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Kellogg Company Benefited From Pandemic-Related Gains

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Kellogg’s dividend growth has been modest over the past five years, at an annualized rate of 2.9%. However, Morningstar analysts anticipate a higher rate going forward: “We forecast Kellogg will raise the shareholder dividend in the mid-single-digit range annually on average during the next 10 years.”

In their Best Ideas report, the analysts made the following case for the stock, which trades at an 18% discount to fair value: “Kellogg has benefited from pandemic-related gains in the retail channel (which drives 90% of its sales) as consumers continue to spend more time at home. Even before the pandemic, we thought Kellogg was taking steps to profitably reignite its top-line trajectory: abandoning direct-store distribution in favor of warehouse delivery, divest-ing noncore fare and stock-keeping units, and upping investments in its manufacturing capabilities and brands.

Although we expect more muted gains over a longer horizon, we think the company is using the current backdrop to sharpen its edge.

“We believe actions to expand its category exposure beyond cereal (with 50% of sales now from on-trend snacks versus 20% from North American cereal) will prop up its sales growth potential longer term. Further, we like the changes to its pack formats to include more on-the-go offerings, which should allow for increased penetration in alternative outlets. We also think recent acquisitions (including smaller, niche startups like RXBAR) afford the opportunity to grease the wheels of Kellogg’s innovation cycle to more nimbly respond to ever-changing consumer trends as they relate to health and wellness and taste.”

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Commodities Trading Ideas & Charts

NiSource Accelerated Investment Should Lead to Growth

From the Best Ideas report:

“Natural gas utility share prices have lagged the Morningstar US Utilities Index as the economy recovers from COVID-19, due in part to environmental con-cerns about the long-term use of natural gas. However, we believe the electrification of building space and water heating has significant technical and economic obstacles and the market’s misperception of the future of nature gas results in an attractive price for NiSource shares.

“The fully regulated company derives about 60% of its operating income from its six natural gas distribution utilities and the remaining 40% from its electric utility business in Indiana. NiSource has accelerated the pace of gas pipeline restoration investment following a tragic natural gas explosion in 2018, and this will reduce risk and cut methane emissions. Its electric utility will close its last coal-fired power plant in 2028 and replace the capacity with wind, solar, and energy storage.

As a result of favorable regulation and renewable energy investments, we expect NiSource to step up its capital expenditures to almost $12 billion over the next five years, almost 40% higher than the pre-vious five years. The accelerated investment should result in better than 7% EPS growth, strong dividend growth, an improved ESG profile, and reduced risk for investors.”

NiSource Inc. is one of the largest fully regulated utility companies in the United States, serving approximately 3.5 million natural gas customers and 500,000 electric customers across seven states through its local Columbia Gas and NIPSCO brands

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Dividend Stocks Shares

Telstra Corp – Show Off Infrastructure Strength

The strategic intent is taking shape: segregate the AUD 200 million EBITDA-generating InfraCo Towers for potential monetisation (akin to Optus’ current moves to do the same), maintain the optionality of keeping the AUD 1.5 billion EBITDA-generating InfraCo Fixed stand-alone (as NBN mulls its future ownership), and continue refocusing the AUD 5.7 billion EBITDA-generating ServeCo on its transformation to become a more simple, efficient, and digital-centric competitor.

Rather than having investors obsess over the ebbs and flows of Telstra’s near-term earnings still suffering from the margin-crunching impact of NBN and competition, the restructure is likely to shift investor focus to the group’s underlying asset values. We expect a flurry of favourable sum-of-parts asset valuations to hit the market over the coming months, underpinned by the current low-interest rate environment and possibly “inspired” by the lucrative investment banking and advisory fees on offer.

The cloud surrounding Telstra’s near-term earnings is also clearing. Management not only reiterated fiscal 2021 earnings guidance (second-half-weighted and driven by cost-cuts, COVID-19 recovery, mobile earnings growth), but also provided encouraging signs for beyond. Return to underlying EBITDA growth in fiscal 2022 (excluding one-off NBN receipts) and an upgrade to fiscal 2023 return on invested capital, or ROIC, to 8% (from 7%) are all broadly in line with our unchanged estimates. But they are still comforting, especially after the shock of the August update when management (too conservatively) trimmed fiscal 2023 ROIC target to 7%-plus (from 10% previously).

As an illustration of the type of sum-of-parts valuation that investors may see in the coming months, traditional infrastructure entities typically trade at low-to-mid-teen EBITDA multiples. We see no reason why Telstra’s InfraCo Towers and InfraCo Fixed won’t attract similar multiples, given their recurring, predictable and indexed earnings growth (at margins of well over 60%) and likely long-term contracts with Telstra and NBN as anchor tenants. Applying, say, a 12 times multiple to both InfraCo Towers’ fiscal 2020 pro forma AUD 200 million EBITDA and InfraCo Fixed’s AUD 1.5 billion EBITDA, and 8 times to the still-rationalising ServeCo’s AUD 5.7 billion EBITDA produces total enterprise value of AUD 66.0 billion. Subtract AUD 16.8 billion in net debt and one can come up with an asset-based valuation of around AUD 4.10 per share for Telstra. And we are likely to witness much more creative ways to boost this value from the investment community in the future. Our unchanged AUD 3.80 fair value estimate for Telstra will remain based on a discounted cash flow methodology.

 (Source: Morningstar)

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Property

Transurban Group – Recovery Is a Little More U-Shaped Than Previously Expected

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The weighted average concession life of the portfolio is around 30 years. Under the leadership of Scott Charlton, Transurban has aggressively expanded its portfolio through a combination of acquisitions and greenfield projects. Toll roads have high barriers to entry and benefit from rising traffic volumes and tolls, which increase in line with the consumer price index or higher. Traffic volumes are recovering strongly from COVID-19 lockdowns. Nonetheless, distributions fell 20% in fiscal 2020 and are not expected to fully recover until fiscal 2023.

Key Considerations

  • Cash flow is typically defensive and increases strongly, as solid revenue growth is leveraged over a fixed cost base. Profitability benefited from falling debt costs because of low global bond rates, but we think rates are likely to trend higher. Coronavirus remains a headwind.
  • The core Australian roads generate strong returns on initial investments. Upgrades, such as widening these assets, should also generate good risk-adjusted returns.
  • Finite life concessions require the firm to add new roads to extend its existence, introducing high forecasting risk for developments and leading to the need for ongoing equity issues.
  • Core Australian roads generate defensive revenue that grows with traffic volumes and toll price increases, which are at a minimum pegged to inflation.
  • Solid revenue growth and a high fixed-cost base translate to strong cash flow and distribution growth.
  • Transurban owns high-quality infrastructure assets with limited regulatory risk.
  • There are attractive organic growth opportunities, such as potential widening of roads.
  • Building and acquiring new roads can destroy equity value as a result of overbidding and overly optimistic traffic forecasts.
  • Transurban faces risk from the coronavirus outbreak, given high financial leverage coupled with a major hit to revenues as countries go into lockdown to prevent the spread of the disease.
  • Bond yields are likely to trend higher, detracting from profitability and the attractiveness of its distribution yield.
  • Transurban is expanding aggressively late in the cycle, increasing risk.

 (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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Dividend Stocks Shares

Merck MRK High-Margin Drugs and Vaccines

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Management expects Organon, after it’s spun off in the second quarter, “to pay a meaningful dividend that will be entirely incremental to that of Merck.” It also intends to keep Merck’s payout ratio in the 47%–50% range. Based on consensus earnings for 2021 and 2022, Merck should be able to maintain solid dividend growth while remaining within that range.

“Merck’s combination of a wide lineup of high-margin drugs and vaccines along with a pipeline of new drugs should ensure strong returns on invested capital over the long term. Merck is well positioned to gain further entrenchment in immuno-oncology with Keytruda, which holds a strong first-mover advantage in the large first-line non-small-cell lung cancer market with excellent data. Also, we expect Keytruda to gain ap-provals in early-treatment settings, which should open up underappreciated sales potential.

“Merck’s vaccines look ready to drive further gains, led by human papillomavirus vaccine Gardasil, which continues to generate excellent clinical data. While the firm’s late-stage pipeline lacks several new blockbusters, we expect early-stage assets focused on cancer to move through trials rapidly.

Even though Merck faces some patent losses over the next five years, including diabetes drug Januvia, we expect new drug launches and gains from currently marketed products to more than offset generic competition.

Merck & Co., Inc., d.b.a. Merck Sharp & Dohme outside the United States and Canada, is an American multinational pharmaceutical company headquartered in Kenilworth, New Jersey. It is named after the Merck family, which set up Merck Group in Germany in 1668. Merck & Co. was established as an American affiliate in 1891. 

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Technology Stocks

Dell Posts Strong First Quarter and Capitalizes on Digitalization-Induced Demand

We are encouraged by Dell’s broad-based expanding addressable markets, as the company continues to benefit from accelerated trends toward digitalization, remote working and learning environments, and cloud-based infrastructure. We believe the secular trends of organizations accelerating the adoption of digitalization, cloud-based infrastructure, and facilitating remote working and learning environments, are aligned with Dell’s core capabilities, and the company is executing well. With shares trading in the mid- to high $90 area, we continue to view shares as slightly overvalued.

First-quarter revenue grew 12% year over year to $24.5 billion, led by CSG’s 20% year-over-year revenue increase to $13.3 billion. CSG continues to heavily benefit from high demand for computers to enable remote learning and work. CSG’s consumer business contributed significantly to the group’s success, up 42% year over year, capitalizing on ecommerce and digital entertainment accelerations. ISG revenue grew 5% year over year to $7.9 billion as demand for hybrid cloud solutions continues to increase. ISG’s growth was led by server’s revenue, up 9% year over year. VMware revenue increased 9% annually to $3 billion.

Guidance for the second quarter includes sequential revenue growth that is expected to be less than the historical 6% increase and a low- to mid-single-digit sequential decline in adjusted operating income as costs return after pandemic-related savings.

Dell continues to place emphasis on deleveraging its balance sheet, committing to a target of at least $16 billion in debt reduction for the full year. Management remains confident that the completion of VMware’s spin-off in the fourth quarter will help the company achieve an investment grade rating.

Dell Technologies Company Profile

Dell Technologies, born from Dell’s 2016 acquisition of EMC, is a leading provider of servers and storage products through its ISG segment; PCs, monitors, and peripherals via its CSG division; and virtualization software through VMware. Its brands include Dell, Dell EMC, VMware (expected to be spun off toward the end of 2021), Boomi (expected to be sold by the end of 2021), Secure works, and Virtustream. The company focuses on supplementing its traditional mainstream servers and PCs with hardware and software products for hybrid-cloud environments. The Texas-based company employs around 158,000 people and sells globally.

Source: Morningstar

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Dividend Stocks

Coach’s Enduring Popularity Provides Stability as Tapestry Establishes Its Acceleration Program

Due to the pandemic, all three of Tapestry’s brands suffered sales and operating profit declines in fiscal 2020, but its results are improving rapidly in fiscal 2021 as it implements its three-year Acceleration Program strategy to cut costs and improve margins.

Coach shares many of the qualities of other luxury brands per the Morningstar Luxury Brand Power Framework and, therefore, has the brand strength and pricing power to continue to provide a narrow moat for Tapestry. Coach struggled with excessive distribution and competition in the past, but we think Tapestry has turned it around through store closures, restrictions on discounting, and increased e-commerce, which has grown by triple-digit percentages during the pandemic. Further, we expect growth in complementary categories like footwear and fashion. We anticipate China to be a key growth region for Coach as, according to Bain & Company, Chinese consumers will compose 46% of the worldwide luxury goods spending in 2025, up from 35% in 2019. We forecast Coach’s greater China sales will increase to nearly $1.2 billion in fiscal 2030 (21% of sales) from $601 million in fiscal 2020 (17% of sales).

We do not believe the acquisitions of Kate Spade and Stuart Weitzman contribute to Tapestry’s moat. Spade was a natural fit for Coach as both generate most of their sales from Asia-sourced handbags. However, Spade merchandise is priced lower than Coach and lacks its international reach. Still, we think Spade can grow in both North America and Asia through store openings and new products, such as shoes (currently licensed). Tapestry has a stated goal of $2 billion in Spade revenue, which we forecast will not be achieved until fiscal 2030. As for Stuart Weitzman, while its women’s shoes achieve luxury price points, we view it as a niche brand (less than $300 million in fiscal 2020 sales) with fashion risk. Stuart Weitzman is struggling so much that Tapestry recently wrote off all the goodwill and intangibles related to its purchase and is downsizing its store base.

Real Value and Profit Maximisers

We are raising our per share fair value estimate on Tapestry to $43.50 from $40.50, which implies a fiscal 2022 P/E of 13 and an EV/EBITDA of 8. The COVID-19 pandemic forced the temporary closure of Tapestry’s stores and continues to affect consumer spending on accessories and apparel in some regions. However, Tapestry’s third quarter of fiscal 2021 was better than expected as e-commerce and strong sales in mainland China (up more than 40% as compared with two years earlier) partially offset store disruptions. Given this momentum, we have raised our fiscal 2021 sales growth and adjusted operating margin expectations to 14.7% and 19.0%, respectively, from 9.8% and 17.8%.

We now forecast adjusted EPS of $2.94, up from $2.64 previously. For fiscal 2022, we estimate EPS of $3.23 (up from our prior estimate of $2.80) on 7% sales growth.

Tapestry has started its three-year Acceleration Program to boost sales and profits. This program, which includes store closures and cost cuts, could reduce sales of Kate Spade and Stuart Weitzman in the short term. We project sales growth rates of 20% and 4.1% for Coach and Kate Spade, respectively, in fiscal 2021, but a decline of 7% on permanent store closures for Stuart Weitzman in Europe and Asia (excluding China).

We forecast selling, general, and administrative expenses as a percentage of sales for Tapestry of around 51% in the long term. While we expect the firm will achieve some expense savings under the Acceleration Program, we also think it will invest in advertising and other selling expenses to support each of its brands. As sales shift rapidly to digital channels, we expect only moderate increases in individual brand store bases over the next decade. We anticipate little or no store growth in North America, but some expansion in China and other international territories. At the end of fiscal 2030, we forecast Tapestry will operate 959 Coach stores (958 at fiscal 2020), 561 Spade stores (420 at fiscal 2020), and 173 Weitzman stores (131 at fiscal 2020). We have raised our long-term tax rate to 19.0% from 16.5% in anticipation of a possible increase in the U.S. corporate tax rate.

Tapestry Inc’s Company Profile

Coach, Kate Spade, and Stuart Weitzman are the fashion and accessory brands that comprise Tapestry. The firm’s products are sold through about 1,500 company-operated stores, wholesale channels, and e-commerce in North America (62% of fiscal 2020 sales), Europe, Asia (32% of fiscal 2020 sales), and elsewhere. Coach (71% of fiscal 2020 sales) is best known for affordable luxury leather products. Kate Spade (23% of fiscal 2020 sales) is known for colourful patterns and graphics. Women’s handbags and accessories produced 68% of Tapestry’s sales in fiscal 2020. Stuart Weitzman, Tapestry’s smallest brand, generates nearly all (98%) of its revenue from women’s footwear.

Source: Morningstar

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Dividend Stocks Shares

ViacomCBS Poised to Capitalize with Paramount+; International Streaming Expansion Key to Growth

The flagship service offers not only a strong on-demand library from the firm’s deep library but also access to CBS and its wealth of sports rights including the NFL and March Madness which helped to drive streaming growth over the first four months of 2021. With the recent renewal of the Sunday afternoon NFL rights, ViacomCBS now controls two of its most important sports rights into the next decade.

Like its larger peers, Netflix and Disney+, we expect that Paramount+ and Pluto will both benefit from international expansion. While the rebranded flagship service launched in 23 international markets in March including 18 in Latin America, the service has yet to launch in most of Europe, the largest non-U.S. market for Netflix, or India, the biggest international market for Disney+. Given the opportunity internationally and the relatively low guidance of 65-75 million subscribers by 2024, we think it’s likely that management raises the guidance in the next two years similar to the increase that Disney management made in December 2020.

In order to support the streaming growth, we project that ViacomCBS will continue to invest in content creation for the linear networks, theatrical slate, and the streaming platforms. Additionally, we expect that the firm will likely exceed its minimal target of $5 billion in streaming content spending as it ramps local language content to better compete with Disney+ and Netflix around the world. This spending will not help to drive subscription revenue but also ad revenue for both the lower-priced ad-supported tier and Pluto.

ViacomCBS Inc’s Company Profile

ViacomCBS is the recombination of CBS and Viacom that has created a media conglomerate operating around the world. CBS’ television assets include the CBS television network, 28 local TV stations, and 50% of CW, a joint venture between CBS and Time Warner. The company also owns Showtime and Simon & Schuster. Viacom owns several leading cable network properties, including Nickelodeon, MTV, BET, Comedy Central, VH1, CMT, and Paramount. Viacom has also built several online properties on the strength of these brands. Viacom’s Paramount Pictures produces original motion pictures and owns a library of 2,500 films, including the Mission: Impossible and Transformers series.

Source: Morningstar

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Technology Stocks

Narrow-Moat Splunk Continues to See Cloud-Transition Linked Uncertainty; Lowering FVE to $164

As a result, we are lowering our fair value estimate for Splunk to $164 from $212, but continue to view shares as undervalued at the moment. In spite of increased uncertainty, the cloud transition continues at a solid pace, with over 50% of software bookings coming from the cloud. We expect sustained cloud penetration, a growing robust product suite, and strong execution to lead to healthy long-term growth.

First-quarter revenue increased 16% year over year to $502 million. After several quarters of declines in the top line as a result of the cloud transition, accelerated adoption of Splunk’s robust product suite, as well as growing cloud traction have resulted in revenue growth once again. As cloud revenue is recognized ratably over time rather than up-front (as with term licenses), Splunk has been facing top line pressure for some time. This has been compounded by falling contract durations as a result of macroeconomic uncertainty and growing cloud demand. However, as we predicted, Splunk is now exhibiting growth in the latter part of the transition, and we expect this to persist in the future. First-quarter cloud revenue grew 73% year over year to $194 million, with cloud annual recurring revenue, or ARR, up 83% over the same period. This contributed to a 39% increase in total ARR. Even though management has withdrawn some long-term targets, healthy growth in cloud adoption has Splunk still on track to wrap up the cloud transition sooner than previously expected.

During the quarter, Splunk acquired TruSTAR, a cloud-based security threat detection and response solution. We believe this should augment Splunk’s security solutions by incorporating additional solutions into its already robust security product set and augmenting demand for the security buying center. The firm also rolled out the Splunk Observability Cloud, enabling businesses to use a unified platform to address a wide range of observability use cases. In addition, Splunk announced the appointment of Teresa Carlson in the position of President and Chief Growth Officer. In terms of guidance for the second quarter of fiscal 2022, management expects revenue between $550 million and $570 million, up approximately 14% at the midpoint. NonGAAP operating margins are expected to be negative 25%, reflective of the cloud transition and greater investments into the firm’s platform. While management did not provide full-year guidance, we expect the firm to successfully complete its shift towards the cloud and support healthy top-line growth in the future.

Splunk Inc’s Company Profile

Splunk provides software for machine log analysis. Its flagship solution, Splunk Enterprise, is employed across a multitude of use cases, including application management, IT operations, and security. The company has historically deployed its solutions on-premises, but the software-as-a-service delivery model is growing in popularity with Splunk Cloud.

The company derives revenue from software licenses, as well as cloud subscriptions, maintenance, and support.

Source: Morningstar

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Technology Stocks

Guidewire’s Cloud Is Gaining Steam; Initial Fiscal 2022 Outlook Is Constructive; Maintain $116 FVE

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Overall, the firm saw 12 go-lives on 30 different products, with cloud momentum continuing. We continue to believe Guidewire turned the corner in terms of product development, customer references, and new deal activity beginning in the January quarter. We also get the sense the services business is once again on a smooth track. Management also provided a preliminary outlook for fiscal 2022 that was perhaps a little light on total revenues, which is likely due to conservatism and is fairly consistent with our model. We expect Guidewire will be the primary winner as the P&C insurance industry continues to modernize. We are maintaining our fair value estimate of $116 per share and see shares as increasingly attractive as the software group has sold off thus far in 2021.

Third-quarter revenue declined 2% year over year to $164 million, compared with the high end of guidance of $159 million and FactSet consensus of $158 million. Compared with our model, subscription and support was well ahead, while services were slightly ahead, and license lagged. Data and analytics remain strong. ARR grew 11% year over year to $538 million in the quarter, which is consistent with the firm’s full-year ARR growth outlook.

Based mainly on a better outlook for subscriptions and services, Guidewire raised its full-year guidance to $735 million and $17 million at the midpoints for revenue and non-GAAP operating profit, respectively, from $729 million and $6 million. We continue to see guidance as conservative, especially for operating profit and particularly given upside this quarter, and we note that our model is just under the high end of guidance.

Management also provided some preliminary guidance for fiscal 2022. Key points here include total revenue growth of 3% to 5%, non-GAAP operating margin expansion, and ARR growth of 12% to 14% from the midpoint of the fiscal 2021 outlook. We view this outlook as a conservative preview for next year that is largely consistent with our model–although we did lower our revenue growth outlook by approximately 150 basis points.

Non-GAAP operating margin was negative 9.9% in the quarter, compared with 3.4% last year, which was significantly better than the negative 17.2% at the midpoint of guidance. Higher revenue and a slower-than-anticipated pace of hiring drove overall margin upside. Despite better than-anticipated margins, the ongoing shift to cloud deals continues to pressure margins year over year. Ultimately, we see nothing within results that impact our long-term operating margin outlook and expect steady improvement over time. Granted, we still see continued margin pressure over the next several quarters due to the model transition.

Guidewire Software Inc’s Company Profile

Guidewire Software provides software solutions for property and casualty insurers. Flagship product InsuranceSuite is an on-premises system of record and comprises ClaimCenter, a claims management system; Policy Center, a policy management system including policy definitions, quotas, issuance, maintenance, and renewal; and Billing enter, for billing management, payment plans, and agent commissions. The company also offers insurance Now, a cloud-based offering, as well as a variety of other add-on applications.

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.