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Dividend Stocks Shares Technical Picks

Domino’s Pizza Enterprises- Outlook

The stock suits investors seeking exposure to the food and beverage sector. Australia can still increase its store base by around 40% over the next decade. European growth is much more substantial, with potential to substantially increase the existing store base to around 2,850 outlets during the next decade. In its capacity as a master franchisee, Domino’s capital requirements are limited, which means that royalty payments should continue to be paid as dividends.

Key Considerations

  • Domino’s was an early adopter of digital. By migrating orders online, the company has been able to save costs, establish a customer database, and up-sell to customers.
  • Japan and Europe are underpenetrated markets. Replicating its success in Australia abroad presents a significant growth opportunity.
  • Short-term drivers can materially affect year-to-year earnings, including currency movements, raw material input costs, and changes to foreign government policies related to sales taxes and wages.
  • Domino’s is a highly visible brand based on a successful U.S. business model. Across Domino’s three regions, sales have increase at a CAGR of 14% over the past four years. We expect annual growth rates to continue in the low teens over the next five years.
  • The pizza market in Europe is highly fragmented, presenting significant opportunity for Domino’s to take market share with an attractive value proposition, increased convenience to the customer, and a differentiated product offering.
  • The company’s large network size has positive implications for discounted supplier arrangements.
  • There is a high level of competition, stemming from independent pizza stores and other quick-service restaurants.
  • The company might evaluate its target markets in new countries incorrectly, given the geographical distance and cultural variances.
  • The low-price business model may still be affected by slowing retail and discretionary spending.

 (Source: Morningstar)

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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

Costa Group Holdings – Expansion to Drive Costa’s Earnings Growth

The Australian fresh produce industry enjoys some protection from imports, with strict biosecurity restrictions and Australia’s relative geographic isolation. But the local market is highly fragmented, and competing product lines are largely commoditised. Further, Costa’s concentrated customer base prevents the establishment of an economic moat because the balance of bargaining power lies with its powerful customers, notably the dominant supermarket chains.

Key Investment Considerations

  • Costa Group’s earnings are highly exposed to the major Australian supermarkets, which constitutes around 70% of produce revenue.
  • Fluctuations in weather and climate can lead to volatility in pricing and yield.
  • International berry expansion to China is running according to Costa’s original five-year plan and appears set for significant growth.
  • Costa’s strong market share in key categories mitigates its high customer concentration risk.
  • International berry expansion to China is running according to Costa’s original five-year plan, and appears set for significant growth.
  • Costa is well-positioned to capitalise on high growth in emergent product categories, such as blackberries.
  • Costa Group’s earnings are highly exposed to the major Australian supermarkets, which constitute the majority of revenue.
  • Severe weather conditions can lead to undesirable volatility in both pricing and yield.
  • Access to water is also imperative to Costa’s business, and restrictions or termination of water rights due to events such as drought would adversely affect Costa’s ability to maintain its crops.

 (Source: Morningstar)

Disclaimer

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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Property

Dexus- Solid Balance Sheet

The majority is in the Sydney CBD or fringe (54% by book value), as well as substantial CBD exposure in Melbourne (18%) and Brisbane (13%), and minor other holdings around Australia. The group has a sizable industrial property portfolio (14% of income), and small retail and healthcare property interests. Funds management and property management accounts for about 8% of income, with funds management the group’s fastest growth engine. The group targets a gearing of 30 40%, so financial risk is moderate considering that revenue is underpinned by long leases with fixed or CPI uplifts. Its funds management business is sticky given lock-ups and switching costs (exit penalties, and tax/transaction costs).

Key Investments

  • Rental income is underpinned by high-quality assets, relatively long leases, and fixed or CPI-linked escalations. Developments and the funds-management platform can add to growth.
  • Very low government bond yields increase the relative attractiveness of Dexus’ yield, but the share price would likely retrace sharply to any unexpected jump in bond yields, or further negative earnings surprises.
  • Office supply is increasing and Dexus has material lease expiries in fiscal 2021 and 2022 (especially in Melbourne, 25% in fiscal 2021). The group will likely offer substantial lease incentives to attract tenants.
  • Dexus owns a high-grade office property portfolio and a solid industrial portfolio, and it will likely benefit from an ongoing demand for quality property from the likes of pension funds, sovereign wealth funds and other offshore investors.
  • Population growth boosts the value of Dexus’ assets with high-quality sites achieving more rent bargaining power, and some low quality sites potentially switching to higher value uses. OLower interest rates could weigh on capitalisation rates, offsetting pressure on rent collections.
  • Capitalisation rates are historically low and likely to rise. Even if government bond yields remain low compared with history, property is not a risk-free asset and should be priced with appropriate risk premiums. OProperty may be considered a bond proxy, but it is not a bond. The poor performance of retail property is a reminder that property can be disrupted by technology, as is now occuring with the work-from-home trend undermining office rents.
  • Office and industrial property have benefited from several years of tight supply and rents have increased dramatically. COVID-19 is likely to cause that to unwind.

 (Source: Morningstar)

Disclaimer

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

Facebook merits a wide moat rating based on network effects

Facebook is the largest social network in the world, attracting more than 2.5 billion monthly active users. Mogharabi believes that the growth in users and user engagement, along with the valuable data that they generate, makes Facebook attractive to advertisers over both the short and long term. Mogharabi also highlights Facebook’s continued innovation that helps the business increase its user base and engagement. This innovation has taken the shape of additional features and apps to keep users engaged within the Facebook ecosystem. With more Facebook user interaction among friends and family members, sharing of videos and pictures, and the continuing expansion of the social graph, we believe the firm compiles more data, which Facebook and its advertising clients then use to launch online advertising campaigns targeting specific users.

Mogharabi also sees further economic tailwinds for the company as it is expected to benefit from an increased allocation of marketing and advertising dollars toward online advertising—more specifically to social network and video ads where Facebook is especially well positioned. The firm is also taking more steps to monetize its app portfolio while utilizing AI and virtual and augmented reality to drive further user engagement. This overall strength is driven by an ever-expanding social graph that helps the firm compile more data, which is used by Facebook and its advertising clients to launch targeted online advertising campaigns.

We believe Facebook merits a wide moat rating based on network effects around its massive user base and intangible assets consisting of a vast collection of data that users have shared on its various sites and apps. Facebook is a textbook example of how network effects can form an economic moat. It is worth noting that all the firm’s applications become more valuable to its users as people both join the networks and use these services. These network effects serve to both create barriers to success for new social network upstarts (as demonstrated by the firm’s success against Snap) as well as barriers to exit for existing users who might leave behind friends, contacts, pictures, memories, and more by departing to alternative platforms.

Mogharabi highlights the firm’s intangible assets as an economic moat source. These intangible assets are related to how much information the company has about its user base. Unlike any other online platform in the world, Facebook has accumulated data about everyone with a Facebook and/or an Instagram account. Facebook has its users’ demographic information. It knows what and who they like and dislike. It knows what topics and/or news events are of interest to them. With access to such data, Facebook is able to enhance the social network by offering even more relevant content to its users. This virtuous cycle further increases the value of its data asset, which only Facebook and its advertising partners can monetize.

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

Sony put an effort in building an ecosystem within its PlayStation business

With name recognition across the globe, a market cap above $130 billion, and a history of profitability, we understand how some readers may be surprised at our no-moat rating of the company. However, at the same time, we must observe the competitive landscape in which the company operates. Ito asserts that Sony does not have an economic moat as a large percentage of its products have very low switching costs, even though we identify economic moats in some parts of its business. In particular, we believe that consumer electronic products (25% of revenue) will be exposed to fierce competition with Asian manufacturers.

With many products in this part of the business being commoditized, and a replacement cycle of digital appliances being three to six years, it is generally difficult for consumer electronic companies to build up an economic moat that generates sustainable excess returns on capital.

At the same time, however, Ito positively evaluates Sony’s efforts in building an ecosystem within its PlayStation business. While PlayStation 4 accumulated shipments reached approximately 97 million units by the end of fiscal 2019, the number of PS Plus users exceeded 36 million. This not only gives Sony solid cash flows with which to improve the profitability of its gaming segment but also provides a hook for customers, leading them to again purchase a PlayStation console in the next generation.

Ito also notes strength in Sony’s sensor business that focuses on improving picture quality. As a result, Sony has increased its market share, owing to growing demand from handsets. This strength can be quantitatively illustrated in Sony’s dominance in the global market share for image sensors. Sony’s global market share in this space is estimated to be in excess of 50% with the second-largest player, Samsung, holding 18% of the global market share. Security and automotive (autonomous driving) fields are the next growth drivers for Sony’s image sensor business. A critical factor for both fields is high sensitivity under various difficult conditions, and so we believe Sony could leverage its strength to expand this business in the near term.

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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Commodities Trading Ideas & Charts

Cabot is the only natural gas producer to earn a narrow moat rating

Meats believes that the firm’s assets are ideally located in the northeast portion of the play fairway, which mainly yields dry gas with very little oil condensate or natural gas liquids content in the production stream. This geographic advantage not only allows the firm to keep costs low but also maintain very high daily production rates. These advantages have enabled the firm to be among the lowest-cost natural gas producers in the Appalachia region, and this competitive advantage enables it to consistently deliver very strong returns on invested capital. Meats do advise caution, however. The company has drilling opportunities in the Lower and Upper Marcellus. The opportunities in the Lower Marcellus are far more lucrative but are expected to last until the late 2020s. This means that the firm will eventually pivot to opportunities in the Upper Marcellus that are typically up to 30% less productive. Meats asserts that when the firm does pivot to the Upper Marcellus, it will be able to reuse existing roads and pad sites, and as there are no well configuration constraints in this undeveloped interval, it could enhance returns by drilling longer laterals. As a result, we expect well costs to decrease enough to offset the dip in flow rates, leaving potential returns unchanged.

Cabot is the only natural gas producer to earn a narrow moat rating. The main reason for this rating is the firm’s low operating and development costs in the Marcellus Shale, which puts Cabot at the lower end of the U.S. natural gas cost curve.

ESG is an important factor to consider when looking at exploration and production companies. This is due to the downside risk ESG factors possess for such companies due to reputational and regulatory risks. Meats does not think that these issues threaten the company’s economic moat due to the 5%-10% spread between projected returns and Cabot’s cost of capital that provides a comfortable margin of safety. The most significant ESG exposure for Cabot is greenhouse gas emissions. While greenhouse gas emissions are unavoidable for oil and natural gas producers, Cabot has taken steps to reduce greenhouse gas emissions intensity in 2020 while also reporting zero flaring in the year. It is also worth noting that while consumers get more skeptical of fossil fuels, much of this aversion is directed toward coal. Natural gas, on the other hand, is less carbon-intense than coal but does not have the intermittency issues that plague wind and solar generators.

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

Sompo Holdings nursing-care business expansion

Laptop with chart on its display at workplace of economist

• Medium-term growth could surprise the market to the upside if the integration of Sompo International continues smoothly.

• Sompo’s nursing-care business, while only a minor contributor to overall earnings at present, could provide a competitive advantage if it can be integrated with insurance products or if leveraging real-time data can allow it to generate new revenue sources.

Bears Say

• Sompo’s ambitious overseas expansion plans raise the risk of its overpaying for future mergers and acquisitions or acquiring targets that are difficult for it to manage.

• Because it is slightly smaller in domestic scale than Tokio Marine and MS&AD, this could be a cost disadvantage in the long term.

• Sompo’s historical connection to Nissan offers less advantage in developing future auto insurance products than competitors’ automaker ties, such as MS&AD’s connection to Toyota.

Company Profile

SOMPO Holdings, Inc. is a Japanese insurance holdings company. It is listed on the Nikkei 225. The firm is considered one of three top insurers in Japan. Sompo Holdings, Inc. provides property and casualty (P&C) insurance, life insurance, and nursing and health care services in Japan and internationally. It underwrites various P&C insurance products, including automobile and fire, as well as offers security, risk management, assistance, and warranty services; and life insurance products. The company also provides nursing care and healthcare services; and customer security, health, and wellbeing support services. In addition, it offers asset management services; home remodeling services; health support services comprising health guidance and health counseling, and employee assistance programs; and wellness communications services. The company was formerly known as Sompo Japan Nipponkoa Holdings, Inc. and changed its name to Sompo Holdings, Inc. in October 2016. Sompo Holdings, Inc. was founded in 2010 and is headquartered in Tokyo, Japan.

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

Takeda Pharmaceutical top-selling drug Entyvio has strong growth quarter

• Biologic therapy Entyvio is one of the best drugs for treating IBD and will likely see improved sales once a subcutaneous injection is approved.

• Takeda’s pipeline has many interesting early-stage pipeline candidates, some with first-in-class or best-inclass potential, and we could see a boost in sentiment if early data readouts are positive, especially around its orexin program for narcolepsy.

Bears Say

• Takeda’s pipeline is mostly early stage, and success or failure of clinical trials will be critical in determining the market’s perception of the company.

• Takeda’s top-selling drug Entyvio has strong growth, but loss of exclusivity is expected to start in 2024 (for the U.S. and the EU).

• Other important drugs facing loss of exclusivity events within the next few years include Vyvanse, Dexilant, and Velcade.

Company profile

Takeda Pharmaceutical Company Limited engages in the research, development, manufacturing, and marketing of pharmaceutical products, over-the-counter medicines and quasi-drug consumer products, and other healthcare products. It offers pharmaceutical products in the areas of gastroenterology; oncology; neuroscience; and rare diseases, such as rare metabolic and hematology, and heredity angioedema, as well as plasma-derived therapies and vaccines. 

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

BMW: Attractively Valued Stock with a Narrow Economic Moa

× We think the market has priced BMW as though industry-disruptive technology spending will permanently leave margins at cycle lows, a view we do not share owing to the company’s narrow-moat driven by premium brands across the entire product portfolio.

× Our Stage I base case assumes 1% annualized industrial revenue growth versus 6% 10-year historical and average industrial EBIT margin of 6.4% versus the 10-year high, low, and median of 11.6% (2011), negative 0.5% (2009), and 9.0%. We assume a normalized sustainable midcycle of 7.5%.

× The company continues to guide to a long-term 8% to 10% industrial EBIT margin range with 6% to 8% for 2019, excluding a charge for the European Commission’s finding that German automakers colluded on diesel equipment (4.5% to 6.5% including the charge).

× To force our model to generate a fair value equal to the sell-side consensus and the current market valuation, we would have to believe normalized sustainable midcycle margins of 2.1% and 1.5%, respectively.

× Despite the headwinds already baked into our model, our fair value represents upside potential to the sell-side consensus price target and current market valuation of 63% and 76%, respectively.

Bayerische Motoren Werke AG, together with its subsidiaries, develops, manufactures, and sells automobiles and motorcycles, and spare parts and accessories worldwide. It operates through Automotive, Motorcycles, and Financial Services segments. The Automotive segment develops, manufactures, assembles, and sells automobiles and off-road vehicles under the BMW, MINI, and Rolls-Royce brands; and spare parts and accessories, as well as offers mobility services. This segment sells its products through independent and authorized dealerships. The Motorcycles segment develops, manufactures, assembles, and sells motorcycles under the BMW Motorrad brand, as well as spare parts and accessories.

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

ResMed Inc ltd – Long-Run Strategy

We forecast the company to gain share in the USD 5 billion sleep apnea treatment market as reimbursement becomes increasingly linked to evidence of patient compliance. We expect to see both commercial and national health insurance payers get on the connected device bandwagon, which benefits the duopoly of ResMed and Philips greatly.ResMed’s recent acquisitions of software services platforms for home healthcare practitioners is a new strategic direction and the company has already pieced together approximately 20% share in this USD 1.5 billion market.

Key Investment Considerations

  • ResMed has a strong position in the structurally growing sleep apnea market, where volume growth has been more than sufficient to offset the price deflation headwind.
  • Cash flow is robust with 100% of earnings represented by free cash flow over the preceding five years, a trend we forecast to continue.
  • Risks remain around tax issues as ResMed has been subject to large tax charges in both the U.S. and Australia in the last two years. We are concerned about the reflection on corporate culture and the potential USD 300 million-plus in taxes and penalties payable.
  • ResMed is taking a “smart devices” and “big data” approach to further entrench itself as one of the two leading players in the global sleep apnea market. The strategy is two-fold – accelerating diagnosis of the underpenetrated market and monitoring patient compliance which keeps diagnosed patients in the treatment net and payers happier to reimburse the cost of respiratory devices.
  • The global sleep apnea market is only 20%-30% penetrated and respiratory device companies are making headway growing volumes around 10% per year, offset by average price deflation of 2%-3%. It is dominated by ResMed and Philips, which together make up an estimated 80% of the USD 5 billion value. ResMed plays a key role in driving diagnosis with its at-home sleep testing devices and ongoing education drive to create awareness of the disease.
  • ResMed has demonstrated a robust top line despite experiencing pricing pressure, and this together with the low financial leverage, leads us to use a below-average cost of equity of 7.5%. This results in a company weighted average cost of capital estimate of 7.4%.
  • The ResMed initiatives to improve sleep apnea diagnosis could result in an acceleration of revenue growth over the next five years. With the sleep apnea market an estimated 50% diagnosed in the U.S. and less in other major markets, the runway for growth is long.
  • Pricing risk for durable medical supplies has played out and pressure could ease going forward resulting in faster top-line growth and expanding margins.
  • The strategic focus on data to support product purchases positions ResMed well to demonstrate the value of its products to the healthcare system.
  • The tax issues that came to light in 2018 could suggest a corporate culture that allows questionable practices in other areas like selling, which is regulated in the U.S.
  • Future cash flows need to fund the total potential historical tax liabilities of USD 300 million over the upcoming years.
  • ResMed is unproven as a software provider, an area it is currently directing a lot of capital to.

 (Source: Morningstar)

Disclaimer

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.