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Categories
Technology Stocks

Operating cash flow was up +42.0% to $502.4m reflecting strong business performance and underlying cash flow generation capability

Investment Thesis:

  • Trades on attractive multiples and valuation.
  • On market buy back should be supportive of its share price.
  • Fasting growing Digital business, with strong execution by management.
  • Expectations of new product releases will gain significant traction with customers. 
  • Increasing skew towards recurring revenue.
  • Global gaming exposure. 
  • Growing market share in underpenetrated markets. 
  • Leveraged to a falling AUD.
  • Strong balance sheet with ample liquidity provides management with significant flexibility to take advantage of value accretive acquisitions or pursue organic growth opportunities. 

Key Risks:

  • Any further downside to the Japanese market.
  • Low replacement/uptake in the US market.
  • Competition risk.
  • Loss in market share.
  • Lack of product development.
  • Adverse currency movements.
  • Adverse outcome from any potential court case. 

Key Highlights:

  • Group revenue increased to $2.7bn, up +23.1% in reported terms, or up +19.7% in constant currency compared to the pcp, driven by strong performance in Gaming Operations and Outright Sales, supported by robust portfolio performance from Pixel United.
  • EBITDA of $970m, up +30% on a reported basis and +27% higher on a constant currency basis compared to the pcp.
  • Normalized profit after tax and before amortization of acquired intangibles (NPATA) of $580m, up +41% (up +37% in constant currency). According to management, this was +37% ahead of (pre-COVID) 1H19 profit performance, despite mixed operating conditions and supply chain disruptions.
  • Operating cash flow was up +42.0% to $502.4m reflecting strong business performance and underlying cash flow generation capability.
  • ALL’s balance sheet remained robust, with gearing (net (cash)/debt to EBITDA) further reduced to (0.3x), and more than $3.3bn of liquidity available as of 31 March 2022.
  • The Board declared an interim fully franked dividend of 26.0cps (A$173.7m).

Company Description

Aristocrat Leisure Ltd (ASX: ALL) manufactures and sells gaming machines in Australia and globally, to casinos, clubs and hotels. In addition, ALL provides complementary products and services such as gaming systems and software, table gaming equipment and other related products.

(Source: Banyantree)

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.

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.

Categories
Technology Stocks

Bilibili’s video sharing site has a superior business model compared with most other streaming companies

Business Strategy and Outlook 

Bilibili generates revenue through five major sources: 1) advertising; 2) mobile games; 3) live streaming; 4) subscriptions; and 5) e-commerce. The advertising business (as part of its YouTube-like video sharing website) is the most important asset for the company’s long-term success. Bilibili’s video sharing site has a superior business model compared with most other streaming companies. The company has appropriately decided to focus most of its resources on building a platform for UGC (user-generated content) instead of investing heavily into original content or paying huge up-front content licenses. By doing so, it avoids going head-to-head against Tencent Video and iQiyi, both of whom are spending hundreds of billions on content development and licensing, and have yet to generate operating profit.

More importantly, Bilibili has created a self-maintainable UGC ecosystem that allows the firm to acquire video content at significantly lower costs than traditional streaming players such as iQiyi and Tencent Video. In 2021, Bilibili recorded just CNY 11 in content cost per MAU, less than one-fourth of iQiyi’s, while delivering a comparable level of revenue per user. The fact that it has a lower cost structure demonstrates the superiority of Bilibili’s platform business model. Although Bilibili is ahead of the pack in the growing video sharing and streaming markets, it faces potential competition from behemoths such as Tencent and ByteDance. Unlike Bilibili, these firms don’t rely solely on a single app to drive profitability and can potentially run at break-even, or even as loss leaders, while monetizing users via other products and services. In addition to its core video platform, Bilibili also offers other services such as live streaming, mobile games, and e-commerce. While they offer some growth, which looks less confident of their outlook than the core video product due to weak competitive positioning, low barrier to entry, and numerous existing competitors.

Financial Strength

Bilibili might need to raise additional capital before it achieves breakeven cash flows in 2026. The firm was sitting on a net cash of CNY 11.2 billion at the end of 2021, but it is expected that another 17 billion of cash burn before Bilibili becomes net cash generative. In the past, Bilibili has used convertible debt and stock issuance to finance its operations. Its 2021 listing in Hong Kong alone provided CNY 19 billion of funds for the company. It is expected that Bilibili is to continue running its asset-light business model. The company will continue to focus its resources on building a platform for user-generated content, or UGC, instead of investing heavily into original content or paying huge up-front content licenses. Besides revenue-sharing, the bulk of cost is in people (R&D, sales and marketing). Over the next few years, the firm is to spend upward of 10 billion annually in these two categories in total. Bilibili is not expected to take part in major M&A deals as management remains focused on organic growth opportunities.

Bulls Say’s

  • Bilibili’s video sharing platform is in early stage of monetization with significant runway for growth.
  • Bilibili’s strong hold on younger users provide tremendous value to advertisers seeking to target such demographic group.
  • The firm still has room to attract a wider base of users, potentially increasing the platform’s appeal to advertiser

Company Profile 

Bilibili is a Chinese online entertainment platform that is best known for its video-sharing site that resembles YouTube. The site was founded in 2009 and started as a long-form video platform for anime, comics, and gaming, or ACG, content that appealed to Gen Z users. Since then, it has expanded its content on the platform to include a broader range of interests that have attracted Chinese users outside of the Gen Z cohort. The firm generates revenue through five main areas: advertising, mobile games, live streaming, value-added services, and e-commerce.

 (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

Sensata to use bolt-on M&A to supplement sensor content growth in its core markets

Business Strategy and Outlook 

Sensata Technologies is a differentiated supplier of sensors and electrical protection, predominantly for the automotive market. The firm has oriented itself to benefit from secular trends toward electrification, efficiency, and connectivity, and investors will see meaningful top- and bottom-line growth as upon an automotive market recovery. Despite the cyclical nature of the automotive and heavy vehicle markets, electric vehicles (EVs) and stricter emissions regulations provide Sensata the opportunity to sell into new sockets, which has allowed the firm to outpace underlying vehicle production growth by about 4% historically. Such an outperformance is achievable over the next 10 years, there are expectations for a fleet mix shift toward EVs and Sensata’s growing addressable content in higher-voltage vehicles.

Sensata’s ability to grow its dollar content in vehicles demonstrates intangible assets in sensor design, as it works closely with OEMs and Tier 1 suppliers to build its products into new sockets. The mission-critical nature of the systems into which Sensata sells gives rise to switching costs at customers, leading to an average relationship length of roughly three decades with its top 10 customers. As a result of switching costs and intangible assets, Sensata benefits from a narrow economic moat and will earn excess returns on invested capital for the next 10 years. Over the next decade, it is expected Sensata to use bolt-on M&A to supplement sensor content growth in its core markets. Sensata established a leading share in the tire pressure monitoring system market in 2014 with its acquisition of Schrader, and acquisitions will play a key role in allowing the firm to enter new, higher-growth, adjacent markets. Recent acquisitions of GIGAVAC and Xirgo will allow Sensata to compete in the electric vehicle charging infrastructure and telematics markets, respectively, which is to begin to bolster the top line and margins near the end.

Financial Strength

Sensata Technologies is leveraged, but its balance sheet is in good shape, and that it generates enough cash flow to fulfil all of its obligations comfortably. As of Dec. 31, 2021, the firm carried $4.2 billion in total debt and $1.7 billion cash and equivalents. Sensata closed out 2021 with a net leverage ratio of 2.8 times, which is squarely in management’s target range of 2.5-3.5 times. Over the next few years, Sensata is expected to stay in its target leverage range as it continues to engage in supplemental M&A. Between 2023 and 2026, Sensata has $2.1 billion total in debt maturing, with $400 million-$700 million coming due each year. The firm will easily fulfil its obligations with its cash balance and cash flow– over $700 million in average annual free cash flow over the explicit forecast. Finally, Sensata has a variable cost structure that allows it to keep a relatively healthy balance sheet during difficult demand environments. Even with weak end markets in 2019 and 2020 that shrunk the top line, Sensata’s free cash flow generation held steady, with its free cash flow conversion jumping to 130% in 2020.

Bulls Say’s

  • Sensata should benefit from secular trends toward electrification, efficiency, and connectivity to continue outgrowing global vehicle production. 
  • Fleet management is an opportunity for Sensata to expand its margins and create a recurring base of revenue in an emerging, high-growth market. 
  • Accelerating adoption of electric vehicles should be a significant tailwind for Sensata’s burgeoning GIGAVAC high-voltage contactor sales.

Company Profile 

Sensata Technologies is a global supplier of sensors for transportation and industrial applications. Sensata sells a bevy of pressure, temperature, force, and position sensors into the automotive, heavy vehicle, industrial, heating, ventilation, and cooling, and aerospace markets. The majority of the firm’s revenue comes from the automotive market, where it focuses on bumper-in applications.

 (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

ABB Shares Look Attractive Even When Factoring In a Slower 2023 Due to Potential Macro Headwinds

Business Strategy & Outlook:   

ABB generates around 40% of its revenue from electrical equipment and around 40% from industrial automation products. While it has low exposure to faster-growing software, it has a fast-growing robotics business, where it is the number-two global supplier; this contributes around 9% of revenue. We project 4% medium-term revenue growth for ABB. Automation is the fastest-growing category in the industrial space, and ABB has an enviable base of robotics and automation customers that puts it in a solid position for Industry 4.0, or the Industrial Internet of Things. Its robotics and industrial controller (used to program equipment) products have leading market share and enjoy loyal customer bases that would be difficult for competitors to capture. Furthermore, ABB’s electrification products division offers some overlap with other customer segments, such as process industries, that could prove useful in cross-selling the automation portfolio. 

However, growing demand from Industry 4.0 has meant that ABB and its close competitors have had to refresh their product offerings, acquiring or developing in-house industrial automation components and software. ABB has been slow to refresh its product offering and, in some cases, has had to turn to second-best choices. ABB’s software strategy lags that of competitors like Siemens and Schneider. ABB has a hybrid strategy for its Industry 4.0 software, offering most of its equipment productivity and maintenance optimization software from its own developed software portfolio, while for design and simulation software, it has a partnership with Dassault Systems. The partnership structure deprives ABB of the advantage of in-house development that Siemens and Schneider enjoy, as they offer similar software developed by in-house engineering teams.

Financial Strengths:  

At the end of December 2021, ABB’s net debt/adjusted EBITDA was less than 1. We do not believe the company has near-term liquidity nor long-term solvency issues. The company generates about $3.6 billion annually in free cash flow, so in theory it could pay off its roughly $7 billion in gross debt in less than three years.

Bulls Say: 

  • ABB is one of the best-positioned companies to benefit from industrial automation and robotics. 
  • The company’s restructuring program, which focuses on reducing corporate costs through decentralization of management, should benefit long-term margins and capital allocation by putting more profit and loss accountability into the hands of business unit leaders. 
  • ABB’s exposure to smart-grid products and electrical distribution components should benefit from a demand tailwind for grid-management and energy saving products

Company Description:  

ABB is a global supplier of electrical equipment and automation products. Founded in the late 19th century, the company was created out of the merger of two old industrial companies: ASEA and BBC. The company is the number-one or number-two supplier in all of its core markets and the number-two robotic arm supplier globally. In automation, it offers a full suite of products for discrete and process automation (continuous processes like chemical production) as well as industrial robotics.

(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

Challenges Abound and its Targets Look Aggressive, but PVH’s Brands have Global Appeal

Business Strategy & Outlook: 

Neither Tommy Hilfiger nor Calvin Klein has the pricing power or competitiveness to provide PVH with a moat. Moreover, the firm is dealing with the war in Ukraine, shipping delays, inflation, depreciation of the euro versus the dollar, and higher taxes. The adjusted EPS will drop about 10% this year. Due to these challenges and competition, PVH will fall short on its PVH+ plan targets of 2025 revenue, operating margin, and free cash flow of $12.5 billion, 15%, and $1 billion, respectively. The estimates are $10.6 billion, 12.4%, and $900 million. Even so, its key brands as healthy, and believe efforts to elevate product, achieve cost efficiencies, and build e-commerce will result in consistent earnings growth after this year. Once known as a producer of mid-tier men’s shirts, PVH purchased fashion brand Calvin Klein in 2003. It acquired a second large fashion brand in Tommy Hilfiger (2010) and Calvin Klein licensee Warnaco (2013). 

PVH now has employees in more than 40 countries, and the share of its revenue generated in the U.S. fell to just 32% in 2021 from nearly 90% in 2009. Growth rates and operating income for the international segments of both Calvin Klein and Tommy Hilfiger have consistently exceeded those of their North American segments over the past few years. While PVH’s international expansion, its brands suffered sales declines in North America in both 2019 and 2020 and remain below peak levels, which is a sign of weakness in these brands. PVH, has failed to connect with North American consumers as well as some peers. PVH’s dependence on just two brands is risky. Its U.S. business is exposed to department stores, such as no-moat Macy’s and narrow-moat Nordstrom, that have closed full-price stores. However, PVH is working to reduce its dependence on these channels by increasing sales through mono-branded stores and e-commerce. Its five largest customers only accounted for 15% of sales in 2021, down from 22.2% in 2015. Aside from its two key brands, PVH owns and licenses a few smaller brands that have minimal profitability and strategic value.

Financial Strengths:  

PVH has taken the proper steps to get through the COVID-19 crisis. During the first quarter of 2020, PVH collected $169 million in cash from its sale of Speedo and raised EUR 175 million in a bond offering at an attractive interest rate of 3.625% (matures in 2024). In the second quarter, it raised an additional $500 million in a debt offering at 4.625% interest (matures in 2025). Then, in 2021, it closed its heritage brands retail stores and sold most of the brands for about $220 million. It also cut costs in several parts of its business in both years. After taking these measures, PVH paid down $1 billion in debt in 2021, bringing its long-term debt down to $2.3 billion. PVH’s net debt/adjusted EBITDA fell to 0.9 at the end of 2021 from 6.6 at the end of 2020 due to this debt reduction, cash generation, and increased EBITDA. PVH resumed share repurchases in the second half of 2021. Before the crisis, PVH was repurchasing stock even as it put a priority on reducing debt from its acquisitions of Tommy Hilfiger (2010) and Warnaco (2013). Buybacks increase shareholder value if completed at prices below the estimate of intrinsic value. PVH repurchased about $1.3 billion in stock between 2016 and early 2020 and repurchases exceeded $300 million in 2021. Over the next 10 years, the firm averages are forecasted $880 million per year in free cash flow to equity, which it uses for about $730 million in average annual combined share repurchases and small dividends (2% average payout ratio).

Bulls Say: 

  • Calvin Klein and Tommy Hilfiger have proven global strength, with the potential for greater sales in Asia, Europe, and the Americas. PVH has taken greater control of its brands through acquisitions, allowing improved marketing and pricing. 
  • PVH has paid down debt and resumed share repurchases and dividends. The free cash flow to equity will rise above pre-pandemic levels by 2024.
  • Tommy Hilfiger is known as a casual and active brand, which nicely aligns with recent fashion trends.

Company Description: 

PVH designs and markets branded apparel in more than 40 countries. Its key fashion categories include men’s dress shirts, ties, sportswear, underwear, and jeans. PVH’s leading designer brands, Calvin Klein and Tommy Hilfiger, generate nearly all its revenue after it disposed of most of its smaller brands in 2021. PVH distributes its clothing wholesale to retailers and through company-owned stores and e-commerce. The firm traces its history to 1881 and is based in New York City.

(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

Inflation Pressures Rage, but Harshey’s Competitive Prowess Should Enable It to Weather the Storm

Business Strategy & Outlook:   

Even in the face of competitive and macro-economic headwinds, wide-moat Hershey’s dominance in U.S. confectionery is undeniable (46% share of the chocolate aisle versus just 1% for private label, as cited by the firm, according to IRI). But more so, the strategic focus CEO Michele Buck has brought to helm–ramping up investments in its core domestic brands while pulling back international (high-single-digit percentage of total sales) spend. Hershey’s category mix didn’t benefit from stock up grocery trips that stemmed from concerns surrounding COVID-19–given the impulse nature of the purchase–like other areas of the consumer product landscape. But despite facing labor, packaging, and raw material inflation, it continues to funnel resources to elevate its brands (including a slate of new products in the better-for-you lane), which is perceive as supportive of its leading product mix and its engrained standing with its retail partners. As important, it will back down from these efforts, with the forecast calling for Hershey to direct a high-single-digit level of sales toward research, development, and marketing annually. 

While Hershey’s prominence in North America is without question, its standing abroad (in its key markets of Brazil, China, India, Malaysia, and Mexico) has historically been shakier (particularly given the beachheads wide-moat Nestle, wide-moat Mondelez, and privately held Mars/Wrigley have amassed). But after a rough 2020 plagued by the corollaries of the pandemic (lockdown measures that siphoned off foot traffic and sales at traditional outlets), Hershey has begun chalking up more modest gains (including fiscal 2021 sales that nearly matched the level chalked up two years prior). From the vantage point, these marks are the byproduct of steps CEO Buck has taken since assuming the top spot, including rightsizing its international footprint to strike an appropriate balance between the level of cost and the return likely to ensue. And a runway is viewed for additional improvement over the longer term, with the forecast calling for it to boast mid- to high-single-digit top-line growth annually beyond its home turf.

Financial Strengths:  

With debt/adjusted EBITDA of around 2 times and interest coverage holding in the double-digits at the end of fiscal 2021, which haven’t wavered from stance that the Hershey’s balance sheet strength will buttress its ability to weather a volatile macroeconomic and competitive landscape ahead. And Hershey continues to churn out a significant amount of cash; free cash flow as a percentage of sales has averaged 16% the past five years, and forecasted a similar level (16.2% on average annually) over 10-year explicit forecast horizon. Importantly, don’t expect Hershey will abandon its long-standing commitment to returning excess cash to shareholders; the forecasted 7% annual growth in its dividend over the next 10 years, rendering the payout around 50% of earnings). The sizable ownership stake of the Milton Hershey School Trust (at around 80%) should ensure its stable cash flows aren’t jeopardized by a larger, more transformative deal. From the vantage point, its focus will remain on smaller, bolt-on acquisitions (with an appetite for deals that enhance its exposure to salty or better-for-you alternatives), since the Hershey School depends on the firm’s dividends to fund its operations. However, don’t surmise that Hershey merely hungers for added revenue. In this context, in fiscal 2020, management divested of three brands (its premium meat jerky offering, Krave, and its two premium chocolate brands, Scharffen Berger and Dagoba brands) –though estimated the proceeds were immaterial.

Bulls Say: 

  • Hershey has been intentionally rationalizing its fare over the past few years to ensure shelf space and ad dollars are allocated to the highest return opportunities.
  • Low-priced competition is scant in confectionery, as private-label fare holds just 1% share of U.S. chocolate, versus 46% for Hershey.
  • Hershey has pivoted to use local distributors in China (versus its own salesforce), which is viewed as an opportunity to refocus the business on its areas of competency and to expend resources on ensuring its mix continues to evolve with consumer trends.

Company Description: 

Hershey is a leading confectionery manufacturer in the U.S. (around a $25 billion market), controlling around 46% of the domestic chocolate space (per IRI). Beyond its namesake label, the firm’s mix has expanded over the last 85 years and now consists of 100 brands, including Reese’s, Kit Kat, Kisses, and Ice Breakers. Hershey’s products are sold in about 80 countries, albeit with just a high-single-digit percentage of sales coming from markets outside the U.S., including Brazil, India, and Mexico. The firm has sought inorganic opportunities to extend its reach beyond its core confection business, adding Amplify Snack Brands and its Skinny Pop ready-to-eat popcorn to its mix and Pirate Brands (including the Pirate’s Booty, Smart Puffs, and Original Tings brands) over the past few years.

(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
Commodities Trading Ideas & Charts

Enel’s Attractive Fundamentals are not Priced In

Business Strategy & Outlook:   

Enel has been suffering from high leverage stemming from the acquisition of Endesa at the top of the cycle in 2008. Sovereign debt crises in Spain and Italy and economic doldrums in these countries led to the implementation of adverse regulation for utilities. After 2014, the regulatory and economic backdrop in Enel’s core markets has stabilized, and a new strategy aiming to boost organic growth and streamline the group organization has been implemented. Management reduced costs while increasing growth investments in regulated networks and renewables and strengthened control of its fastest-growing Latin America and renewables businesses by delisting Enel Green Power in 2016 and buying out Latin America activities from its subsidiary Endesa. 

The energy crisis, which started in 2021 has put energy affordability at the forefront of the political agenda of European countries, increasing political risk. Nonetheless, measures mulled by the Spanish government in 2021 to tackle soaring energy prices have been significantly amended so their impact on Enel’s Spanish subsidiary Endesa will be fairly limited. Likewise, windfall taxes taken by the Italian government will have a limited impact on earnings as they will spare hedged power production and will be applied only above EUR 60/megawatt-hours. At end-2021, Enel had 50 gigawatts of installed renewable capacity, the highest among European utilities. The firm intends to increase its solar, wind, and batteries capacity by 19 GW by 2024, or 6.33 GW per year. Thanks to higher renewables generation, the firm intends to lower the cost of energy sold by enhancing its integrated model through the reduction of its short position. The group pledges a fixed dividend of EUR 0.4 and EUR 0.43 in 2023, implying an annual growth rate of 6.4%. In 2024, Enel targets a flat dividend of EUR 0.43. By assuming a 70% payout ratio in 2025 and 2026, forecast a 2021-26 dividend CAGR of 5.5%, in line with its earnings growth.

Financial Strengths:  

The forecasted net debt to increase from EUR 51.6 billion at end-2021 to EUR 57.6 billion at end-2022 on high investments and involving a net debt/EBITDA ratio of 3 times, in line with the guidance. The net debt shall peak at EUR 61 billion in 2023 before falling to EUR 55 billion in 2026, notably thanks to the EUR 7 billion disposals planned by the group. Net debt/EBITDA ratio would peak to 3.05 in 2023 before receding to 2.5 in 2026 on increasing EBITDA and a net debt decline. The projected ordinary EBITDA/net interest expense and net debt/equity to average 9.5 times and 1.25 times, respectively, through 2026. All said, posit Enel will be able to fund its investments and dividends without tapping the stocks market. In line with its 2022-24 business plan, factor in 2022, 2023 and 2024 dividends of EUR 0.4, EUR 0.43, and EUR 0.43, respectively. In 2025 and 2026, assumed a 70% payout ratio involving a 2026 dividend of EUR 0.5 and 2021-26 dividend CAGR of 5.5%.

Bulls Say: 

  • Enel’s diversified profile and leadership positioning in renewables and networks offers solid and visible earnings growth.
  • Strengthening of the Brazilian real and the U.S. dollar will support earnings.
  • Enel boasts higher returns on invested capital than its peer Iberdrola.

Company Description: 

Enel is a diversified energy company domiciled in Italy. Operations are concentrated in Italy, Spain, and Latin America. The firm’s primary activities are electric generation, electric networks, and gas and electricity marketing. Around 50% of the company’s EBITDA is derived from its regulated networks. Taking into account power sold through power purchase agreements in Latin America, around 70% of EBITDA is quasi-regulated. Enel is a giant in global power generation with 86 gigawatts of capacity, of which 39 GW is renewables, including a large share of hydro.

(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

Oracle is losing database market share to new database types that may be better suited to the cloud

Business Strategy & Outlook

Oracle is a best-in-breed provider of on-premises relational database technologies and enterprise resource planning, or ERP, software and is one of the most profitable companies in the software industry. However, growth has been lacking as more customers shift their workloads to the cloud, bypassing Oracle’s solutions. Despite Oracle’s cloud migration efforts, cloud competition will likely provide headwinds for Oracle. In turn, the moat rating for Oracle is narrow, coupled with a negative moat trend rating.

Oracle’s business is centered around its relational database which stores a treasure trove of data that is the lifeblood of many enterprises. Oracle’s software offerings leverage this database as its backend, while Oracle’s servicing and hardware businesses support these database tasks. Oracle remains a best-of-breed provider of on-premises databases and software, and customers face very high switching costs if they look to migrate elsewhere. However, no one can view the company as being on the forefront of recent software trends, and new and potential customers appear to be looking past Oracle for their database needs. Database preferences are far wider today due to the sheer number of ways to manipulate data, and the different data storage practices this necessitates. In turn, Oracle is losing database market share to new database types that may be better suited to the cloud. Additionally, the transition to the cloud is prompting enterprises to change software vendors away from all-in-one ERP systems to application specific that are best of breed. In response, Oracle is banking on its second-generation cloud to not only cater to its traditional enterprise workloads, like supporting databases, but also general use workloads. However, the Oracle’s cloud as sub-scale to Amazon and others and the doubt Oracle can close this gap soon. As per the opinion, Oracle should still be successful in moving a significant amount of its traditional on-premises workloads to Oracle cloud. However, migrating all of its customers is not such a sure thing, as cloud-first software vendors have been able to take meaningful share from legacy Oracle customers.

Financial Strengths

The Oracle to be in healthy financial standing. As of fiscal 2020, Oracle had $43 billion in cash and equivalents versus $72 billion in debt. However, Oracle should generate robust free cash flow in the years ahead to settle these debt obligations over time. That Oracle will have the capital to increase its total annual dividends to $1.28 in fiscal 2025 from $0.96 in fiscal 2020, as the company continues to make share repurchases and acquisitions. However, the magnitude of acquisitions will moderate as the company comes off of its buildout of its second-generation cloud product and has stressed their recent preference to build new capabilities in house. In terms of capital expenditures, the Oracle will spend an average of $1.6 million per year over the next five years, as the company continues to require buildouts for its cloud operations.

Bulls Say

  • Oracle’s relational database should be able to post strong growth as customers continue to depend on its quality features, such as data partitioning which brings incomparable load balancing efficiency. 
  • Oracle’s autonomous database and IaaS was built with ease of use in mind, which could bring a significant base of first-time Oracle users to the company, strengthening top line results. 
  • Oracle’s stake in TikTok Global and cloud services to TikTok’s U.S. operations should add a significant boost to Oracle’s top line and attract more “general use” cloud customers.

Company Description

Oracle provides database technology and enterprise resource planning, or ERP, software to enterprises around the world. Founded in 1977, Oracle pioneered the first commercial SQL-based relational database management system. Today, Oracle has 430,000 customers in 175 countries, supported by its base of 136,000 employees.

(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

The Gap has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes.

Business Strategy & Outlook

The Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes. Still, Gap has fair liquidity, and its Old Navy chain as a solid business. According to Euromonitor, Old Navy is the largest individual apparel brand by retail sales in the United States, and, despite ongoing issues, the Gap’s goal of $10 billion in annual sales for the label (up from $9.1 billion in 2021) as achievable in 2026. Old Navy, though, faces considerable competition in the discount apparel space from wide-moat Amazon, other e-commerce, outlet stores, and discounters like narrow-moat Ross Stores. Meanwhile, Old Navy already has more than 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As its matter of wary of the potential of these markets, one cannot view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, it will have about 1,500 locations in 10 years.

One cannot believe Gap’s once-powerful Gap and Banana Republic brands have competitive advantages, either. According to a 2019 presentation, Old Navy was generating about 80% of Gap’s operating profit even before the pandemic. Now, with scores of Gap and Banana Republic stores slated to be closed, the brands are permanently diminished. Moreover, while a necessary move, as a  doubt that downsizing will improve Gap’s overall margins very much. The firm says that it can reach 10% operating margins in about three years, but Gap’s long-term operating margins at just 8%. Further, one cannot think fast-growing Athleta has achieved a competitive advantage. Athleta grew to more than $1.4 billion in sales in 2021 from $249 million in 2012. However, at less than 10% of Gap’s sales, Athleta is not large or old enough to provide a moat for Gap. Moreover, while the brand benefits from a strong “athleisure” trend, it lacks the pricing power of direct competitor narrow-moat Lululemon.

Financial Strengths

One cannot think Gap has any liquidity concerns even though its free cash flow dropped significantly in 2020 and 2021 due to the COVID-19 crisis and it suffered an operating loss in 2022’s first quarter. In 2021’s third quarter, the firm issued $1.5 billion in new debt that matures in 2029 and 2031 ($750 million each) at interest rates of 3.625% and 3.875%, respectively, and subsequently paid down $1.9 billion in higher-interest debt. After these transactions, it closed March 2022 with $845 million in cash and investments and $1.8 billion in debt. Given that its earliest significant maturity is now seven years away, one cannot view Gap’s debt as a concern. Under normal circumstances, the firm generates significant cash flow, including more than $700 million in free cash flow to equity in 2019. Gap suspended dividend payments and share repurchases during the crisis but resumed both in 2021. The firm has signaled that it will continue to issue dividends despite recognizing a loss in 2022’s first quarter. It is been expected it will return around 30% of its earnings to shareholders as dividends over the next decade. Gap has also been a consistent purchaser of its own stock, having reduced its share count by about 47% between 2008 and 2021. The average yearly repurchases of about $500 million over the next 10 years. The repurchases as prudent when executed at a discount to in the assessment of the firm’s intrinsic value, as has recently been the case. The Gap’s capital expenditures to average 4% of sales over the next 10 years, in line with the 10-year historical average. Gap intends to open Old Navy and Athleta stores and continue to invest in digital capabilities and its supply chain to keep up with competitors.

Bulls Say

  • According to Euromonitor, Old Navy is the largest apparel brand in U.S. It competes in the discount apparel sector, which has been healthier than other areas of apparel retail. 
  • Athleta has established itself in the fast-growing women’s athleisure market, one of the bright spots in North America apparel. The number of Athleta stores will nearly double over the next decade. 
  • Gap’s e-commerce accounted for more than $6.4 billion in sales in 2021, 39% of its total sales. COVID-19 has accelerated e-commerce growth for Gap and others in the apparel space.

Company Description

Gap retails apparel, accessories, and personal-care products under the Gap, Old Navy, Banana Republic, and Athleta brands. Old Navy generates more than half of Gap’s sales. The firm also operates e-commerce sites, outlet stores, and specialty stores under various Gap names. Gap operates nearly 3,000 stores in North America, Europe, and Asia and franchises about 600 stores in Asia, Europe, Latin America, and other regions. Gap was founded in 1969 and is based in San Francisco.

(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

McKesson deepens its relationship with customers through offering marketing merchandising, and administrative support.

Business Strategy & Outlook

McKesson is a leading domestic wholesaler of branded, generic, and specialty pharmaceutical products. With over $180 billion in annual U.S. drug distribution revenue, McKesson supplies nearly one third of the overall market, comparable to AmerisourceBergen and slightly outpacing Cardinal Health in market share. Together, the three operate as a pharmaceutical wholesale and distribution oligopoly, supplying over 90% of the U.S. market. The highly consolidated pharmaceutical wholesale market reflects the substantial scale-based cost advantages held by the largest players.

Wholesalers play a central role in the pharmaceutical supply chain, bridging the gap between over 1,200 drug manufacturers and pharmacy, health system, and provider customers. The primary value proposition to manufacturers is the simplification in distribution logistics by shipping products to centralized wholesaler locations, as opposed to shipping direct to the tens of thousands of pharmacies or healthcare provider locations. Additionally, since McKesson takes legal ownership over the manufacturer’s product, the company effectively absorbs all credit risk associated with delinquent pharmacies, clinics, and providers. Beyond its role as an intermediator, McKesson offers consulting services directly to manufacturers, from clinical trial support through post approval commercialization. Similarly, wholesalers’ primary value proposition to pharmacy and healthcare provider customers is simplification in logistics. McKesson uses its scale to negotiate more effectively than most of its customers and typically acquires drugs at the lowest available price, most of which is passed along in cost savings. In addition, McKesson bears the burden of substantial working capital outlays associated with its comprehensive drug inventory, delivering smaller quantities directly to customer retail locations as needed. Beyond acting as an efficient supplier, McKesson deepens its relationship with customers through offering marketing, merchandising, and administrative support services to smaller independent pharmacies and providers.

Financial Strengths

As of fiscal year-end 2021, cash and equivalents were over $6.3 billion, offset by $7.1 billion in debt. Fiscal 2021 gross leverage was 1.7 times adjusted EBITDA. Free cash flow generation was $4.1 billion in the same period, but free cash flow growth will be slightly muted in the forecast period, associated with opioid settlement payments over the next 18 years. The McKesson enjoys a position of solid financial strength arising from its strong balance sheet and dominant position in a mature market with substantial scale-based barriers to entry. Working capital requirements are high in the industry, as pharmaceutical wholesalers take title, or legal ownership, over the drugs they distribute. However, McKesson’s favorable cash conversion cycle mitigates this risk and reflects its strong negotiation leverage with manufacturers and customers in establishing payment terms.

Bulls Say

  • McKesson distributes pharmaceutical products to nearly one third of the industry, leading to substantial negotiation leverage with generic drug manufacturers. 
  • The industry has largely pivoted away from pharmacy owned warehouses and self-distribution, solidifying wholesalers’ role in the supply chain. 
  • Recent data suggests generic drug price deflation and has eased in the past year, relieving a contributing factor toward wholesaler margin compression.

Company Description

McKesson is a leading wholesaler of branded, generic, and specialty pharmaceutical products to pharmacies (retail chains, independent, and mail order), hospitals networks, and healthcare providers. Along with AmerisourceBergen and Cardinal Health, the three account for well over 90% of the U.S. pharmaceutical wholesale industry. McKesson is currently divesting from its pharmaceutical wholesale and distribution in Europe and Canada in order to redeploy capital to strategic growth areas in the U.S. (oncology network and ecosystem, and biopharma services). Additionally, the company supplies medical-surgical products and equipment to healthcare facilities and provides a variety of technology solutions for pharmacies.

(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.

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