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Global stocks

Improving EBITDA Growth Set to Persist at Royal Caribbean With Full Fleet Deployed

Business Strategy & Outlook

Travel constraints and coronavirus hesitancy are receding, so consumer behavior about travel and social distancing have returned to normal for Royal Caribbean, leading to positive operating cash flow and EBITDA at the business. The redeployment of the fleet is complete, and cruise operators have successfully implemented health protocols to ensure the safety of the cruising population (as evidenced by a lower positivity rate than on land). With virus restrictions largely in the rearview mirror, Royal Caribbean should see modest pricing gains as it digests bookings paid for with future cruise credits and takes new reservations. On the cost side, some health protocols and cruise resumption costs could remain high in near-term spending, but should pare back in 2023, aiding profitability. These factors should lead to average returns on invested capital, including goodwill, that are set to languish below the weighted average cost of capital estimate (9.5%) through 2025, supporting no-moat rating. 

While Royal Caribbean has carved out a compelling position in cruising thanks to its contemporary product, it still has to compete with other land-based vacations and discretionary spending for share of wallet. This could intermittently jeopardize top-line growth during transitory periods of land- and sea-based holiday discounting. Royal Caribbean reduced operating expenses and capital expenditures as a result of COVID-19. It also accessed significant liquidity, most recently raising $1 billion in debt in January 2022, to secure its ability to service debt coming due. With $4.2 billion in customer deposits as of June 30, modest liquidity risk exists, as more than $5 billion in debt maturities due in 2023 will force the company to actively seek refinancing. While Royal Caribbean is set to return to positive EPS in the third quarter of 2022, one doesn’t believe either yields or passenger counts will revisit 2019 levels until at least 2023. This should allow Royal Caribbean to generate positive EPS consistently in 2023 and beyond.

Financial Strengths

Royal Caribbean has taken numerous steps to ensure financial flexibility despite headwinds stemming from COVID-19. In March 2020, Royal Caribbean noted it was taking actions to reduce operating expenses and capital expenditures by the tune of $1.7 billion to improve liquidity. Additionally, since the beginning of the pandemic, the firm secured around $17 billion in liquidity through various debt and equity issuances. Furthermore, as of June 30, more than $4.2 billion in customer deposits were still available for use, a decreasing portion of which should represent shift and lift fares as consumers redeem their future cruise credits. Royal Caribbean has been able to amend the majority of its export-credit backed loan facilities to incorporate an extension of debt payments and a waiver of covenant compliance, helping to moderate cash demands, although payments are slated to pick up again in 2023. On the operating expense side, at the start of the pandemic Royal Caribbean’s executives took a pay cut and Royal Caribbean laid off or furloughed more than 25% of its 5,000 shoreside employees. Such efforts helped preserve capital during that difficult time, but have now fully reversed as the industry has redeployed the fleet. The surmise costs per diem will return back to 2019 levels in 2023. The company should be back to consistently positive cash generation in 2023, as restaffing and redeploying efforts are largely complete (which had been a key expense in the $300 million-plus monthly cash burn during the ramp up). With the cash on hand, the Royal Caribbean should have no near-term going concern issues, thanks to 100% of its capacity back on the seas in the summer of 2022, with full occupancy by year-end.

Bulls Say

  • If COVID-19 regulations continue to pare back quickly, yields could rise faster than expected as demand rises. 
  • The normalization of fuel prices could help benefit the cost structure, thanks to Royal Caribbean’s floating energy prices (with only about 50% of fuel costs historically hedged). 
  • The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators previously had capacity for nearly 4 million passengers at the beginning of 2020, which provides an opportunity for long-term growth with a new consumer when cruising resumes in the region.

Company Description

Royal Caribbean is the world’s second-largest cruise company, operating 64 ships across five global and partner brands in the cruise vacation industry, with 10 more ships on order. Brands the company operates include Royal Caribbean International, Celebrity Cruises, and Silversea. The company also has a 50% investment in a joint venture that operates TUI Cruises and Hapag-Lloyd Cruises, allowing it to compete on the basis of innovation, quality of ships and service, variety of itineraries, choice of destinations, and price. The company completed the divestiture of its Azamara brand in the first quarter of 2021.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

HSBC Q2 Results Solid; Interim Dividend Reinstated in 2023

Business Strategy & Outlook:    

HSBC’s strengths are its positions in the U.K. and Hong Kong banking systems. As China, Hong Kong, and Singapore are important pools of wealth and growing trade corridors, the bank’s pivot toward Asia, which makes up about 75% of pretax profit, makes strategic sense. The focus is on deepening relationships with customers across its existing geographies, and leverage the bank’s international network in bringing in new clients. According to the bank, its banking network addresses 90% of global trade and generates about 40% of the bank’s revenue. The broad geographic nature of its business model results in reduced pretax profit volatility versus peers, as evident during the global financial crisis, but comes with higher capital requirements.

Over the past few years, the bank restructured and exited unprofitable markets and low-returning regions. However, the restructuring was not enough and the bank struggled in global banking and markets, Europe, and the U.S. To address these issues, the bank announced another restructuring plan at the end of 2019. The restructuring is proceeding as planned with USD 104 billion of the risk-weighted assets redeployed or reduced at the end of 2021. A target of USD 120 billion by 2022 is achievable. Close to USD 3.3 billion in cost has been taken out of the business and the completion of the USD 5.5 billion program is expected by 2022. Cost savings is expected to be generated from digitalization, resulting in automation, a decline in headcount from operations and technology, and reduced office footprint. The restructuring plan allows HSBC to focus on its strengths in Asia and the U.K., the Asia region is growing in terms of importance for global trade, increased urbanization, and a growing middle class. The bank’s strengths in Hong Kong position it well to take advantage of growth in the Pearl River Delta, given it is the leading international bank in China. The latter is achieved through the bank’s long operational history and investments in China. As a result, HSBC is well positioned to capture economic growth in asset management, yuan internationalization, and consumer and corporate lending.

Financial Strengths:  

Much attention has been paid to HSBC’s dividend and its ability to return capital. HSBC to be in good financial health. Risk-weighted assets have declined as the bank improved its capital efficiency and redeployment of USD 100 billion in RWA, by 2022, is expected to lift profitability. RWA intensity has already declined to below 30s at the end of 2020 from above 40% in 2014. The common equity Tier 1 ratio was 13.6% at the end of second-quarter 2022. Management expects to maintain the common equity Tier 1 ratio at a range of 14% to 14.5% in the long term. With the coronavirus situation improving, the U.K. regulator is allowing U.K. banks to reinstate its dividends in 2021. HSBC provided an updated dividend policy of 40% to 55% of reported earnings per share applies from 2022, compared with a fixed dividend of USD 0.51 per share previously. A share buyback of USD 2 billion was announced in 2021 and completed in early 2022, and a further USD 1 billion buyback was announced at the end of 2021 to begin in April 2022. The common equity Tier 1 ratio of 13.6% at end of the second quarter is below the bank’s target of 14% to 14.5%, and this may dip below 14% in the third quarter due to the divestment of its French retail business and acquisitions. Profitability to drive a higher common equity Tier 1 ratio from 2023, and expected further capital management initiative in 2023. The bank’s liquidity position is also strong. Customer deposits make up around 60% of group funding, equity at 10%, and the balance from the wholesale debt and trading liabilities. The bank’s liquidity coverage ratio and net stable fund ratio both exceed regulatory requirements.

Bulls Say:

  • HSBC’s exposure to the fastest-growing economies ensures robust demand for its products and services, from deposits and wealth management to international trade finance.
  • The benefits of geographic diversification were highlighted during the financial crisis. Although HSBC took large losses in its North American segment, its other operations picked up the slack, and the bank escaped without reporting a loss.
  • HSBC has been operating in many banking systems for decades, building up a deep well of local knowledge and relationship that is hard to duplicate.

Company Description:

Established in 1865 in Hong Kong, London-based HSBC is one of the largest banks in the world with assets of USD 3 trillion and 40 million customers worldwide. It operates across 64 countries with around 220,000 full time staff. Key regions include Asia, Europe, the Middle East and North Africa, and North America. United Kingdom and Hong Kong are the two largest markets for the bank. The bank offers retail, commercial and institutional banking, global banking and markets, wealth management, and private banking.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Recession-Resistant McDonald’s Offers Attractive Restaurant Exposure Amidst Tough Times

Business Strategy & Outlook:    

As the leader in global food-service sales, McDonald’s is taking adequate steps to adjust to an evolving competitive landscape, leveraging its scale to invest heavily in digital acuity and menu innovation en-route to compelling unit economics. A turbulent couple of quarters amidst a quickly deteriorating macroeconomic environment (and a stubbornly persistent global pandemic), and encouraged by management’s vision for the business, which should enable McDonald’s to maintain its edge. The firm has widely embraced customer centricity and technological prowess since its 2015 turnaround, and while the processes have evolved since then, the firm’s focus on the customer experience has not. Recent initiatives, including the loyalty program launch, a large breast chicken sandwich line, and test-marketing a McPlant burger, attest to a more finely tuned sense of market demands. Though the velocity growth plan laid the groundwork for better products and unit-level performance, that management’s new “Accelerating the Arches” framework better capitalizes on the firm’s cost advantages in marketing and technology investments. The plan focuses on a unified marketing approach, a commitment to the core menu, and an emphasis on the three D’s: delivery, digital, and drive-thru. 

With nearly a third of orders now coming through digital channels, that the pivot is warranted and see long-term upside through labor efficiency, improved order accuracy, and suggestive selling, particularly following a year that saw mid-teens labor cost inflation in the industry. With the notoriously slow-moving restaurant industry forced to make widespread investments in technology in 2020 and 2021, omnichannel ordering capabilities to become a required offering from larger players. McDonald’s mobile application, loyalty program, and recent efforts toward order automation and suggestive selling represent steps in the right direction, with customization, targeted promotions, and increased penetration of the delivery channel offering alluring opportunities to the operators able to get ahead of the curve.

Financial Strengths: 

McDonald’s financial strength as sound, with the firm maintaining an investment-grade credit rating and reasonable leverage relative to its competitive set. Debt/EBITDA clocked just north of 3 turns at year-end 2021 (within the long-term guidance range of 3-3.5 times). Solid free cash flow generation (averaging 42% of revenue through 2024) and high EBIT coverage of interest payments (nearly 8 times for 2022) should be more than sufficient to meet near-term obligations while leaving investment plans and dividends untouched. While they acknowledge differences in financing philosophies with private equity ownership, McDonald’s sports substantially lower leverage than Restaurant Brands International and Yum Brands, two of its largest peers in the QSR space, which operate with around 5-6 times debt/EBITDA. The company’s commitment to maintaining an investment-grade credit rating strikes us as prudent, with corporate strength tending to correspond to more attractive franchisee borrowing rates (and increased unit-level profitability), bolstering the brand intangible asset. Finally, the firm maintains substantial cash flow flexibility, with clearly demarcated priorities of growth capital investment, payment of common stock dividends, and share buybacks. The forecasted total returns to shareholders of $19.9 billion between 2022 and 2024 and recognize that $6.5 billion in modeled share buybacks during that period provides a healthy cushion that could easily be repurposed to meet debt service or pursue attractive investment opportunities. With stability of cash flows driven by an increasingly franchised model and well-matched future minimum rent receipts and debt service payments.

Bulls Say: 

  • With 65% of global stores featuring a drive-thru and more than 80% of stores offering home delivery, McDonald’s is well positioned to take advantage of evolving ordering habits.
  • Technological investments and the ongoing rollout of the firm’s loyalty program leverage McDonald’s scale and could positively drive average check and brand affinity.
  • As the low-cost operator in the space, input cost inflation and consumer pressure offer McDonald’s a chance to gain share in key markets.

Company Description: 

McDonald’s is the largest restaurant owner-operator in the world, with 2021 system sales of $112 billion across more than 40,000 stores and 119 countries. McDonald’s pioneered the franchise model, building its impressive footprint through partnerships with independent restaurant franchisees around the world. The firm earns more than 60% of its revenue from franchise royalty fees and lease payments, with the remainder coming from company-operated stores across its three core segments: the United States, internationally operated markets, and international developmental/licensed markets. McDonald’s owned 55% of the real estate and 80% of the buildings in its franchise system as of the end of 2021, offering it substantial leverage in maintaining quality standards and consistency.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Small Cap

United Malt Should Benefit from Improving Barley Crops and Normalizing Beer Demand

Business Strategy & Outlook:   

United Malt is the fourth-largest global malt producer, with operations in four countries and a diverse range of customers. The business has capacity to process about 1.25 million tons of malt annually, or roughly 5% of the global 23 million tons produced. This capacity primarily serves the U.S. and Canada beer market, with additional facilities in Australia (serving domestic brewing and exports to Asia) and the U.K. (selling to Scotch whisky distillers). The primary use for malt is for brewing beer–more than 90% of demand–and softening beer consumption in the developed world has offset rising intake in emerging markets. However, malt demand has risen at a faster clip over the past several years given the contribution from rising craft beer demand. Craft beers use a greater amount of malt given heavier taste profiles and, in the U.S., the use of adjunct grains such as rice and corn in mainstream light beer recipes. This demand is expected to grow further, albeit at a slower pace given the already high number of craft brewers globally. 

The primary raw material cost for malting companies is barley. While any given year’s cost for malting barley will depend heavily on weather conditions in key global growing areas, the expected average cost of barley will track broader inflation, as supply and demand roughly equal in a typical growing year. The malting industry is relatively concentrated. Commercial maltsters–those independent from brewer ownership–control the vast majority of total industry malting capacity, with the top four controlling nearly half of this portion. Brewers make up the bulk of the remaining one quarter of malting capacity, but have also remained rational. Barring a sizable strategic shift, which appears unlikely, brewers are not forecasted to offer substantial competition to the commercial malt industry. United Malt is one of the major commercial maltsters in each of the four countries in which it operates. It ensures a reliable supply of barley, good relationships with key customers, and the ability to pass through costs in periods of higher barley prices.

Financial Strengths:  

United Malt is in good financial health. The capital structure is straightforward, and interest coverage is sound. Cash conversion (the ratio of net operating cash flows less capital expenditure, interest and tax to EBITDA) has averaged close to 90% over the two years to fiscal 2020, reflecting its stable earnings profile in a mature industry. United Malt’s capital requirements are lower than other GrainCorp divisions, and the targeted dividend payout ratio is manageable, supported by its cash flows. United Malt’s capital structure is customary for an agribusiness of its nature. It is funded by debt and equity, with debt mostly associated with the funding of inventory and plant, property and equipment. Cash flow and working capital requirements can be volatile due to swings in crop prices, hence a working capital facility is also in place for on-demand debt drawdowns. Debt facilities total above AUD 700 million, and are renewed regularly to align with the business’ seasonal requirements. As at Sept. 30, 2021, the company had AUD 312 million in net debt, representing a 2.1 multiple to EBITDA. United Malt aims to maintain a net debt/EBITDA ratio of 2.0 to 2.5 times–unchanged since its original acquisition by GrainCorp in 2009–but the business’ seasonality and associated working capital requirements mean this target may occasionally be exceeded. United Malt has good coverage over its debt. The forecasted net interest cover (EBIT/net interest expense) to improve to about 9 by fiscal 2024 from the COVID-19-affected 3 in fiscal 2022. 

Bulls Say: 

  • Underlying earnings are stable, supported by long- term client contracts and its ability to pass through costs during periods of high barley prices.
  • United Malt benefits from rising craft beer production globally, which requires greater malt volumes and attracts higher prices.
  • Opportunities exist for further penetration into relatively underdeveloped beer markets, such as Asia and Latin America.

Company Description: 

United Malt processes grains into malt, primarily for brewing into beer. The company is the fourth largest global malt processor and works with some of the world’s largest breweries and distillers as well as fast growing craft producers. The business has capacity to process about 1.25 million metric tons of malt annually, primarily housed in the U.S. and Canada, serving the North American beer market, with additional facilities in Australia (serving both domestic brewing and exports to Asia) and the U.K. (selling to Scotch whisky distillers).

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Despite Demand Tailwinds, Primo Water’s Long-Term Returns Should Be Constrained

Business Strategy & Outlook

Formerly known as Cott, Primo has cycled through multiple iterations over the past decade, going from a private-label manufacturer of ambient beverages, or those that can be stored at room temperature, in 2010 to an all-things-water business in 2020. Nevertheless, the current entity combines the heft of Cott’s former water subsidiaries with the legacy Primo business, and as a pure-play water provider, a more robust top-line trajectory and a structurally improved margin profile. Unsurprisingly, Primo’s strategy has radically evolved over the years —it now uses a conventional razor/blade business model, where it seeks to increase penetration of its water-dispensing appliances to facilitate recurring sales of higher-margin water bottles. Ideally, it wants to deliver these bottles directly to customers to avoid the increased costs and competition that go along with retail intermediation. Pre Pandemic sales skewed to the residential side (roughly 60%), but despite an even greater imbalance currently, its base of small and midsize businesses (where it tends to have higher retention) should be important longer term. 

The right tech and service investments are being made, which together with various secular trends (like wellness and deteriorating trust in municipal water) facilitate a nice runway of growth. Acquisitions are also core to management’s strategy. Given the transformational nature of recent activities, the future deals will be confined to tuck-ins. Due to industry fragmentation, the rationale for efforts to increase scale and route density is sound, but continued management discipline is necessary. Primo does not walk a gilded path. It competes in a largely commoditized market, where no brand equity is evident except at the premium end (where Primo has little presence), so one does not see it as moat worthy. Additionally, the coronavirus pandemic has pressured its commercial business. Nevertheless, the firm will be able to navigate and adapt to the evolving landscape.

Financial Strengths

Primo’s financial health looks fair to us, though it leaves a lot to be desired. A torrid pace of M&A since 2014, when it acquired DS Services, has resulted in debt that has been precariously high at times and a credit rating that remains below investment-grade. Nevertheless, the disposition of its soft drink and juice finished-goods bottling business in 2018 allowed for significant deleverage. The adjusted net leverage (on an internally calculated basis) is below 4 times EBITDA today, and with a solid cash flow profile and potential synergies, the management’s goal to reach 2.0-2.5 times by the end of 2024 is ambitious but not unrealistic. Primo’s free cash flow history is muddied by its perpetual merging and divesting, but the most recent transition to a pure-play water company will improve its cash-generating capabilities. Structurally improved margins and relatively modest working capital requirements should be the primary drivers of this performance, and the model free cash flow to the firm averaging around $150 million annually through 2026 (around 6% of sales). The company’s debt profile includes long-dated senior notes and a revolving credit facility, which replaced a long-standing asset-based lending facility in 2020. The primary covenant that management monitors in relation to these obligations is the interest coverage ratio (calculated as adjusted EBITDA divided by interest), which cannot veer below 3 times. Even amid the coronavirus pandemic, the firm remains in compliance with this covenant, and one does not envision a scenario where this is breached. Additionally, there is ample liquidity, as the firm has over $125 million in cash on hand as of December 2021 and over $100 million in unused revolver capacity.

Bulls Say

  • As a pure-play water solutions provider, Primo will more comprehensively benefit from secular growth in the category and more robust margins. 
  • Unparalleled scale in the home and office water delivery market should yield resources that allow Primo to differentiate its services. 
  • With offerings like water refill and exchange currently nonexistent in Europe, there should be ample room for growth in that region.

Company Description

Primo Water is a pure-play water provider that is the product of the March 2020 acquisition of the legacy Primo business by Cott. The firm’s water solutions ecosystem is anchored by an assortment of water dispensers and its water direct business. In the latter, it receives recurring revenue for delivering large-format (3- and 5-gallon) water bottles to residential and commercial customers for use in the dispensers. Supplementary offerings include water exchange, where consumers can exchange or purchase pre filled containers at retail, and water refill, where consumers have access to the network of self-service refill units that Primo manages. Most sales are generated in North America, with the remainder primarily in Europe and Israel.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Turnaround Displayed in Renault First-Half Results, Guidance Raised; FVE Increased to EUR 81

Business Strategy & Outlook

Renault owns 43.7% of Nissan, while Nissan owns roughly 15% of Renault and 34% of Mitsubishi. The alliance is structured as a partnership, with each company operating as an individual entity. Combined, the alliance stands as one of the largest global automakers. The companies benefit from increased scale, purchasing power, and the ability to share vehicle technology and platforms. The group is governed by the alliance board of Renault-Nissan BV, which is 50% jointly owned by Renault and Nissan. Boardroom and management upheaval from the Carlos Ghosn scandal was a huge distraction for the alliance. Renault installed Jean-Dominique Senard (formerly in charge of Michelin) as chairman. The company hired Luca de Meo as CEO (former head of SEAT), who started on July 1, 2020. Renault also owns 67.7% of the parent of Russian automaker AvtoVAZ, which makes Lada, the country’s best-selling brand. However, on March 23, 2022, the company said it may write down its Russian assets, another turnaround setback. In addition, Renault owns 99.4% of Romanian automaker Dacia, and 80.0% of Samsung Motors. Nissan holds a 34% stake in Mitsubishi Motors. 

Renault has organized these companies into an integrated global alliance, sharing purchasing, information services, research and development, production facilities, vehicle platforms, and powertrains. Through its turnaround plan, dubbed “Renaulution” and initiated in 2020, Renault will focus on its geographic market strength and better utilization of alliance cost efficiencies. In the Western European new-car market, Renault has the third-largest share, trailing Volkswagen and Stellantis. To its detriment, Renault has only had limited exposure to China, the world’s largest auto market, but upon the formation of a joint venture with Chinese automaker Dongfeng, local production began in 2017. Nissan has successfully penetrated the China market, annually selling more than 1.0 million units. Renault also has production facilities in Brazil, India, Russia, and Turkey. Through its own operations and through those of its alliance partners, Renault has a solid presence in Eastern Europe, South America, and South Korea.

Financial Strengths

Renault’s automotive business has significant financial leverage, but as per opinion, this is not overly burdensome relative to the company’s substantial cash position. With financial services on an equity basis, total debt/EBITDA has averaged 1.0 times during the period from 2011 to 2021 but was negative 9.7 times at the end of 2020 due to operating losses from COVID-19. The ratio was 3.4 times at the end of 2021. Adding in the impact of operating leases and netting cash against debt, net adjusted debt/EBITDAR during the same period averaged negative 0.2 times, with 2020 coming in at negative 4.2 times, and year-end 2021 at 0.9 times. Before 2008, with financial services on an equity basis, total debt/EBITDA was around 1.5 times. On lower EBITDA and higher outstanding debt in 2008 and 2009, the leverage ratio jumped to 3.6 and 20.6 times, respectively. In early 2009, the company received a EUR 3 billion loan from the French government to reduce refinancing risks associated with accessing credit markets at extremely high interest rates. In 2012, Renault also sold its entire stake in AB Volvo to reduce indebtedness. In response to the coronavirus pandemic, the company announced that it would not pay a dividend in 2020 on 2019’s financial results. Also, the company arranged a EUR 5 billion credit line guaranteed by the French government, on which it drew down EUR 4 billion. At the end of 2020, the undrawn EUR 1 billion was no longer available. Management targets full reimbursement of the French guaranteed loan by the end of 2023. Total liquidity of the automotive group was EUR 17.3 billion at the end of 2021, including a EUR 3.4 billion undrawn credit line and EUR 13.9 billion in cash.

Bulls Say

  • Renault’s alliance with Nissan provides scale and purchasing power that the company would otherwise struggle to achieve on its own. 
  • Renault is the largest manufacturer of light commercial vehicles in Europe, excluding pick-ups, with around a 16% share of the market and a 25% share of the electric LCV market. 
  • The company’s low-cost products, like the Dacia Logan, have benefited from increased demand for value-priced vehicles by cost-conscious consumers.

Company Description

Renault possesses a global alliance of automotive manufacturing, financing, and sales operations. The company’s alliance partners consist of AvtoVAZ (67.7%), Dacia (99.4%), Nissan (43.7%), Renault Samsung Motors (80.0%), and Mitsubishi (Nissan owns 34%). Total 2021 Renault-Nissan-Mitsubishi alliance sales volume of 7.9 million vehicles makes the alliance the third-largest vehicle group in the world, behind Toyota at 10.5 million and Volkswagen at 8.6 million vehicles sold.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Williams Has an Attractive Collection of Gas Projects Over the Next Decade

Business Strategy & Outlook

Williams Companies has shifted its strategy in recent years to focus on organic growth investments that improve the returns and competitive position of its legacy assets. This is a positive for investors, creating a more stable financial profile and more high-return growth opportunities than most of its midstream peers. Clean energy investments could become a material growth area in the next few years, with the recent Orsted partnership a particularly attractive growth engine for its Northwest portfolio. With nearly half of its earnings and cash flow coming from rate-regulated gas pipelines, Williams increasingly looks more like a utility than an energy company. Williams delivered steady performance through turbulent energy markets the last two years, relying on its largely fee-based, long-term contracted revenue and strategically well-positioned assets. The recent acquisition of Sequent looks well timed, as marketing profits have well exceeded expectations in 2022. Most of Williams’ growth will continue to be directed toward its Transco gas pipeline, which runs from the Gulf Coast to the Northeast. Transco links low-cost gas supply in the Gulf Coast and Marcellus shale to high demand for retail use, LNG exports, gas power generation, and increasing industrial gas demand. Specifically, Williams is developing seven bcf/d of projects related to LNG and five bcf/d for power generation and industrial gas opportunities. The Transco capacity will reach 21 bcf/d by 2023 from 10 bcf/d in 2014 and continue to grow as natural gas demand in the eastern U.S. grows. With more than 100 bcf/d in interconnects and regulatory hurdles for competing projects, Transco faces no major competitive threats. Williams’ other businesses are demonstrating their favorable competitive positions with steady results through volatile energy markets. The Northeast gathering and processing business has a captive customer base in low-cost producing regions. The Northwest pipeline benefits from steady demand from utilities and supply from producers in the Western U.S. Williams is growing and improving the competitive position of its other assets through upstream partnerships.

Financial Strengths

Williams has strengthened its balance sheet and dividend coverage in recent years. Leverage has fallen to 3.9 times at the end of 2021 from over 5 times in 2016, and to continued declines over the next few years. Its improved credit profile and long-term, fixed-fee contract structures gives Williams financial flexibility to pursue growth investment opportunities, grow the dividend, keep the balance sheet strong, and execute its $1.5 billion share repurchase plan initiated in September 2021. The Trace Midstream deal for $933 million has consumed Williams’ excess cash and then some in 2022, but buybacks could exceed $400 million annually in 2023 and 2024. Williams can maintain steady dividend growth even through short-term energy market volatility. Williams has raised its dividend to $1.64 in 2021 from $1.20 in 2017 while strengthening its balance sheet. One can expect 3%-4% dividend increases going forward. The 2018 consolidation of Williams Partners and elimination of incentive distribution rights resulted in a shadow dividend cut of about 17% for former Williams Partners unitholders. The flip side was an improved credit profile, higher dividend coverage, and the ability to invest in growth without issuing equity. The long-running legal dispute between Williams and Energy Transfer over Energy Transfer’s alleged breach of its merger agreement appears to be close to an end. After repeated arguments since 2016, Williams won a $410 million settlement plus fees and interest in December 2021. However, the settlement can still be appealed to the Delaware Supreme Court.

Bulls Say

  • A large, well-positioned network allows Williams to invest in high-return growth projects with minimal regulatory hurdles. 
  • After several years of structural and financial moves, Williams is positioned to maintain steady dividend growth for the foreseeable future. 
  • Williams is leveraged to U.S. LNG exports via agreements with LNG terminals as a key supplier of gas.

Company Description

Williams is a midstream energy company that owns and operates the large Transco and Northwest pipeline systems and associated natural gas gathering, processing, and storage assets. In August 2018, the firm acquired the remaining 26% ownership of its limited partner, Williams Partners.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Idex has consistently generated returns on invested capital in the upper midteens

Business Strategy and Outlook 

Idex owns a collection of moaty businesses that tend to be leaders in their respective niche end markets, typically holding the number-one or -two market share. It manufactures a wide array of products, ranging from equipment used in DNA sequencing to wastewater pumps to Jaws of Life hydraulic rescue tools. Idex’s lean manufacturing process allows it to effectively operate in a high-mix and low-volume environment, offering customers a wide variety of highly engineered products that are configurable or customizable. Furthermore, a common theme across its businesses is that they specialize in making mission-critical equipment that performs a vital function but typically constitute a small part of the customer’s total bill of materials. This aspect of the business contributes to Idex’s narrow moat through customer switching costs and allows the firm to command premium pricing. In the long run, Idex can be viewed as a GDP-plus business. Organic sales growth will continue to outpace industrial production by around 1%-2% annually as the firm’s commitment to innovation and investments in research and development continue to bear fruit and generate additional revenue through introductions of new or refreshed products. It can be projected organic sales to grow at a roughly low-single-digit clip in fluid and metering technologies as well as the fire and safety segment and the diversified products segment, and at a mid-single-digit rate in the health and science technologies segment.

Additionally, the firm will continue to supplement its organic sales growth with acquisitions. Historically, management has avoided overpaying for acquisitions. As such, despite regular mergers and acquisitions, which add goodwill and assets to the firm’s capital base, Idex has consistently generated returns on invested capital in the upper midteens. Management has remained disciplined in the current elevated valuation environment, and it will continue to manage acquisition risk appropriately and focus on maximizing returns on invested capital.

Financial Strength

Idex maintains a sound capital structure, which will help the firm navigate the uncertainty due to the coronavirus pandemic. As of Dec. 31, 2021, the firm owed roughly $1.2 billion in short- and long-term debt while holding approximately $0.9 billion in cash and cash equivalents. The company can also tap into its $800 million revolving credit facility. Idex will generate average annual operating cash flows of roughly $800 million over the next five years. Given its healthy balance sheet and solid cash flow generation, Idex is adequately capitalized to meet its upcoming debt obligations. Idex will have a debt/adjusted EBITDA ratio of roughly 1.5 times in 2022. Management will continue to prioritize investing in organic growth and executing M&A, growing the dividend, and allocating excess capital to opportunistic share repurchases. The firm has raised its quarterly dividend by an average annual rate of roughly 10% over the last five years, and the dividend will keep growing roughly in line with earnings. The payout ratio will remain around 30% over the next five years.

Bulls Say’s

  • Idex has a portfolio of moaty businesses that have leading shares in niche end markets. 
  • Idex generates strong free cash flows, which have averaged around 16.5% of sales during the last 10 years. 
  • Recent acquisitions of Akron Brass and AWG, as well as new product introductions (including eDraulic and SAM), have reinforced Idex’s already strong competitive position in the fire and safety business

Company Profile 

Idex manufactures pumps, flow meters, valves, and fluidic systems for customers in a variety of end markets, including industrial, fire and safety, life science, and water. The firm’s business is organized into three segments: fluid and metering technologies, health and science technologies, and fire and safety and diversified products. Based in Lake Forest, Illinois, Idex has manufacturing operations in over 20 countries and has over 7,000 employees. The company generated $2.8 billion in revenue and $661 million in adjusted operating income in 2021.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Humana appears focused primarily on organic growth, it remains open to partnerships and acquisitions, too

Business Strategy and Outlook 

In the U.S. healthcare system, Humana pays caregivers to provide services through an integrated and value-based approach while also making the insurance experience easy to navigate for end users. Perhaps not surprisingly, given its founding as a nursing home in the 1960s, the firm has a special focus on serving the elderly population, especially in its top-tier position in administering Medicare Advantage plans. Given U.S. demographic trends and the increasing penetration of Medicare Advantage plans in the eligible population, Humana remains at the forefront of one of the fastest-growing areas in U.S. health insurance.

Within Medicare Advantage, insurers like Humana are paid the same amount that the traditional Medicare program pays to provide benefits for its consumers; then the insurer aims to lower the costs associated with caring for users by making them healthier while also providing them additional benefits and generating a profit. Given that dynamic, incentive alignment with care providers remains more important in this product than in other health insurance products and Humana sees this alignment as its key differentiator from other health insurance players. For example, about two thirds of its Medicare Advantage members have primary-care physicians that operate in value-based arrangements, which encourage those caregivers to improve quality and costs. Humana owns some of these caregivers, including primary-care practices and the planned acquisition of the largest home healthcare provider in the United States, Kindred at Home. Also, the firm provides pharmacy benefit management functions, managing that key health input in an integrated fashion primarily for internal members. While especially powerful in the Medicare Advantage market, this integrated approach benefits Humana in its other target markets too, including Medicaid, military, and small-employer plans. With large opportunities in its target markets, management aims to continue growing at a fast pace with a long-term annual earnings per share growth goal of 11%-15%. While Humana appears focused primarily on organic growth, it remains open to partnerships and acquisitions, too.

Financial Strength

Humana maintains a healthy balance sheet. Most of its cash ($3.4 billion at the end of 2021) is held at its subsidiaries, though, and the company aims to hold about $500 million of cash at the parent company typically ($0.9 billion at the end of 2021), which constrains its liquidity a bit. Humana owed $12.5 billion in debt, or 44% debt/capital by the calculations at the end of 2021, which is above management’s typical leverage after the Kindred at Home transaction in 2021. With the divestiture of some non core businesses from that transaction expected in 2022, the leverage to start falling toward the company’s target of 35% in 2022, although share repurchases may constrain that transition a bit. With limited capital expenditure requirements, free cash flows to typically range between about $4 billion-$5 billion annually through 2026. Those cash flows should help the company meet its maturity schedule during the next five years, which cumulatively totals $7.2 billion, and also deleverage after the Kindred at Home transaction.

Bulls Say’s

  • With its prowess in Medicare Advantage plans, Humana looks likely to benefit from strong demographic trends and increasing popularity of that program. 
  • Humana enjoys industry-leading customer satisfaction metrics that positively influence its brand and reputation in the consumer-driven Medicare Advantage and Medicaid insurance sectors. 
  • Humana’s growth trajectory looks strong, with management aiming for 11%-15% EPS growth in the long run.

Company Profile 

Humana is one of the largest private health insurers in the U.S. with a focus on administering Medicare Advantage plans. The firm has built a niche specializing in government-sponsored programs, with nearly all its medical membership stemming from individual and group Medicare Advantage, Medicaid, and the military’s Tricare program. The firm is also a leader in stand-alone prescription drug plans for seniors enrolled in traditional fee-for-service Medicare. Humana offers employer-based plans primarily for small businesses along with specialty insurance offerings such as dental, vision, and life. Beyond medical insurance, the company provides other healthcare services, including primary-care services, at-home services, and pharmacy benefit management.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

ServiceNow’s Differentiated Software Drives Multiple Organic Growth Vectors in Expanding TAM

Business Strategy & Outlook:    

ServiceNow has been successful thus far in executing on a classic land and expand strategy. First, it built a best-of-breed SaaS solution for IT Service Management (ITSM) based on being modular and flexible, having a superior familiar user interface, offering a way to automate a wide variety of workflow processes, and becoming a platform to serve as a single system of record for the IT function within the enterprise. Having established itself in ITSM and then the much larger IT operations management, or ITOM, market, the firm moved beyond the IT function. The same set of product design features and technologies has allowed ServiceNow to bring its process automation approach to HR service delivery, customer service, and finance. More recently, ServiceNow has been offering higher pricing tiers with an increasing array of features, along with industry specific solutions, which have higher ASPs and help drive revenue growth. 

ServiceNow’s success has been rapid and notably organic. The company already offers high-end enterprise-grade solutions and boasts elite level customer retention of 97% to 98%. ServiceNow focuses on the largest 2,000 (G2K) enterprises in the world and these customers continue to renew for larger contracts, with the average annual contract value doubling in the last three years. Further, the company has no small business exposure. Additionally, customers overall are re-upping for more than one solution, as more than 75% of customers are multi-product purchasers, which is driving deal sizes higher. Having the IT function within an enterprise as the initial landing pad is fortunate, as it provides a built-in advocate for software (an IT responsibility) for other functional areas of the enterprise. ServiceNow will continue to use its position to land new IT-driven customers and upsell ITOM features on the platform, but the company will increasingly cross-sell emerging products in HR and customer service, along with the platform as a service (PaaS) offering. The product strength, market presence, and a strong sales push into areas outside of IT, will continue to drive robust growth.

Financial Strengths:  

ServiceNow is a financially sound company. Revenue is growing rapidly, while non-GAAP margins are positive and expanding. The continued traction in ITSM and ITOM, along with adoption of new use cases in customer service and HR service delivery, and the PaaS solution will continue to drive revenue growth in excess of 20% for at least the next five years. As of Dec. 31, 2021, ServiceNow had $3.3 billion in cash, offset by approximately $1.6 billion in debt, resulting in a net cash position of $1.6 billion. Gross leverage sits at 2.1 times trailing EBITDA, which allows for flexibility should the environment worsen. Operating margins are increasing as ServiceNow continues to scale, with 2019 the first year of profitability on a GAAP basis. ServiceNow should be able to drive in excess of 100 basis points of margin expansion annually. Free cash flow margin was 31% in 2021, providing a preview of what will be strengthening margins over the next decade. In terms of capital deployment, ServiceNow does not pay a dividend, does not regularly repurchase shares, and makes only small acquisitions. In fact, ServiceNow has spent only a few hundred million dollars on acquisitions in aggregate since 2011. The company made a variety of tuck-in acquisitions in 2019 and 2020–all for undisclosed amounts. Small, feature-driven acquisitions are expected to continue but have not explicitly modeled any such deals. The company might not initiate a dividend in the foreseeable future, nor regular share repurchases.

Bulls Say: 

  • ServiceNow’s superior product has led to rapid share gains and exceptional retention within the ITSM market. Now the company is using this strength to expand into other areas of ITOM.
  • The company has added additional growth drivers, including customer service and HR service delivery, which should help propel robust growth over the next five years.
  • GAAP operating margin was break-even for the first time in 2019 and see a decade-long runway for expansion.

Company Description: 

ServiceNow Inc provides software solutions to structure and automate various business processes via a SaaS delivery model. The company primarily focuses on the IT function for enterprise customers. ServiceNow began with IT service management (ITSM), expanded within the IT function, and more recently directed its workflow automation logic to functional areas beyond IT, notably customer service, HR service delivery, and security operations. ServiceNow also offers an application development platform as a service (PaaS).

(Source: Morningstar)

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