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Arista Capitalizing on Booming Demand for Cloud Data Centers and Adjacencies

Arista works closely with its core customers to optimize their networking ecosystems, which we believe can strengthen its customer switching costs. To expand its customer base beyond the data centers of hyperscale cloud providers, enterprises, service providers, and financial institutions, Arista announced its intention to expand into the campus market. The adjacent move is due to requests from existing customers desiring one software platform across networking locations, and Arista has bolstered its clout with wireless capabilities. Even with current customer concentration risk, Arista is growing alongside key customers and that new ventures have expanded from core competencies.

Financial Strength 

Arista is considered to be in a financially healthy position; its zero debt balance and $2.9 billion in cash, cash equivalents, and marketable securities as of the end of 2020 provide flexibility for the future. With no stated plans to return capital to shareholders, the company’s investment plan is fixated on developing products and expanding sales. It is believed that the company’s financial health will remain stable and cash could be deployed for growth via bolt-on products or technologies.

Bulls Say

  • Demand for EOS continuity across networks should proliferate Arista’s installation base. Installation base growth causes new customers to consider Arista during upgrades. 
  • Arista has been a first mover on its path to rapid profitable growth. Upcoming industry disruptions that Arista may lead include 400 Gb Ethernet switching and campus market splines. 
  • Instead of relying on partnerships to plug portfolio gaps, Arista might be able to make accretive acquisitions in adjacent markets that could catalyze growth in areas such as analytics, access points, and security.

Company Profile

Arista Networks is a software and hardware provider for the networking solutions sector. Operating as one business unit, software, switching, and router products are targeted for high-performance networking applications, while service revenue comes from technical support. Customer markets include data centers, enterprises, service providers, and campuses. The company is headquartered in Santa Clara, California, and generates most of its revenue in the Americas. It also sells into Europe, the Middle East, Africa, and Asia-Pacific.

 (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

The COVID-19 Crisis Continues to Impact VF, but Its Brands Provide a Competitive Advantage

Vans has grown from its roots as an action sports brand into an everyday brand. Around 60% of Vans apparel is now purchased by females, and it is one of the most popular shoe brands for teens of both sexes. It is viewed as less of a sports brand than a brand for creative people. Vans, like wide-moat Nike and others, offer customization options that are very popular among consumers aged 13-24. Vans has strong potential as it is still relatively small (approximately $3.5 billion in fiscal 2021 revenue) compared with global brands like Nike (about 10 times larger).

It is expected that the North Face will benefit from its new FutureLight waterproof fabric, brand extensions, and expansions of its direct-to-consumer business. VF plans 8%-9% annual growth for The North Face, which may be possible after the coronavirus crisis has passed.

Future Outlook

VF laid out fiscal 2024 goals of a gross margin above 55.5%, an operating margin above 15%, and an ROIC above 20% at its 2019 investor event. These targets are aggressive, but achievable. Indeed, the analyst of Morningstar forecast an operating margin of 15% in fiscal 2024, up from an estimated 13% in fiscal 2022. To achieve this, VF will need continuing strong growth from high-margin brands Vans and Supreme as the virus fades.

Narrow-Moat VF Dealing With Supply Chain Woes and Weakness in China, but Brands Remain Healthy

Vans’ sales increased just 8% in the quarter due to a 10% decline in wholesale sales related to the supply problems and soft demand in China. Attributing the same to the latter COVID-19-related closures and weakness in China’s economy and do not think the long-term prospects for Vans in the region have been affected. The activewear and casualization trends are positive for Vans. Other key brands The North Face and Timberland were affected by supply problems, leading to outdoor coalition growth of 31%, short of the 40% forecast. Dickies was a standout, as workwear sales jumped 18%.

 Apart from these issues, apparel and footwear manufacturers are dealing with higher labor, energy, and raw material costs, especially for cotton. In VF’s case, cotton represents only about 10% of its product costs, lower than for some competing firms that are heavier in apparel. Thus far, VF and others in the industry have been able to overcome inflation with strong pricing as discounting in the clothing space remains relatively low. Moreover, as product shortages are likely to persist and underlying demand is healthy, as a result pricing will remain strong through the holiday period. 

Bulls Say

  • Vans, expected to generate over $4 billion in sales in fiscal 2022, is developing into a fashion brand. It still has growth potential, given its small share in the roughly $120 billion (Euromonitor) sports-inspired apparel and footwear markets. 
  • VF has disposed of its weaker jeans (in 2019) and work (in 2021) brands, helping to pull its gross margins up to the mid-50s from the high-40s. 
  • As an upscale brand with high price points, Supreme brings higher margins than any of VF’s individual brands except Vans. There is potential for VF to generate significant sales of Supreme gear in China.

Company Profile

VF designs, produces, and distributes branded apparel and accessories. Its largest apparel categories include action sports, outdoor, and workwear. Its portfolio of about 15 brands includes Vans, The North Face, Timberland, Supreme, and Dickies. VF markets its products in the Americas, Europe, and Asia-Pacific through wholesale sales to retailers, e-commerce, and branded stores owned by the company and partners. The company has grown through multiple acquisitions and traces its roots to 1899.

 (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

L3Harris Continues to Delivers on Merger-related Synergies

came about from the merger of equals between L-3 Technologies, a sensor-maker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger’s thesis was an assumption that additional scale would primarily generate cost synergies but that eventually, the firms would produce meaningful revenue synergies.

Cost synergies to a large extent drove the 30-year wave of consolidation across the defense industry, which has largely generated shareholder value. Arguably, L-3 was an ideal partner for a merger of equals because L-3 operated as a holding company and there are quite a few potential efficiencies from consolidating the firm into a more integrated firm. The three biggest firm-specific growth opportunities for L3Harris Technologies are the tactical radios replacement cycle, national security satellite asset decentralization, and electronic warfare capabilities.

Supply-Chain Issues Constrained L3Harris Q3 Sales, But booking remains same 

L3Harris reported a strong third quarter as sales were limited by supply chain issues. That noted, the shorter-cycle prime is showing its portfolio is well aligned in the decelerating funding environment, as the organic backlog of about $21 billion is up 9% from last year and 4% year to date. Many peer defense contractors have had declining backlogs in 2021. Revenue of $4.2 billion missed FactSet consensus by 6.6% but non-GAAP EPS of $3.21 beat FactSet consensus by 0.8%. Organic revenue declined 1.2% as a 5.2% organic revenue decline in communications systems due to supply chain difficulties and a 2.6% revenue decline in integrated mission systems due to the timing of contracts more than offset low single- digit growth in the firm’s other segments. Sales activity was strong, the firm posted book/bills above 1 in three of the firm’s four segments, indicating that the firm’s revenue pipeline remains robust.

Financial Strength

L3Harris is in solid financial shape. The firm increased debt by about $4.5 billion in 2015 to fund the acquisition of Exelis, a sensor-maker that was spun off from ITT and had been paying down debt since. The firm’s all-stock merger of equals with L-3 Technologies did not dramatically increase debt relative to size, and projecting a 2021 gross debt/EBITDA of roughly 2.1 times, which is quite manageable for a steady defense firm. 

While L3Harris has some exposure to commercial aviation (depending on definitions, roughly 5% -15% of sales), The firm will be materially affected by the downturn in commercial aviation. L3Harris produces a substantial amount of free cash flow and is not especially indebted, so we anticipate that the company would be able to access the capital markets at minimal cost if necessary. 

Bulls Say’s

  • There is substantial potential for cost synergies from the merger with L-3 due to the decentralized organizational structure of the pre-merger entity.
  • L3Harris is at the base of a global replacement cycle for tactical radios, which we think will drive substantial growth.
  • Defense prime contractors operate in an a cyclical business, which could offer some protection as the U. S. is currently in a recession.

Company Profile 

L3Harris Technologies was created in 2019 from the merger of L3 Technologies and Harris, two defense contractors that provide products for the command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) market. The firm also has smaller operations serving the civil government, particularly the Federal Aviation Administration’s communication infrastructure, and produces various avionics for defense and commercial aviation.

(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 Shares Small Cap

Rail Congestion a Headwind, but Robust Contract Pricing Driving Impressive EBIT Growth for Hub Group

In its flagship intermodal division, Hub contracts with the Class I railroads for the line-haul movement of its containers. It operates the second-largest fleet in the industry, with exclusive access to more than 30,000 containers, and enjoys an approximate 10% market share. By gross revenue, J.B. Hunt is the largest intermodal marketing company, followed by Hub and the intermodal divisions of Schneider National, XPO Logistics, and Knight Swift.

Hub has constructed intermodal and truck brokerage networks of sufficient scale to be attractive to customers (shippers) and suppliers, both of which benefit from using a larger intermediary. Sophisticated IT systems and market know-how enable customers to outsource intermodal shipping to an expert specialist, while Hub’s large volume of loads and significant control of containers make it an attractive customer to the Class I railroads. The company’s primary rail carriers are Norfolk Southern in the East and Union Pacific in the West.

Financial strength

Hub Group’s balance sheet is healthy, and the firm is not overly leveraged. At the end of 2020, Hub held a manageable amount of amount of debt, which is normally used to help finance equipment purchases as well as tuck-in acquisitions like the 2020 NonStopDelivery deal. Total debt came in near $270 million in 2020, including minimal capital lease obligations. Debt/EBITDA stood at a comfortable 1.1 times versus 1.0 times in 2019 and a five-year average near 1.4 times. The firm held roughly $125 million in cash at year-end 2020 versus $169 million in 2019. Historically, Hub’s model generated decent free cash flow in years when it wasn’t acquiring intermodal containers. Overall, free cash flow averaged 1.7% of gross revenue over the past five years, with capital expenditures approximating 3% of sales (3.2% in 2020). Capital expenditures will likely come in near 4% of sales in 2021 due in part to investment in additional intermodal containers to capitalize on growth opportunities.

Bulls Say’s

  • Spiking consumer goods spending and heavy retailer restocking are driving incredibly strong freight demand, tight trucking market capacity, and favorable pricing conditions for all of Hub’s operations in 2021.
  • Intermodal shipping enjoys positive long-term trends, particularly secular constraints on truckload capacity growth and shippers’ efforts to minimize transportation costs through mode conversions (truck to rail).
  • Intermodal market share in the Eastern U.S. still has runway for growth as rising rail service levels support incremental truck to rail conversion activity.

Company Profile 

Hub Group ranks among the largest asset-light providers of rail intermodal service. Following the August 2018 divestiture of logistics provider Mode, which was run separately, its core operating units are intermodal, which uses the Class I rail carriers for the underlying line-haul movement of containers (60% of sales); highway brokerage (12%); Unyson Logistics, which provides outsourced transportation management services (20%); and Hub Dedicated (8%), an asset-based full-truckload carrier.

(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

Shaw’s Merger With Rogers Rests on Regulatory Approval

Shaw has made significant efforts to improve its wireless network and is now bundling wireless with wireline service to customers in its cable footprint, enabling it offer even better value and enhancing service when offloaded onto its Wi-Fi network. Between the ends of fiscal years 2016 and 2020, Shaw more than doubled its postpaid wireless subscriber base, increased average billings per user (ABPU) by 20%, and expanded its wireless EBITDA margin by 900 basis points. The firm continues to invest heavily to improve its wireless network, and we think the firm is a legitimate competitor for new wireless customers and will continue seeing wireless results trend upwards.

The stronger competition has caused Shaw to lose customers and market share over the last several years. The losses are attributable to television and voice customers, which face secular challenges for all competitors, but even Internet customer growth has been anemic (up 2% since 2017, including customer losses in 2021).

Financial Strength

Shaw is currently in a good financial positionAt the end of fiscal 2020, Shaw had over CAD 700 million in cash and CAD 4.5 billion in long-term debt, which represented 1.6 times net debt to adjusted EBITDA. Shaw’s coverage ratio (adjusted EBITDA to interest expense) ended 2020 at 8.7, and the company has CAD 1.5 billion available on a revolving credit facility. Shaw has no long-term debt maturing until the end of 2023. Its debt covenants require its leverage ratio to stay below 5.0 and its coverage ratio to stay above 2.0, both comfortably distant from where the firm is currently. Shaw has maintained a dividend of CAD 1.19 per share since 2016, and will remain flat over the next few years, as the firm allocates capital to additional spectrum auctions in 2021 and 2022. Shaw suspended its share buyback in the wake of the COVID-19 pandemic, but it still expects its free cash flow will be able to cover the dividend.

Bulls Says 

  • Shaw is doing all the right things to build up its wireless business, acquiring and building out sufficient assets and luring customers by offering great deals. 
  • The Canadian government is keen on bringing wireless competition to the big three incumbents. Unlike previous national upstarts, Shaw’s strong financial position and family control afford it the time and money to stick with a long-term strategy to succeed. 
  • Shaw’s move to bundle wireless and wireline service with Shaw Mobile could expedite its wireless share gains and stem wireline losses it has seen recently

Company Profile

Shaw Communications is a Canadian cable company that is one of the biggest providers of Internet, television, and landline telephone services in British Columbia, Alberta, Saskatchewan, Manitoba, and northern Ontario. In fiscal 2021, more than 75% of Shaw’s total revenue resulted from this wireline business. Shaw is also now a national wireless service provider after acquiring Wind Mobile in 2016. Shaw has upgraded its wireless network, undertaken an aggressive pricing strategy, and significantly enhanced its spectrum holdings. As a smaller carrier, Shaw has favored bidding status in spectrum auctions, giving it a further boost in enhancing its wireless network. At the 2019 auction, Shaw added significant amounts of 600 MHz spectrum to the 700 MHz spectrum it is currently deploying.

 (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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Shares Technology Stocks

Tradeweb benefits from long-term tailwinds as bond markets become increasingly electronic

which tend to focus on a particular bond type or market segment, Tradeweb operates with a broad scope, offering trading in just about anything related to fixed income, including derivatives, as well as some equity exchange-traded funds. That said, Tradeweb’s interest-rate and credit segments are the heart of the company, making up 77% of its revenue in 2020, and are responsible for much of its growth.

Fixed-income markets globally are increasingly moving away from voice-negotiated trading toward electronic platforms because the liquidity and workflow enhancement of these electronic networks promise to lower implicit and explicit trading costs for increasingly expense-conscious firms. Tradeweb has been a major beneficiary of this trend, as its largest competitor is the implicit competition represented by traditional voice-based trading. As bond and derivative markets have shifted, Tradeweb has enjoyed significant tailwinds to its business and has steadily taken overall market share, with its interest-rate swap and U.S. investment-grade bond trading volumes in particular rising rapidly. With most fixed-income trading still primarily voice-based, this transition is still in its early days and Tradeweb has a long runway of growth ahead of it. While revenue growth is likely to decelerate somewhat from an impressive CAGR of 21% over the last three years, Tradeweb is expected to enjoy double-digit revenue growth in the mid- to low teens for years to come.

Financial Strength:

Tradeweb is in an excellent financial position, with more than $821 million in cash and investment securities at the end of September 2021 and no outstanding long-term debt. Tradeweb enjoys wide margins and strong cash flow, and there are no any real prospect of the company being placed under financial pressure in the foreseeable future, particularly given the countercyclical behavior its revenue generation exhibits. Tradeweb’s business has high upfront costs but requires little incremental capital to support growth once a trading platform has been developed, limiting the firm’s capital needs. With no debt to pay down, analysts expect that Tradeweb will continue to use its incoming cash flow to pay dividends, buy back shares, or invest back into its business, either in the form of internal development or external acquisitions.

Bulls Say:

  • Tradeweb benefits from the secular transition away from voice negotiations toward its electronic trading platforms in fixed-income markets, providing the firm with an easy path for continued market share and revenue growth. 
  • Tradeweb’s business features upfront costs and low variable expenses, creating an easy path for operating margin expansion as its revenue base grows. 
  • Tradeweb interest-rate swap and U.S. investment grade corporate bond trading platforms have enjoyed sharp market share gains in recent years, with the pandemic an additional catalyst to ongoing industry trends.

Company Profile:

Founded in 1998 and headquartered in New York City, Tradeweb Markets is a leading fixed-income trading platform. While it does offer electronic processing for some voice-negotiated trades, the company focuses primarily on providing electronic trading networks that connect broker/dealers, institutional clients, and retail customers. While the company offers trading in a wide variety of products, the bulk of its business is in U.S. and European government debt, mortgage-backed securities, interest-rate swaps, and U.S. and international corporate bonds. The firm also sells fixed-income trading and price data, primarily through a deal with Refinitiv’s Eikon service.

(Source: Morningstar)

General Advice Warning

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

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Dividend Stocks Shares

Supply Chain Issues Constrain Output, Hindering Retail Sales at Wide-Moat Polaris

that it stands to capitalize on its research and development, solid quality, operational excellence, and acquisition strategy. However, Polaris’ brands do not benefit from switching costs, and with peers innovating more quickly than in the past, it could jeopardize the firm’s ability to take price and share consistently, particularly in periods of inflated recalls or aggressive industry discounting.

Polaris had sacrificed some financial flexibility after its transformational acquisitions of TAP (2016) and Boat Holdings (2018), but debt-service metrics have been rapidly worked down via EBITDA expansion and cost-saving scale benefits (with debt/adjusted EBITDA set to average around 1.1 times over our forecast). As evidenced by solid ROICs (at 17%, including goodwill, in 2020), Polaris still has top-notch brand goodwill in its segments, supporting consumer interest and indicating the firm’s brand intangible asset is intact.

Financial Strength:

For Polaris exiting the recession, rising profits led to increases in company equity, which helped reduce debt/capital from 49% in December 2009 to 31% in December 2015. With the addition of leverage from the acquisition of TAP (which the company paid $655 million net of $115 million in tax benefits for in 2016), and the financing of Boat Holdings in 2018, Polaris ended 2019 with debt/adjusted EBITDA just above 2 times and debt/capital of 60%. However, robust demand and successful execution through COVID-19 has restored the metric to 1.5 times at the end of 2020, a very manageable level which the company should be able to maintain. Additionally, Polaris is poised to produce strong cumulative free cash flow to equity over the next five years’ worth around $3.2 billion.

Bulls Say:

  • Polaris has historically had a strong reputation for innovation, and new product lines and acquisitions have supported solid performance in both strong and difficult environments. 
  • Profit margins could tick up faster than we expect with faster than enterprise average volume growth from the sizable off-road and low-operating expense Boat Holdings business segments. 
  • Management remains focused on operating as a bestin-class manufacturer. With continutious improvement at existing facilities, the pursuit of excellence should support stable operating margin performance.

Company Profile:

Polaris designs and manufactures off-road vehicles, including all-terrain vehicles and side-by-side vehicles for recreational and utility purposes, snowmobiles, small vehicles, and on-road vehicles, including motorcycles, along with the related replacement parts, garments, and accessories. The firm entered the aftermarket parts segment in 2016, tying up with Transamerican Auto Parts and then tapped into boats through the acquisition on Boat Holdings in 2018, offering exposure to new segments of the outdoor lifestyle market. Polaris products retailed through 2,300 dealers in North America and through 1,400 international dealers as well as more than 30 subsidiaries and 90 distributors in more than 120 countries outside North America at the end of 2020.

(Source: Morningstar)

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

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Global stocks Shares

UPS’ Ground Volumes Face Tough Comps, but Yields Excellent and U.S. Margin Outlook Positive

FedEx and UPS are the major U.S. incumbents.UPS has also boosted its exposure to the asset-light third-party freight brokerage market, especially with its 2016 acquisition of truckload broker Coyote Logistics. 

Despite its unionized workforce and asset intensity, UPS produces operating margins well above competitors’, thanks in large part to its leading package density. In the United States, FedEx’s express and ground units together handled 14.4 million average parcels daily in its four fiscal quarters ended in November 2020, while UPS moved 21.1 million in calendar 2020. The disparity is greater in the U.S. ground market, where UPS moved on average 17.4 million parcels per day and FedEx ground averaged 11.4 million.  

Favorable e-commerce trends should remain a longer-term top-line tailwind for UPS’ U.S. ground and express package business. That said, growth won’t be costless; UPS is amid an operational transformation initiative aimed at mitigating the challenges of a rising mix of lower-margin business-to-consumer deliveries.

Amazon has been insourcing more of its own last-mile delivery needs at a rapid pace to supplement capacity access amid robust growth. This removes some incremental growth opportunities for UPS while creating risk that Amazon decides to take in house the shipments it currently sends though UPS–the retailer now makes up approximately 13% of UPS’ total revenue.

Financial Strength 

UPS’ balance sheet is reasonable and mostly healthy. It held $6.9 billion in cash and marketable securities compared with roughly $24.7 billion of total debt at year-end 2020. Debt/EBITDA leverage came in around 2.4 times in 2020, ignoring underfunded pensions, though the firm plans to pay off more than $2 billion in 2021, with help from cash generation and the $800 million UPS Freight sale. Leverage will likely finish 2021 at comfortably less than 2 times EBITDA. EBITDA/interest coverage for 2020 was a healthy 15 times.Share repurchases slowed modestly in 2018 and 2019 on account of heavy capital investment and were suspended in 2020 (into 2021) due to pandemic risk-mitigation efforts (including debt reduction).

Bulls Say 

  • UPS’ U.S. ground and express package delivery operations should enjoy healthy medium-term growth tailwinds rooted in highly favorable e-commerce trends. 
  • UPS’ massive package sortation footprint, immense air and delivery fleet, and global operations knit together a presence that’s extraordinarily difficult to replicate. 
  • On top of superior parcel density, UPS uses many of the same assets to handle both express and ground shipments, driving industry-leading operating margins.

Company Profile

As the world’s largest parcel delivery company, UPS manages a massive fleet of more than 500 planes and 100,000 vehicles, along with many hundreds of sorting facilities, to deliver an average of about 22 million packages per day to residences and businesses across the globe. UPS’ domestic U.S. package operations generate 61% of total revenue while international package makes up 20%. Less-than-truckload shipping, air and ocean freight forwarding, truckload brokerage, and contract logistics make up the remaining 19%.

 (Source: Morningstar)

General Advice Warning

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

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Global stocks Shares

Wyndham’s Brands Continue to See Industry Leading Travel Recovery in the U.S.

a brand intangible asset and switching cost advantage. This view is supported by the company’s roughly 40% share of all U.S. economy and midscale branded hotels and the industry’s fourth-largest loyalty program by which encourages third-party hotel owners to join the platform. 

With essentially all of its nearly 9,000-plus hotels managed or franchised, Wyndham has an attractive recurring-fee business model with healthy returns on invested capital, as these asset-light relationships have low fixed costs and capital requirements. This asset-light model creates switching costs, given 10- to 20-year contracts that have meaningful cancellation costs for owners.

The 2018 acquisition of La Quinta as a strategically strong fit that supports Wyndham’s intangible-asset-driven narrow moat while enhancing long-term growth Cyclicality, illnesses like COVID-19, and overbuilding are the main risks for shareholders.

Wyndham Continues to Lead the Global Travel Rebound; More Demand Recovery Expected in 2022

Wyndham’s leisure, continued to lead the global travel recovery in the third quarter, with total revenue per available room reaching 98% of 2019 levels. U.S. and international revPAR increased to 107% and 75% of 2019 levels, respectively, up from 95% and 56% in the three months prior. Wyndham expects demand to sustain in the fourth quarter and now sees its 2021 revPAR growth at 43% versus 40% prior and compared with our forecast of 41%. 

Looking to 2022, we expect strong U.S. leisure demand to continue, aided by remote work flexibility, while international markets should experience a strong revPAR recovery because vaccination rates now allow for reduced travel restrictions. This view is supported by Wyndham’s Canadian revPAR improving to 90% of 2019 levels in the quarter, up from around 60%, as the country reduced its pandemic-related restrictions.

Financial Strength

Wyndham’s financial health remains in good shape, despite COVID-19 challenges. Wyndham exited 2020 with debt/adjusted EBITDA of 7.9 times, up from 3.5 times in 2019, as its asset-light business model allows the company to operate with low fixed costs and stable unit growth . But Wyndham did not sit still during the depths of the pandemic; rather, it took action to increase its liquidity profile, tapping its $750 million credit facility (which was repaid in full by Nov. 2020), cutting discretionary expenses, suspending buybacks, and reducing its quarterly dividend from $0.32 to $0.08 (which was increased back to $0.32 per share in Oct. 2021).Further, Wyndham saw positive cash flow generation in 2020, despite COVID-19 significantly reducing global travel demand in that year. While Wyndham’s adjusted EBIT/interest expense was negative 0.4 times in 2020.The company has only $64 million in debt maturing over the next three years. 

Bull Says

  • The La Quinta brand offers long-term growth opportunity to 2,000 units from 937 at the end of 2020, as it is not in 30% of the regions monitored by Smith Travel Research, despite strong third-party hotel operator renewal rates and strong revPAR share in existing market.
  • Wyndham’s economy/midscale select service presence operates at low operating costs, allowing its U.S. hotels to break even at 30% occupancy levels. 
  • The vast majority of Wyndham Hotels’ EBITDA is generated by service-for-fee operations, which are less capital-intensive than owned assets, leading to healthy ROICs.

Company Profile

As of Sept. 30, 2021, Wyndham Hotels & Resorts operates 803,000 rooms across 22 brands in the economy (around 51% of total U.S. rooms) and midscale (45%) segments. Super 8 is the largest brand, representing around 30% of all hotels, with Days Inn (18%) and La Quinta (10%) the next two largest brands. During the past several years, the company has expanded its extended stay/lifestyle brands (2% of total properties), which appeal to travelers seeking to experience the local culture of a given location. The United States represents 61% of total rooms. The company closed its La Quinta acquisition in the second quarter of 2018, adding around 90,000 rooms at the time the deal closed.

(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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Shares Small Cap

Healius EBIT margin to expand to 13% by fiscal 2026 from 8% in pre-pandemic fiscal 2019

Healius is looking to new sources of strategic growth as well as dealing with prior under investment in infrastructure. There is much to fix in the business and we anticipate it to take a few years before significant margin improvements are made in the base pathology and imaging businesses. Healius selling its medical centers and Adora Fertility to focus on redirecting capital toward infrastructure upgrades and higher-margin Montserrat day hospitals is viewed as a positive strategic step.

Improvement in systems is key to improving efficiency. Pathology is an increasingly technologically driven service and the company intends to invest in a new laboratory information system, automation, and digitization through to fiscal 2024. In addition, the number of tests available is expanding. Increasing complexity of tests, such as veterinary and gene-based testing, is also resulting in average fee price increases. Pathology has a high fixed cost of operation and thus benefits from volume growth to drive lower cost-per-test outcomes.

Financial Strength

After divesting the medical centers and Adora Fertility businesses, Healius boasts significant balance sheet flexibility. While the sale proceeds were used predominantly to retire debt, Healius is also on track to return AUD 200 million to shareholders in the form of share buybacks in calendar 2021. At the end of fiscal 2021, Healius reported AUD 188 million in net debt, representing net debt/EBITDA of 0.7 times pre-AASB 16. Following Healius’ improvement program in the near term, it is expected to free cash flow prior to dividends to settle around 96% of net income at midcycle. The high cash conversion affords Healius to maintain dividend payout ratio of 60%, within Healius’ 50%-70% target range.

Bulls Say’s 

  • On top of the base level of COVID-19 testing that is likely to continue, Healius is well-positioned for underlying trends in preventive diagnostic treatments and outpatient care in its day hospitals. 
  • Simplifying the business via the sale of its medical centers and Adora Fertility is a positive indicator for the ultimate success of the company’s turnaround. 
  • Advances in technology and personalized medicine are increasing the number of complex and gene-based tests available to patients, which are typically higher margin.

Company Profile 

Healius is Australia’s second-largest pathology provider and third-largest diagnostic imaging provider. Pathology and imaging revenue is almost entirely earned via the public health Medicare system. Healius typically earns approximately 70% of revenue from pathology, 25% from diagnostic imaging and a small remainder from day hospitals.

(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.