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Technology Stocks

Soaring Lithium Price, a Material Fair Wind for Mineral Resources

Business Strategy and Outlook

Mineral Resources grew significantly following listing on the Australian Securities Exchange in 2006. Demand for crushing and screening services grew strongly with iron ore output from the major Western Australian iron ore miners. Mineral Resources also rapidly expanded its own iron ore mining business, though lacking the integrated rail and port infrastructure of major competitors and at a competitive disadvantage. More recent diversification into lithium production at Mt Marion and the Wodgina mine has sustained earnings momentum. 

The financial record to now is impressive and the balance sheet is unleveraged. 

In fiscal 2010, the company was a mining service provider and minerals producer as now. But disclosure extended to just iron ore production tonnage, and segment earnings. Mining Services and Processing contributed 96% of group EBIT. Step forward to fiscal 2020 and Mineral Resources has materially improved its level of financial disclosure, and the greater depth of clients and number of project sites also reduces risk.

 The business model of the company is demonstrably sustainable. The volume-linked crushing and screening business should be somewhat more resilient to commodity price weakness. Mineral Resources’ mining services business builds, owns, and operates crushing and screening plants on behalf of mining customers. Despite contributing only 40% of group EBIT, Mining Services is core. Twelve 5 to 15 million tonne per year crushing and screening plants are owned and operated on 12 sites. 

Clients substantially include the largest mining companies and contract books have been renewed over time leading to volume growth. Power is supplied by mining companies and margins are comparatively stable. Bolstering growth in the core business centred on mining services around Australian bulk commodities, Mineral Resources will selectively own and develop its own mining operations, with the aim of subsequent sell-down while retaining core processing and screening rights

Financial Strength

Mineral Resources is in strong financial health. Albemarle’s acquisition of a 60% stake in Wodgina lithium instantly expunged net debt in first-half fiscal 2020. From a net debt position of AUD 872 million at end June 2019. Lithium project construction expenditure was at the core of the cash drain. The current circumstance is a return to the usual territory for Mineral Resources, which operated in a position of little to no net debt for at least the eight years to fiscal 2018; a sensible position for a company operating in the volatile mining services space. 

Mineral Resources had faced the key question of what it should do with its cash, with a shrinking pool of growth and investment opportunities in a lower iron ore price environment. A failed investment in Aquila Resources in 2014 attempted to leverage Mineral Resources into Aquila’s West Pilbara Iron Ore Project, and was symptomatic of where Mineral Resources found itself. Booming lithium markets directed the investment decision. Mineral Resources had AUD 595 million in net cash excluding operating leases at end June 2021. 

Bulls Say’s

  •  Mineral Resources grew strongly since listing in 2006.The chairman and managing director have been with the business for over a decade and have meaningful shareholdings.
  • Australian iron ore is mainly purchased by Chinese steel producers, meaning Mineral Resources offers leveraged exposure to Chinese economic growth.
  • Mineral Resources has a recurring base of revenue and earnings from processing infrastructure.
  •  Mineral Resources’ balance sheet is very strong with net cash. This has opened up the opportunity for lithium investments selling into highly receptive markets.

Company Profile 

Mineral Resources listed on the ASX in 2006 following the merger of three mining services businesses. The subsidiary companies were previously owned by managing director Chris Ellison, who remains a large shareholder despite selling down. Operations include iron ore and lithium mining, iron ore crushing and screening services for third parties, and engineering and construction for mining companies. Mining and contracting activity is focused in Western Australia.

(Source: MorningStar)

General Advice Warning

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

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Dividend Stocks

AstraZeneca’s Continual Focus on Innovative Drug Development Increasingly Sets Up Strong Growth

Business Strategy and Outlook

AstraZeneca has built its leading presence in the pharma and biotech industry on patent-protected drugs. The replenishment of new drugs is offsetting the past patent losses on gastrointestinal drug Nexium and cholesterol reducer Crestor, and the company is well positioned for growth.

AstraZeneca’s pipeline is emerging as one of the strongest in the drug group, and we think the company is developing several key products that hold blockbuster potential. These drugs should also carry strong pricing power, driving the potential to expand Astra’s margins. In addition to internal development, AstraZeneca has aggressively pursued acquisitions, with mixed results. 

As Astra’s next generation of drugs launch, Morningstar analysts expect operating margins to improve based on the strong pricing power of the new drugs and the operating leverage the firm should attain as the new drugs reach critical mass. Also, as the new drugs launch, Astra is reducing the asset divestiture strategy it employed to help bridge the massive patent losses facing the firm over the past few years until the newer drugs were ready. While the asset sales helped prop up earnings and support the dividend during a challenging time, the strategy is not sustainable. As new drugs gain traction, Astra will likely continue to reduce the asset sales, which is strategically sound but will likely create a headwind to earnings growth.

AstraZeneca’s Continual Focus on Innovative Drug Development Increasingly Sets Up Strong Growth

After a deep dive review of several of AstraZeneca’s current and pipeline products, Morningstar analysts have increased their projections for several drugs leading to a fair value estimate increase to $64 from $60. Analysts have continued to view the company with a wide moat, supported by a strong pipeline and a relatively secure current portfolio with limited near-term patent losses.

In looking at the pipeline, we are increasingly bullish on several next generation drugs. In particular, the recent approval of severe asthma drug Tezspire looks like a potential new blockbuster. Also, breast cancer drug camizestrant holds significant potential despite an increasingly crowded area of competitive SERD drugs in development but so far, the data  for the drug looks increasingly solid. 

Financial Strength

Astra continues to generate robust cash flows, and the firm’s balance sheet is in solid shape, closing 2020 with debt/EBITDA of close to 2.4 times. However, the firm needs to offset lost cash flows from products losing patent protection over the next couple of years to generate enough cash flow to fund the dividend. Morningstar analysts expect the recently announced acquisition of Alexion to add close to $16 billion in debt on the balance sheet, but it is expected that the strong acquired drugs will produce robust cash flows to quickly pay down the acquisition-related debt.

 Bulls Say 

  • The company is expanding its oncology presence with several important pipeline products. In particular, the company’s EGFR drug Tagrisso holds major blockbuster potential in lung cancer. 
  • The management team is focusing the pipeline toward unmet medical need, which should increase the odds of success and being strong pricing power for the new drugs. 
  • AstraZeneca has a large presence in emerging markets and should benefit from these markets’ fast growth prospects, especially in China

Company Profile

A merger between Astra of Sweden and Zeneca Group of the United Kingdom formed AstraZeneca in 1999. The firm sells branded drugs across several major therapeutic classes, including gastrointestinal, diabetes, cardiovascular, respiratory, cancer, and immunology. The majority of sales come from international markets with the United States representing close to one third of its revenue.

 (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

Corporate Action: Subscribe to Corporate Travel’s Share Purchase Plan

Morningstar analysts recommend eligible shareholders subscribe to Corporate Travel’s Share Purchase Plan, or SPP. It is the AUD 25 million component of a total AUD 100 million underwritten capital raising to fund the AUD 175 million acquisition of Hello World Travel’s corporate and entertainment travel business in Australia and New Zealand. An institutional placement has already raised AUD 75 million (at AUD 21.00 per share) and the remaining AUD 75 million of the purchase price will be funded by an issue of new shares (also at AUD 21.00) to the vendor when the deal completes in the March quarter of 2022.

Morningstar analysts support the SPP which will be priced at least 11% below our fair value estimate as well as  lifted  fair value estimate on Corporate Travel by 7% to AUD 23.50 per share on Dec. 15, 2021 when the deal was first announced. The SPP offer price will be the lower of AUD 21.00 and the five-day average price of Corporate Travel shares during the five trading days up to the SPP closing date (likely Jan. 20, 2022). As this SPP price will be lower than morningstar intrinsic assessment (and the current stock price), Morningstar analyst see value in subscribing to the offer.

Further, Morningstar analysts see the acquisition as opportunistic, struck amid a pandemic. It is a playbook that was used by no-moat-rated Corporate Travel with the October 2020 AUD 275 million buy of Travel & Transport in North America. The Helloworld unit is bite-size (6% of Corporate Travel’s enterprise value), operates in the group’s home market of Australia and New Zealand (with two thirds of business in domestic travel), and synergies are likely to be easier to extract than from the Travel & Transport purchase. As such, management’s projected AUD 8 million synergy is conservative, at just 36% of Helloworld’s pre pandemic EBITDA. This compares with Travel & Transport where the projected AUD 25 million synergy is 61% of the unit’s prepandemic EBITDA, with its extraction making good progress to-date.

Company Profile

Corporate Travel Management provides travel services mainly for corporate customers across the Americas, Australia and New Zealand, Europe, and Asia. The company has built scale and breadth through both organic growth and acquisitions. As of 2021, Corporate Travel is the world’s fourth-largest corporate travel management company based with pro forma, pre-COVID-19 total transaction volumes of AUD 11 billion, but it remains a relative minnow in the highly fragmented USD 1.5 trillion global market. The company offers expertise and personalized service to corporate clients spanning several industries such as government, healthcare, mining, energy, infrastructure, and construction. Before the pandemic, more than 60% of the group’s client travel was domestic (within the country) in nature.

(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
Dividend Stocks Expert Insights

AbbVie’s Next Generation Drugs Are Poised to Help Mitigate Upcoming Humira Biosimilar Pressures

Business Strategy and Outlook:

While AbbVie holds a strong portfolio of marketed and pipeline drugs, the increasing competition to the company’s key drug Humira should slow the growth for the company. At close to 40% of total sales and a higher portion of earnings (due to higher margin revenue), Humira is a key determinant of AbbVie’s earnings performance over the next three years.

Beyond immunology, cancer drug Imbruvica is the next-biggest sales contributor. Imbruvica’s strong clinical data in several forms of blood cancer should lead to peak sales above $6 billion. Additionally, the recent acquisition of Allergan brings several new products, including Botox for both cosmetic and therapeutic uses. Botox’s strong entrenchment bodes well for the treatment as new competition is emerging. Also, AbbVie holds several mature drugs with patent expirations long past, but with manufacturing or specific dosing complexities, which make generic competition less likely. Looking forward, AbbVie’s pipeline is weighted more toward new cancer and immunology drugs. The company should be able to leverage its solid entrenchment with Humira and Imbruvica to launch the new drugs.

Financial Strength:

AbbVie’s acquisition of Allergan significantly increased its debt level. The firm’s net debt position to peak at close to $70 billion in 2020, but given the strong cash flows of AbbVie’s base business and the acquired cash flows from the Allergan deal, the firm is expected to rapidly pay down debt while still financing the dividend. However, it is not expected that AbbVie will have much room to make any other significant acquisitions for several years while capital is tied up paying down debt and funding the robust dividend.

Bulls Say:

  • AbbVie supports a strong dividend yield, which should act as valuation support, as the cash flows to support the dividend look secure over the next few years. 
  • AbbVie’s increasing entrenchment in blood cancers should bode well for growth as pricing power remains solid in this therapeutic area of the pharmaceutical market. 
  • AbbVie’s next generation immunology drugs targeting the IL23 and JAK pathways should help mitigate the competitive threats facing Humira.

Company Profile:

AbbVie is a pharmaceutical company with a strong exposure to immunology and oncology. The company’s top drug, Humira, represents close to half of the company’s current profits. The company was spun off from Abbott in early 2013. The recent acquisition of Allergan adds several new drugs in aesthetics and women’s health.

(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

BioNTech growth is projected following additional COVID-19 contracts and Shingles collaboration

Business Strategy and Outlook:

BioNTech, founded in 2008 in Germany, has become a key player in the development of personalized mRNA cancer treatments. The emerging biotech’s first commercial vaccine, for COVID-19, received its first authorization in December 2020, and its early-stage pipeline and mRNA technology platforms have caught the eye of several large pharmaceutical companies, resulting in collaborations and partnerships.

BioNTech’s internal discovery platform is focused on mRNA, including off-the-shelf and personalized mRNA drugs, but opportunistic acquisitions have brought in targeted antibodies and cell therapies as well. As such, BioNTech is not overly reliant on any one key drug candidate or drug class at this point, and it is poised to tackle cancer via many different mechanisms. Further, the company has a burgeoning vaccine pipeline for infectious diseases. In partnership with the Bill & Melinda Gates Foundation, BioNTech is developing vaccines for HIV and tuberculosis, and the company’s COVID-19 program in partnership with Pfizer and Fosun Pharma was built off an existing partnership with Pfizer for an influenza vaccine.

Financial Strength:

The fair value estimate of the stock is USD 200.00 per ADR from $177, after incorporating Europe’s recent COVID-19 vaccine option exercise for 2022, Pfizer’s latest update on contracted COVID-19 vaccine sales for 2023, and a small placeholder for potential profit share on an mRNA-based shingles vaccine.

Like most of its emerging biotech peers, BioNTech has historically burned through cash to fund research and development of its pipeline. The company has minimal debt on its balance sheet, as it has funded discovery and development with equity issues and collaboration payments from partnerships with large pharmaceutical firms.

The company is expected to continue to rely on these two avenues for cash for the next several years as well as a large inflow of cash from Comirnaty gross profits in 2021 and 2022. Outside of BioNTech’s COVID-19 vaccine candidates, we think the earliest approval could arrive in 2023, which would put the company on a path toward steady profitability. Management has taken advantage of a couple of opportunities to acquire early-stage assets and expand its geographic footprint to establish a U.S. research hub at low prices.

Bulls Say:

  • BioNTech’s pipeline, which relies on expertise in mRNA and bioinformatics, will be difficult to replicate by competitors. 
  • BioNTech will be able to command a premium price with its personalized cancer therapies, if successful. 
  • The rapid development of COVID-19 vaccine Comirnaty bodes well for the rest of BioNTech’s pipeline and the future of its mRNA research platform.

Company Profile:

BioNTech is a Germany-based biotechnology company that focuses on developing cancer therapeutics, including individualized immunotherapy, as well as vaccines for infectious diseases, including COVID-19. The company’s oncology pipeline contains several classes of drugs, including mRNA-based drugs to encode antigens, neoantigens, cytokines, and antibodies; cell therapies; bispecific antibodies; and small-molecule immunomodulators. BioNTech is partnered with several large pharmaceutical companies, including Roche, Eli Lilly, Pfizer, Sanofi, and Genmab. Comirnaty (COVID-19 vaccine) is its first commercialized product.

(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 Shares

PG&E on path to test California wildfire insurance fund Income after Dixie fire report

Business Strategy and Outlook

PG&E will always face public and regulatory scrutiny as the largest utility in California. That scrutiny has escalated with the deadly wildfires and power outages. Legislative and regulatory changes during and since the bankruptcy have reduced PG&E’s financial risk, but the state’s inverse condemnation strict liability standard remains a concern. CEO Patti Poppe faces a tall task restoring PG&E’s reputation among customers, regulators, politicians, and investors. PG&E is well positioned to grow rapidly, given the investment needs to meet California’s aggressive energy and environmental policies. PG&E is set to invest $8 billion annually for the next five years, leading to 10% annual growth. After suspending its dividend in late 2017, PG&E should be positioned to reinstate it in 2024 based on the bankruptcy exit plan terms.

Financial Strength

PG&E has substantially the same capital structure as it did entering bankruptcy with many of the same bondholders after issuing $38 billion of new or reinstated debt. PG&E’s $7.5 billion securitized debt issuance would eliminate $6 billion of temporary debt at the utility and further fortify its balance sheet. The post-bankruptcy equity ownership mix is much different. PG&E raised $5.8 billion of new common stock and equity units in late June 2020, representing about 30% ownership. Another $3.25 billion of new equity came from a group of large investment firms. The fire victims trust owned 22% and legacy shareholders retained about 26% ownership at the bankruptcy exit. The fire victims’ trust plans to sell its stake over time but had not sold any shares as of late 2021.

Bankruptcy settlements with fire victims, insurance companies, and municipalities totaled $25.5 billion, of which about $19 billion was paid in cash upon exit. PG&E entered bankruptcy after a sharp stock price drop in late 2018 made new equity prohibitively expensive and the company was unable to maintain its 52% required equity capitalization. It is estimated that PG&E will invest up to $8 billion annually during the next few years. Tax benefits and regulatory asset recovery should eliminate any equity needs at least through 2023.

Bulls Say’s 

  • California’s core rate regulation is among the most constructive in the U.S. with usage-decoupled revenue, annual rate true-up adjustments, and forward-looking rate setting. 
  • Regulators continue to support the company’s investments in grid modernization, electric vehicles, and renewable energy to meet the state’s progressive energy policies. 
  • State legislation passed in August 2018 and mid-2019 should help limit shareholder losses if PG&E faces another round of wildfire liabilities

Company Profile 

PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.3 million electricity customers and 4.4 million gas customers in 47 of the state’s 58 counties. PG&E operated under bankruptcy court supervision between January 2019 and June 2020. In 2004, PG&E sold its unregulated assets as part of an earlier post-bankruptcy reorganization.

(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
Property

Hotel Property Investments’ yield attracts but concerns about the main tenant remain

Minature houses resting on pound coin stacks concept for property ladder, mortgage and real estate investment

Business Strategy and Outlook:

Hotel Property Investments generates predictable and growing revenue, with long-term leases and contracted rental increases getting a boost from the recent uptick in inflation. But the no-moat REIT also faces material risks. The main tenant is highly geared and faces threats from COVID-19 lockdowns and social distancing rules. Overall, the stock is considered to be fairly valued, with fair value estimate of AUD 3.10 per unit. Hotel Property Investments offers a forecast fiscal 2022 yield of 6% with modest growth potential. It has a long weighted average lease term of over 10 years and mostly triple-net leases that see the tenant pay for most property costs, including maintenance capital expenditure. Lease expiries are relatively well spread, with just 13% expiring in the five years to 2026 and a further 40% in the five years thereafter. In fiscal 2021, occupancy was 100%.

Another key positive is that contracted rental growth is high relative to most REIT peers. Two thirds of leases have annual rent uplifts of the lesser of 4% or twice the average of the last five years’ CPI inflation. However, rents reset to fair market rates when leases expire so actual rent growth over the long term is unlikely to be as strong as contracted rental uplifts suggest.

Financial Strength:

Hotel Property Investments’ credit metrics are relatively aggressive, with debt/assets of about 38%. This is significantly higher than peers, such as BWP at less than 20%.

Despite being mostly exposed to Queensland, which has so far experienced only minor impacts from COVID-19, Hotel Property Investments agreed to defer AUD 7.5 million of rent —equivalent to 12% of annual net rental income—for the main tenant for the period from April 2020 to September 2020. In addition, smaller tenants forced to close during lockdowns had rents abated, but this amounted to a negligible AUD 0.1 million in fiscal 2021. Further deferrals and abatements can’t be ruled out as lockdowns are a likely tool to control the spread of new variants. With interest rates currently low, the trust has been actively acquiring properties, including nine in fiscal 2021. The combination of acquisitions and rising property valuations have doubled the value of Hotel Property Investments’ property portfolio in the past eight years. Capitalisation rates are likely to ease lower in the near term to reflect recent market evidence, pushing book values up a little further.

Company Profile:

Hotel Property Investments is an Australian REIT with a portfolio of freehold pub properties primarily in Queensland. Its portfolio is almost exclusively leased to Queensland Venue Company on triple-net long-term leases where the tenant is responsible for outgoings (except land tax in Queensland), resulting in relatively low maintenance expenses. Most leases also provide for annual rental increases typically at the lower of 4% or two times the average of the last five years consumer price index.

(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

Smucker Continues to Benefit From At-Home Food Consumption but Struggles to Stabilize Market Shares

Business Strategy and Outlook

Despite having leading positions in many categories (fruit spreads, peanut butter, dog treats, coffee, and cat food) Morningstar analysts believe that Smucker lacks an economic moat, either via its brand intangible assets or entrenched retail relationships. Morningstar analysis shows 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 and suspected that these expenditures are not as productive as its competitor.

Morningstar analysts expect that Smucker’s organic sales growth will average 2% annually over the long term, and it is also expected that market share in coffee and dog food will persist as Smucker struggles to compete with strong brands such as Starbucks  and BLUE. As per Morningstar analyst perspective, 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. Net debt to adjusted EBITDA was 2.4 times in fiscal 2021. Smucker’s free cash flow as a percentage of revenue has averaged high single digits to low double digits historically and similar results are expected forward also. 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. Morningstar analysts expect that Smucker will invest 3.5% of annual sales in capital expenditures over the long term. Analysts also expect that Smucker will continue to reshape its portfolio through acquisitions and divestitures. The estimated dividend payout ratio will range between 40% and 50%, in line with management’s long-term targets, with forecasts anticipating 2%-6% annual dividend increases. Morningstar analysts also expect Smucker to repurchase 0%-5% of shares annually, which we view as a prudent use of capital if the share price remains below our fair value estimate.

Bulls Say

  • 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
Global stocks

Raising Tesla FVE to $700 on Higher Near-Term Vehicle Volumes; Shares Remain Overvalued

Business Strategy and Outlook

Tesla is the largest battery electric vehicle automaker in the world. In less than a decade, the company went from a startup to a globally recognized luxury .Tesla also plans to sell multiple new vehicles over the next several years. These include a platform that will be used to make an affordable sedan and SUV, a light truck, a semi truck, and a sports car.

Tesla’s strategy is to maintain its market leader status as EVs grow from a niche auto market to reaching mass consumer adoption. To do so, the company is undergoing a massive capacity expansion to increase the number of vehicles it can produce. Tesla also invests around 5% of its sales in research and development, focusing on improving its market-leading technology and reducing its manufacturing costs. For EVs to see mass adoption, they need to reach cost and function parity with internal combustion engines. To reduce costs, Tesla focuses on automation and efficiency in its manufacturing process.To reach functional parity, EV will need to have adequate range, reduced charging times, and availability of charging infrastructure.Tesla continues to grow its supercharging network, which consists of fast chargers built along highways and in cities throughout the U.S., EU, and China. The company is attempting to take a larger share of its customers’ auto-related spending, which includes selling insurance and offering paid services such as autonomous driving functions.

Tesla also sells solar panels and batteries used for energy storage to consumers and utilities. As the solar generation and battery storage market expands, Tesla is well positioned to grow.

Raising Tesla FVE to $700 on Higher Near-Term Vehicle Volumes; Shares Remain Overvalued

On Jan. 2, Tesla reported strong fourth-quarter and full-year vehicle delivery numbers. On the year, Tesla reported 936,172 vehicles delivered, which is up over 87% year on year versus 2020. Morningstar analyst have updated our model to incorporate higher 2021 sales volumes and have raised our outlook for 2022 as well as forecasted that Telsa will deliver a little over 1.5 million vehicles in 2022, which represents over 60% year-on-year growth. Separately, Morningstar analyst have decreased  2022 gross margin forecast for Tesla as they increased production costs associated with the opening of the two new production plants in Austin, Texas, (U.S.) and in Berlin, Germany. Our long-term outlook is largely unchanged as we continue to expect Tesla’s sales growth will slow. Having updated model to reflect these changes, Morningstar analyst have increased Tesla fair value estimate to $700 per share from $680.

Financial Strength

Tesla is in solid financial health as cash and cash equivalents exceeded total debt as of Sept. 30. Total debt was roughly $8.2 billion; however, total debt excluding vehicle and energy product financing (nonrecourse debt) was around $2.1 billion. Cash and cash equivalents stood at $16.1 billion as of Sept. 30.To fund its growth plans, Tesla has used credit lines, convertible debt financing, and equity offerings to raise capital. In 2020, the company raised $12.3 billion in three equity issuances. Morningstar analyst thinks this makes sense as funding massive growth solely through debt adds near-term risk in a cyclical industry.Management has stated a preference to pay down all debt over time and continues to make progress on this goal. Regardless, with positive free cash flow generation and a clean balance sheet, we think Tesla could maintain its current levels

Bull Says

  • Tesla has the potential to disrupt the automotive and power generation industries with its technology for EVs, AVs, batteries, and solar generation systems. 
  • Tesla will see higher profit margins as it achieves its plan to reduce battery costs by 56% over the next several years. 
  • Through the combination of its industry-leading technology and unique supercharger network, Tesla offers the best function of any EV on the market, which should result in its maintaining its market leader status as EV adoption increases.

Company Profile

Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. The company sells solar panels and solar roofs for energy generation plus batteries for stationary storage for residential and commercial properties including utilities. Tesla has multiple vehicles in its fleet, which include luxury and midsize sedans and crossover SUVs. The company also plans to begin selling more affordable sedans and small SUVs, a light truck, a semi truck, and a sports car. Global deliveries in 2020 were roughly 500,000 units.

 (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 Technology Stocks

Reinitiating Coverage of Ceridian HCM With Narrow Moat, Stable Trend Rating and $80 FVE

Ceridian offers payroll and human capital management solutions via its flagship Dayforce platform, secondary platform Powerpay targeting small businesses in Canada, and remaining legacy Bureau products such as tax services. The company benefits from high customer switching costs, allowing it to retain clients, upsell add-on modules, and earn a steady stream of recurring revenue at a low marginal cost, underpinning our narrow moat rating. Morningstar analysts expect Ceridian’s growing record of performance should help to attract new business, increase market share, and expand into new global markets. The shares currently screen as overvalued, trading at a 30% premium to our fair value estimate.

Ceridian has disrupted incumbent providers and taken share of the expansive and growing HCM market through the appeal of its agile, cloud-based solutions that offer an alternative to legacy on-premises solutions or solutions cobbled together using multiple databases or platforms. The company derives most of its revenue from Dayforce, which is geared to larger enterprises wishing to streamline complex human resources operations across multiple jurisdictions on a unified platform and leverage the platform’s scalable infrastructure. Dayforce offers real-time continuous payroll calculation and, as a natural extension, on-demand pay. Leveraging this functionality, Ceridian introduced Dayforce Wallet in 2020, which allows clients’ employees to load their net earned wages to a prepaid Mastercard, generating interchange fee revenue for Ceridian when purchases are made. While this innovation is being replicated by competitors, we expect it will create a promising new high-margin revenue stream for Ceridian that leverages the firm’s exposure to millions of employees and their earned wages.

Morningstar analysts estimate revenue to grow at an 18% compound annual rate over the five years to fiscal 2025, driven by mid-single digit industry growth, market share gains, and mid-single digit group revenue per client growth. As per Morningstar analyst perspective, 12% average annual growth in Dayforce recurring revenue per client due to an increasing skew to larger businesses and greater module uptake. This growth will be offset by low single-digit revenue growth per Powerpay client due to minimal price increases and modest module uptake. Across both platforms, Morningstar expects fierce competitive pressures to limit like-for-like pricing growth to low single digits. Over the same period,  expect operating margins to increase to about 14% from less than 1% in a COVID-19-affected 2020 and 9% in a pre-COVID 2019. We anticipate this uplift will be driven by operating leverage from increased scale and higher interest on client funds.

Ceridian has made a tactical shift to target larger businesses and move further upmarket into the large enterprise and global space. While this drives higher revenue per client and exposes the company to a larger pool of client funds, we expect fierce competitive pressures and powerful clients will lead to increased pricing pressure, limiting margin upside potential over the long run. Morningstar analysts assume Ceridian will achieve midcycle operating margins around 31% in 2030, which is comparable with our forecast for wide-moat Workday, which also targets large enterprises with its cloud-based HCM software. By comparison, morningstar analyst forecast wide-moat Paychex, which targets small and midsize clients with significantly lower bargaining power, will achieve mid cycle operating margins of 43%. Ceridian operates in a highly competitive market, and  expect it will need to maintain high levels of investment to ensure that the functionality of its product suite is comparable with peers’ and meets clients’ needs.

Company profile

Ceridian HCM provides payroll and human capital management solutions targeting clients with 100-100,000 employees. Following the 2012 acquisition of Dayforce, Ceridian pivoted away from its legacy on-premises Bureau business to become a cloud HCM provider. As of fiscal 2020, nearly 80% of group revenue was derived from the flagship Dayforce platform geared toward enterprise clients. The remaining revenue is about evenly split between cloud platform Powerpay, targeting small businesses in Canada, and legacy Bureau products.

(Source: Morningstar)

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