Author: lvc-admin

Categories
Global stocks Shares

Marriott’s Demand Set to Rebound Further in 2022, Aided by Global Leisure and Corporate Pick-Up

that Marriott to expand room and revenue share in the hotel industry over the next decade, driven by a favorable next-generation traveler position supported by renovated and newer brands, as well as its industry-leading loyalty program. Additionally, the acquisition of Starwood has strengthened Marriott’s long-term brand advantage, as Starwood’s global luxury portfolio complemented Marriott’s dominant upper-scale position in North America.

Marriott’s intangible brand asset and switching cost advantages are set to strengthen. Marriott has added several new brands since 2007, renovated a meaningful percentage of core Marriott and Courtyard hotels in the past few years, and expanded technology integration and loyalty-member presence; these actions have led to share gains and a strong positioning with millennial travelers. Starwood’s loyalty member presence and iconic brands should further strengthen Marriott’s advantages.

Future Outlook

It is expected that room growth for Marriott averaging midsingle digits over the next decade  supported by the company having around 20% of all global industry rooms under construction, well above its high-single-digit existing unit share, as of the end of 2020.

With 97% of the combined rooms managed or franchised, Marriott has an attractive recurring-fee business model with high returns on invested capital and significant switching costs for property owners. Managed and franchised hotels have low fixed costs and capital requirements, along with contracts lasting 20 years that have meaningful cancelation costs for owners.

Marriott’s Demand Set to Rebound Further in 2022

Marriott’s third-quarter revenue per available room, or revPAR, improved to 74% of 2019 levels ,up from 56% last quarter ,driven by rate recovering to 96% of prepandemic marks. 

Meanwhile, Marriott’s brand advantage remains intact. Marriott’s EBITDA margins improved to 17.3% from 14.5% a year ago. It is observed that high-teens operating margins in 2030, compared with the low-double-digit prepandemic average, aided by cost efficiency offsetting wage inflation.

It is expected that leisure travel to remain robust, but we expect business travel to recover in 2022. In this vein, Marriott noted that business travel bookings have recently picked up, and that group 2022 revenue on books is down about 20% from 2019, with rooms down 23% and rate up 4%.

Financial Strength

 Marriott’s financial health remains in good shape, despite COVID-19 challenges. Marriott entered 2020 with debt/adjusted EBITDA of 3.1 times, as its asset-light business model allows the company to operate with low fixed costs and stable unit growth, but reduced demand due to COVID-19 caused the ratio to end the year at 9.1 times. During 2020, Marriott did not sit still; rather, it took action to increase its liquidity profile, including suspending dividends and share repurchases, deferring discretionary capital expenditures, raising debt, and receiving credit card fees from partners up front. As a result, Marriott has enough liquidity to operate at zero revenue through 2022, and at second half of 2020 demand levels the company was around cash flow neutral. 

 Bulls Say  

  • Marriott is positioned to benefit from the increasing presence of the next-generation traveler through emerging lifestyle brands Autograph, Tribute, Moxy, Aloft, and Element. 
  • Marriott stands to benefit from worker flexibility driving higher long-term travel demand. Our constructive stance is formed by higher income occupations being the most likely industries to sustainably work from remote locations. 
  • Marriott has a high exposure to recurring managed and franchised fees (97% of total 2019 units), which have high switching costs and generate strong ROICs.

Company Profile

Marriott operates nearly 1.5 million rooms across roughly 30 brands. Luxury represents around 9% of total rooms, while full service, limited service, and time-shares are 43%, 46%, and 2% of all units, respectively. Marriott, Courtyard, and Sheraton are the largest brands, while Autograph, Tribute, Moxy, Aloft, and Element are newer lifestyle brands. Managed and franchised represent 97% of total rooms. North America makes up two thirds of total rooms. Managed, franchise, and incentive fees represent the vast majority of revenue and profitability for the company.

 (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 Shares Technical Picks

Quantitative Equities Continue to be a Drag on Janus Henderson’s Fund Flow Recovery

leaving them more dependent on market gains to increase their assets under management. With USD 419.3 billion in AUM at the end of September 2021, Janus Henderson has the size and scale necessary to be competitive in the industry and is structurally set up to hold on to assets regardless of market conditions, being somewhat diversified across its four main asset class segments–equities (two thirds of managed assets), fixed income (close to a fifth), multi-asset and alternatives (the remainder). 

During that same period, the firm’s organic growth rate averaged negative 5.1%, with a standard deviation of 2.4%, which was worse than the average of its publicly traded peers, with revenue growth and operating margins both trailing the average results for the U.S.-based asset managers. Janus Henderson’s organic growth to be in a negative 2%-4% range annually during 2021-25, with revenue growth and operating margins affected by industry fee compression and the need to spend more to enhance performance and distribution.

Financial strength

Janus Henderson entered 2021 with USD 300 million of 4.875% senior notes due in July 2025, leaving it with a debt/total capital ratio of around 6%, interest coverage of more than 50 times, and a debt/EBITDA ratio (by our calculations) of 0.4 times. The company also had a USD 200 million unsecured revolving credit facility (with a maturity date of February 2024). Under the credit facility, the company’s financing leverage ratio cannot exceed 3 times EBITDA. There were no borrowings under the credit facility at the end of September 2021. Should the firm close out the year in line with our expectations, Janus Henderson will enter 2022 with a debt/total capital ratio of around 6%, interest coverage of close to 70 times, and a debt/EBITDA ratio (by our calculations) of 0.3 times.

The company declared an initial quarterly dividend of USD 0.32 per share during the third quarter of 2017 and has since raised it to USD 0.38 per share. As for share repurchases, the company repurchased approximately 4.0 million shares for USD 100 million during 2018, another 9.4 million shares for USD 200 million during 2019, and during 2020 picked up 8.7 million shares for USD 180 million. In February 2021, Janus Henderson repurchased 8.0 million shares of common stock (which was distinct from its corporate buyback program) from Dai-ichi Life Holdings for USD 230 million. The firm has also repurchased 1.8 million shares for USD 75 million as part of its buyback program since the start of 2021.

Bulls Say’s

  • Janus Henderson is the only offshore-based global wealth manager listed on the Australian Securities Exchange. It provides investors exposure to a growing global wealth sector, with a high bias toward equity strategies.
  • Operating leverage is high, capital demands are low, and when free cash flow generation is strong investors can be rewarded with a good mix of growth and income returns. 
  • Janus Henderson carries added currency risk compared with listed Australian peers, given the primary listing is on the New York Stock Exchange and the base currency is the U.S. dollar.

Company Profile 

Janus Henderson Group provides investment management services to retail intermediary (49% of managed assets), self-directed (21%) and institutional (30%) clients under the Janus Henderson and Intech banners. At the end of September 2021, fundamental equities (56%), quantitative equities (9%), fixed-income (19%), multi-asset (13%) and alternative (3%) investment platforms constituted the company’s USD 419.3 billion in assets under management. Janus Henderson sources 56% of its managed assets from clients in North America, with customers from Europe, the Middle East, Africa and Latin America (30%) and the Asia-Pacific region (14%) accounting for the remainder. Headquartered in London, JHG is dual-listed on the New York Stock Exchange and the Australian Stock Exchange.

(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

Akamai’s Security Business Is on Fire as CDN Business Stagnates

The key to Akamai’s recent success has been the cybersecurity solutions it now offers. As the rest of its business struggles to produce revenue growth, security solutions have been growing about 30% annually and exceeded $1 billion in sales in 2020, making up one third of Akamai’s total sales. We think management is focusing on the right things and developing great products, but we fear the firm is susceptible to competitors’ CDNs.

The loss of so much business from the big Internet customers forced Akamai to look elsewhere for growth and rely less on the media business, which went from providing 58% of total revenue in 2014 to about 47% the past four years. Akamai now has a more robust web business, where it serves customers including retailers, financial services firms, travel-related companies, government agencies and others that benefit from having high-quality, interactive websites with significant traffic. Those firms also are particularly vulnerable to various hacking and security threats, which left an opportunity for Akamai to offer security products, and it is believed it will be the primary source of future growth.

Akamai’s Security Business Is on Fire as CDN Business Stagnates

Security continues growing at a rapid pace and has shown little sign of slowing down, even as it now makes up 40% of total revenue. The content delivery network, or CDN, business, which Akamai rebranded earlier this year as its Edge Technology Group, struggles to grow and is one where little opportunity for a competitive advantage exist.The most impressive aspect of Akamai to us is its ability to acquire small cybersecurity firms and integrate them into its own business.

Financial Strength 

Akamai is in excellent financial shape. At the end of 2020, it had $350 million in cash, about $750 million in marketable securities, and $1.9 billion in debt. The company typically trades with a gross debt/EBITDA ratio around 1.5. Akamai frequently makes small acquisitions, so its cash balance can frequently fluctuate. Akamai does not pay a dividend and does not intend to. It does return some cash back to shareholders via share repurchases, but the buybacks mostly just offset share dilution. 

Bulls Say 

  • Akamai is a major player in the exploding cybersecurity industry, so rapid growth there will more than offset a stagnant core CDN business. 
  • A major shift in viewing habits to Internet-based TV and video directly increases the need for content delivery networks, of which Akamai’s is second to none. 
  • The exodus of Akamai’s six Internet platform companies has stabilized, and they now represent well under 10% of sales, so they will no longer be a meaningful drag on growth.

Company Profile

Akamai operates a content delivery network, or CDN, which entails locating servers at the edges of networks so its customers, which store content on Akamai servers, can reach their own customers faster, more securely, and with better quality. Akamai has over 325,000 servers distributed over 4,000 points of presence in more than 1,000 cities worldwide. Its customers generally include media companies, which stream video content or make video games available for download, and other enterprises that run interactive or high-traffic websites, such as e-commerce firms and financial institutions. Akamai also has a significant security business, which is integrated with its core web and media businesses to protect its customers from cyber threats

 (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

Nexstar Well Positioned to Capitalize on Political Ad Spending Growth

Though it’s slightly declining in importance, advertising remains an important source of revenue for Nexstar. Just under 44% of total 2019 revenue came from nonpolitical advertising. Over 70% of non-political advertising revenue is generated at the local level by selling ad time to area businesses, including restaurants, auto dealerships, and retailers, which have suffered during the pandemic. Because of its size and geographic reach, Nexstar also sells advertising nationally to auto manufacturers, telecom firms, fast-food restaurants, and retailers via their ad agencies. The larger scale of the firm, along with increased political ad spending, has increased the importance of elections. Hence it is expected that Nexstar will continue to benefit from political ad spending growth offsetting slower local and national ad growth.

Over the past decade, retransmission revenue has grown rapidly as a source of revenue for local television stations. For Nexstar, retrans revenue was 45% of total 2019 revenue, up from 25% in 2014. While the growth in retrans revenue has been and will continue to be a growth driver for local station owners, and it is projected that national network owners will continue to raise both network affiliation fees and reverse compensation fees, decreasing the bottom-line benefit to Nexstar.

Financial Strength 

Nexstar is more highly leveraged than it has been traditionally, it is in decent financial shape. Overall debt increased as a result of the Tribune Media acquisition. The firm had $7.5 billion in debt as of September 2021, up sharply from $3.9 billion at the end of 2018. Nexstar continues to use its free cash flow to lower its debt load. It spent over $425 million in the first nine month of 2021 to reduce its debt load, lowering its first-line net leverage to 2.14times at the end of the quarter from 3.52 times at the end of 2019. The new level is well below the covenant level of 4.25 times. Total net leverage is at 3.4 times, well below the management’s target of 4.0 times. The firm had no bond maturities due until 2024, though some of its $4.7 billion first-lien loans will come due over the next three years.

Bulls Say  

  • Nexstar can drive local ad revenue growth via its duopoly markets. 
  • The increased reach provided by the Tribune merger will help attract more national advertisers and grow political ad spending. 
  • Nexstar has the heft and reach to strike more advantageous retransmission agreements with pay television distributors. 

Company Profile

Nexstar is the largest television station owner/operator in the United States, with 197 stations in 115 markets. Of its 197 full-power stations, 158 are affiliated with the four national broadcasters: CBS (50), Fox (43), NBC (35), and ABC (30). The 2019 merger with Tribune made Nexstar the top broadcast affiliate for both Fox and CBS as well as the number-two partner for NBC and number three for ABC. The firm now has networks in 15 of the top 20 television markets and reaches 69 million television households. Nexstar also owns WGN, a nationwide pay-television network, and a 31% stake in Food Network and Cooking Channel.

 (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

Lyft’s Network Effect Strengthened the Platform’s Supply and Demand in Q3; Increasing FVE to $66

that it is  valued at over $550 billion (based on gross revenue) by 2024, from estimated of $224 billion in 2019. Lyft warrants a narrow economic moat and a stable moat trend rating, thanks to the network effect around its ride-sharing platform and intangible assets associated with riders, rides, and mapping data, which can drive Lyft to profitability and excess returns on invested capital.

From a strategic standpoint, Lyft is well on its way to becoming a one-stop shop for on-demand transportation. It has tapped into the bike and scooter-sharing markets, which will be worth over $12 billion by 2029, growing 7% annually. Lyft also appears to be aggressively pursuing the autonomous vehicle route as it understands that self-driving cars may help the firm to expand its margins; without drivers, it could recognize a bigger chunk of the fare as net revenue. In contrast to Uber, Lyft is not focused on food transportation or logistics.

Financial strength

Increasing Fair Value Estimate for Lyft by 5% to $66, which represents a 46% upside from the stock’s 2nd  November closing price. Third-quarter revenue came in at $864 million, up 73% from last year, driven by more riders (51% growth from last year) and more drivers (45%). In addition, 47% more new riders were activated on Lyft than last year. Net revenue stood at 90% of 2019 third-quarter levels (up from 88% in the second quarter and from 52% last year), while riders were at 85% (up from 79% last quarter and from 72% in 2020). Net revenue per rider grew 14% year over year to $45.63, driven by increase in the number of rides requested per rider, which more than offset decline in prices.

Strong revenue growth created operating leverage and lessened operating loss to $177 million, from second quarter’s $240 million and last year’s $453 million in losses. Management expects fourth-quarter net revenue between $930 million and $940 million, which implies $3.17 billion- $3.18 billion full-year net revenue. The firm expects fourth-quarter contribution margin to come in at 59%. Lyft also guided for adjusted EBITDA between $70 million and $75 million in the fourth quarter, equivalent to a full-year adjusted EBITDA of around $90 million. 

 At the end of 2020, Lyft had $1.6 billion in net cash on its balance sheet. It burned $1.4 billion in cash from operations in 2020, significantly more than the $106 million in 2019, mainly due to the impact of the COVID-19 pandemic. By 2030, it is estimate that Lyft’s cash from operations to approach over $4 billion, outpacing top-line growth due to operating leverage. Excluding a one-time $18 million benefit, Lyft’s third-quarter adjusted EBITDA was $47 million (6% margin).

Bulls Say’s

  • Lyft’s position in the autonomous vehicle race could equalize gross and net revenue, if it no longer needs to pay drivers. 
  • Lyft will profit from its do-good brand in comparison with competitor Uber. 
  • The company’s aggregation of multimodal offerings will drive in-app stickiness, making Lyft a one-stop shop for all transport needs.

Company Profile 

Lyft is the second-largest ride-sharing service provider in the U.S., connecting riders and drivers over the Lyft app. Lyft recently entered the Canadian market in an effort to expand its market outside the U.S. Incorporated in 2013, Lyft offers a variety of rides via private vehicles, including traditional private rides, shared rides, and luxury ones. Besides ride-share, Lyft also has entered the bike- and scooter-share market to bring multimodal transportation options to users.

(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

Bed Bath carves out new revenue opportunities to boost performance; shares skyrocket

Narrow moat Kroger is the leading American grocer, with 2,742 supermarkets (at the end of 2020) across multiple banners. While the entry into boxes is set to be “small-scale,” a more meaningful long-term opportunity exists if the initial efforts are well-executed. Not only does this partnership offer Bed Bath an incremental distribution network for its products, but it also provides visibility to customers who want a one stop omnichannel option tied into their grocery transactions.

Second, Bed Bath is launching a digital marketplace for the home and baby categories that will offer curated third-party brand products that fit into the firm’s digital platform. While the economics of these projects were not offered, a benefit should fall to both the top line and the bottom line (as scale helps absorb costs).

Financial Strength:

The dividend yield by the company during the year 2020 was a whopping 6.3% and PE ratio was 23.5.

Bed Bath now plans to complete its $1 billion share buyback in 2021, two years ahead of schedule. Depending on the acquisition prices, Bed Bath could purchase its equity at premiums to the analyst’s fair value estimate, which would not be viewed as prudent. However, this move is appreciated by the analysts as it signals management’s long-term belief surrounding the stability of the business, and that the turnaround is well underway.

Company Profile:

Bed Bath & Beyond is a home furnishings retailer, operating around 1,000 stores in all 50 states, Puerto Rico, Canada, and Mexico. Stores carry an assortment of branded bed and bath accessories, kitchen textiles, and cooking supplies. In addition to 813 Bed Bath & Beyond stores, the company operates 132 Buy Buy Baby stores and 54 Harmon Face Values stores (health/beauty care). In an effort to refocus on its core businesses, the firm has divested the online retailer Personalizationmall.com, the One Kings Lane business and Christmas Tree Shops and That (gifts/housewares), Linen Holdings, and Cost Plus World Market.

(Source: Morningstar)

General Advice Warning

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

Categories
Shares Technology Stocks

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.

Categories
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.

Categories
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.

Categories
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.