybersecurity vendor that sells security appliances, subscriptions, and support into enterprises, government entities, and service providers. The company’s product portfolio includes firewall appliances, virtual firewalls, endpoint protection, cloud security, and cybersecurity analytics. The Santa Clara, California, firm was established in 2005 and sells its products worldwide.

(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

Check Point Software Technologies Ltd: Changing the cybersecurity mindset in a hybrid cloud world

Business Strategy and Outlook

Check Point Software Technologies is a top player in the cybersecurity market. It generates revenue from selling products, licenses, and subscriptions to protect networks, cloud environments, endpoints, and mobile users. Historically, firms purchased security point solutions to combat the latest threats and had to manage various software and hardware vendors’ products simultaneously. Changing the cybersecurity mindset in a hybrid cloud world, Check Point’s Infinity architecture consolidates various security products into a single management plane that deploys the latest updates across all attack vectors. With its vast customer base of over 100,000 businesses and renowned product leadership for existing threat technology, it is believed that Check Point’s consolidated security architecture provides ample upselling and cross-selling opportunities as enterprises increase their reliance on cloud-based products and distributed networking. With its growth lagging security peers, Check Point will ramp up sales and marketing efforts to showcase the advantage of its platform approach and next-generation security offerings. Check Point has adjusted its selling model to be subscription-based, and further ingrain the company with businesses that favor predictable operating expenditures. Its subscription-based Infinity Total Protection architecture offers all of Check Point’s products on an annual pay-per-user basis. This concept may help permeate Check Point’s product throughout an organization, since there are no additional costs for using more products, which then creates higher switching costs and better customer retention.

Check Point Software Moat Ratings upgraded to wide and increased fair value from $ 132 to  $137

Morningstar analysts have upgraded its moat roating for Check point Software to wide from narrow. For moat trend,analyst maintained a stable view of point in regards to the firm and increased its fair value estimate is now $137 from $132. Check Point’s shares attractive for patient investors in the steady, but lower growing firm.For Check Point’s stable trend, analyst  believes the company has a large, loyal customer base that relies upon its sticky products, but a conservative approach of investing in development and sales and marketing efforts has caused leading competitors to make inroads in the broader security landscape.

Financial Strength

Check Point can be viewed as financially stable firm that should continue to generate strong operating cash flow. .At the end of 2020, the company had no debt with $4.0 billion in cash, equivalents, and marketable securities. Check Point has never paid a dividend, and it is expected to continue to repurchase shares following the announcement of an additional $2 billion buyback authorized during 2020 (with a $350 million cap per quarter).Outside of the repurchase program, it is also expected that Check Point to primarily use its cash for operating expenditures to capitalize on customers requiring cloud-based threat protection. Additionally, Check Point will continue to make tuck-in acquisitions to bolster its presence in the cloud and mobile-based security markets.

Bulls Say 

  • Customers may adopt Check Point’s Infinity platform over using multiple vendors for cybersecurity protection. This should further embed the company’s products and increase switching costs. 
  • Check Point’s movement into cloud-based and mobile user security offers large growth opportunities to supplement its network security portfolio. Its existing customer base may prefer Check Point for security consistency. 
  • Increasing subscription-based sales and growing recurring revenue should further bolster Check Point’s stellar operating margin profile.

Company Profile

Check Point Software Technologies is a pure-play cybersecurity vendor. The company offers solutions for network, endpoint, cloud, and mobile security in addition to security management. Check Point, a software specialist, sells to enterprises, businesses, and consumers. At the end of 2020, 45% of its revenue was from the Americas, 43% from Europe, and 12% from Asia-Pacific, Middle East, and Africa. The firm, based in Tel Aviv, Israel, was founded in 1993 and has about 5,000 employees.

(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.