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Global stocks

Poshmark Poised for Outsize Growth as Resale Economics and Acceptance Drive Traction

Business Strategy & Outlook

Poshmark is among the largest apparel resale platforms on the market, boasting an interactive marketplace that benefits from a triumvirate of secular tailwinds: social commerce, an ongoing mix shift toward online retail sales, and the stratospheric growth of the apparel resale market. The firm’s strategy coalesces around four key priorities: product innovation, category expansion, international growth, and buyer acquisition. As per neutral view of management’s road map, with the research leaving us unconvinced that Poshmark’s international thrusts are poised to generate excess returns for investors, and surmise that purportedly adjacent categories like consumer electronics, art, or pets may not be concordant with the firm’s apparel core competency.

As a slew of firms have entered the resale space, competition has arisen around exclusive access to customers, inventory assortment, and distribution channels, with long-term equilibrium remaining uncertain. Consolidation looks inevitable, particularly as the scope of those companies’ offerings see increasing overlap, commensurate with category, price point, and geographic expansion. Poshmark’s right to win hinges on its ability to convincingly answer the “why Poshmark?” query, attracting platform participants with some combination of competitive seller services, frictionless listing, quick inventory turnover, attractive fees, broad assortment, and authentication services.

The until cross-listing is viable, each international market must be approached as greenfield development, with local competitors boasting a home field advantage at the outset. Winning any of a handful of culturally similar markets (Canada, Australia, the U.K., Germany, France) would meaningfully expand the long-term addressable market, but it remain dubious of the firm’s entry into India, which has proven notoriously difficult to monetize. Finally, the management to target efforts at ameliorating the shipping pain point, with more diversified last-mile providers and a thrust toward higher-priced products likely helping to defray costs that currently constitute about a quarter of average order values, weighing on GMV growth.

Financial Strengths

The Poshmark’s financial strength as sound. The firm carries no long-term debt, has $597 million in cash and cash equivalents on its balance sheet as of the first quarter of 2022, and figures to be free cash flow positive in each of the next three years, by the calculations. The management has adequate wiggle room to pursue moat-bolstering investments, while narrowing operating losses should provide a route to enduring operating profitability by 2026.

Following its IPO, the firm’s capital structure has simplified meaningfully, retiring $50 million in convertible notes issued during the third quarter of 2020 that carried a panoply of derivative clauses. Shareholder dilution hereafter should be limited to those shares issued in the normal course of business. The Poshmark’s waterfall of investment priorities as consistent with other high growth firms: pursuing internal investments and strategic mergers and acquisitions. One cannot anticipate pressure building for shareholder returns through repurchases or cash dividends until the firm achieves operating profitability, with the model suggesting the inception of a modest repurchase program in 2026, though this timeline could be delayed by a strategic acquisition or more circuitous route to positive earnings. As Poshmark emerges from its high-growth phase, and encourage management to consider optimizing the firm’s capital structure (adding debt) and initiating a cash dividend, but this remains a long-dated concern that don’t contemplate a dividend until 2030.

Bulls Say

  • Five straight quarters of operating profitability during 2020 and 2021 (ending in the third quarter of 2021) suggest a strong underlying business model once customer acquisition costs normalize.
  • Early traction in Australia and Canada could augur well for long-term success in those and other culturally similar markets.
  • Adding APIs and analytics tools for wholesalers and liquidators could add another platform use case, while generating higher units per transaction, average order values, and fulfillment cost leverage.

Company Description

Poshmark is one of the largest players in a quickly growing e-commerce resale space, connecting more than 30 million active users on a platform that sells men’s and women’s apparel, accessories, shoes, and more recently consumer electronics and pet products. The marketplace operates in four countries–the U.S., Canada, Australia, and India–with a capital-light, peer-to-peer model that dovetails nicely with prevailing trends toward social commerce, apparel resale, and an ongoing pivot toward the e-commerce channel. With $1.8 billion in 2021 gross merchandise volume, or GMV, the estimate that the firm captured about 13%-14% of the domestic online resale market, with rolling lockdowns and tangled supply chains providing a meaningful impetus for channel trial during 2020 and 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
Commodities Trading Ideas & Charts

Longtime Cost Leader Diamondback Thriving in Higher Commodity Environment

Business Strategy & Outlook

Diamondback Energy was a modest-size oil and gas producer when it went public in 2012, but it has rapidly become one of the largest Permian-focused oil firms through a combination of organic growth and corporate acquisitions, most notably Energen in 2018 and QEP Resources in 2021. The firm consistently ranks among the lowest-cost independent producers in the entire industry, supporting a maintainable margin advantage.

Keeping costs low is baked into the culture at Diamondback, and the operations to remain lean and efficient, despite the recent expansions. From the outset, the company has enjoyed a competitive advantage that enables it to systematically undercut its upstream peers. This was initially based on the ideal location of its acreage in the core of the basin, and helped by the early adoption of innovations like high-intensity completions (resulting in more production for each dollar spent). More recently, the firm has started seeing significant economies of scale as well.

Management has fiercely protected the balance sheet over the years and has been willing to tap equity markets, when necessary, as it did several times during the 2015-16 downturn in global crude prices. But that’s ancient history now. Diamondback’s financial health is excellent, and the firm can maintain or grow its production while generating substantial free cash flows under a wide range of commodity scenarios. There is no chance that the firm will choose to allocate more capital for new drilling than appropriate, which means production will probably stay flat or grow at low-single-digit rates for the foreseeable future. Excess cash will be used for debt reduction or returned to shareholders. To preserve flexibility for management, the firm has not committed to a specific reinvestment rate or vehicle for capital returns, like certain peers have, but it does intend to distribute at least half of its free cash somehow. Finally, highlight the firm’s stake in its mineral rights subsidiary, Viper Energy Partners. This vehicle owns the mineral rights relating to some of Diamondback’s most attractive acreage, further juicing returns on drilling for the parent.

Financial Strengths

Diamondback has historically maintained excellent financial health, with one of the strongest balance sheets in upstream coverage. The Energen acquisition pushed up its leverage ratios for a brief spell in 2019, COVID-19 kept them elevated in 2020, and the Guidon and QEP deals extended these periods of above average leverage into 2021. But borrowing never reached an unmaintainable level, even in these periods, and the firm’s leverage has already recovered. At the end of the last reporting period, debt to capital was 30% and annualized debt/EBITDA was 0.7 times. And as the firm is capable of generating substantial free cash under a wide range of commodity price scenarios, these ratios to continue improving. Consolidated liquidity is over $1.5 billion, with no material debt maturities until 2024.

Bulls Say

  • Diamondback is one of the lowest-cost oil producers operating in the United States.
  • The firm generates substantial free cash under a wide range of commodity scenarios and has to pledged to return at least half of that to shareholders.
  • Diamondback has been an early adopter of returns-enhancing technology in the field, and is expected to remain at the leading edge.

Company Description

Diamondback Energy is an independent oil and gas producer in the United States. The company operates exclusively in the Permian Basin. At the end of 2021, the company reported net proven reserves of 1.8 billion barrels of oil equivalent. Net production averaged about 375,000 barrels per day in 2021, at a ratio of 60% oil, 20% natural gas liquids, and 20% natural gas.

(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

Cronos Projected To Experience 11% Average Annual Volume Growth Based On 10-Year DCF

Business Strategy & Outlook

Cronos Group cultivates and sells cannabis predominantly in Canada and hemp-derived CBD in the U.S. but also participates in the global medical cannabis market. Cronos does not disclose its sales by recreational and medical end-markets. The entire Canadian market is forecasted to grow roughly 20% per year on average over the next decade, driven by the conversion of black-market consumers into the legal market and new cannabis consumers. Cronos is half the size or smaller than the majority of other Canadian licensed producers. This adds to the challenge of reaching profitability given a harder ability to scale overhead expenses. International medical cannabis exports are a small but growing part of Cronos. At present, Cronos exports into Germany, Poland, and Israel. The global market looks lucrative, given higher realized prices and the growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Cronos. Roughly 20% average annual growth is forecasted over the next decade. Cronos’ U.S. operations largely center on hemp-derived CBD. 

CBD is generally viewed as a less attractive opportunity given the massive amount of competition and low barriers to entry. The company recognized a $236 million impairment in 2021, which confirms this concept. In June 2021, it acquired an option for a 10.5% stake in U.S. multistate operator PharmaCann, giving Cronos THC investment exposure. For THC, the U.S. market remains murky with individual states legalizing recreational or medical cannabis while it remains illegal federally. However, it is expected that federal law will be changed to allow states to decide THC legality within their borders by the end of 2023. Cronos’ strategy is geared for an eventual national distribution model more akin to alcohol and tobacco rather than today’s multi-state operator model. Speculation that national distribution will come anytime soon is met with skepticism, and the dispensary will hold most of the value nevertheless. The PharmaCann option is a good albeit small hedge should this scenario be the case in  the future of the U.S. market.

Financial Strengths

Cronos carries virtually no debt. At the end of its first quarter, the company had only about $9 million in lease obligations compared with a market capitalization of roughly $1.2 billion as of May 2022. Cronos continues to carry roughly $1 billion in cash, including short-term investments, which represents the majority of its current market value. The company continues to generate cash losses, but a $1.8 billion investment from Altria in March 2019 reduced the need for significant capital raises in the future. The company is projected to reach positive free cash flow in 2028 and that the Altria investment will be enough to fund expanded operations to meet surging demand growth in Canada and U.S. CBD. Benefiting its financial health, Cronos has generally relied on equity to fund acquisitions and expansion, with no significant debt raises in its history. The company is expected to rely on equity to fund capital needs, which is typical for growth companies such as Cronos to help alleviate potential pressure on its financial health.

Bulls Say

  • Altria Group’s investment of $1.8 billion provides Cronos with capital and a strategic partner with significant product development, branding, and regulatory experience. If successful, Altria Group may increase its ownership of Cronos or potentially acquire it. 
  • Altria’s distribution network gives Cronos an advantage in the hyper competitive U.S. CBD market and can be leveraged for eventual THC distribution. 
  • Cronos’ option to acquire 10.5% of U.S. multistate operator PharmaCann gives U.S. THC investment exposure and a hedge if the dispensary model persists.

Company Description

Cronos Group, headquartered in Toronto, Canada cultivates and sells medicinal and recreational cannabis through its medicinal brand, Peace Naturals, and its two recreational brands, Cove and Spinach. Although it primarily operates in Canada, Cronos exports medical cannabis to Poland and Germany. In addition, it has entered joint ventures in Israel, Colombia, and Australia to drive further international cultivation and distribution growth. In the U.S. the company directly sells hemp-derived CBD and has an option to acquire 10.5% of U.S. multistate operator PharmaCann.

(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

Increase In Operating Expenses And Similar Decline In Rate Case Outcomes Underpins Decline Prediction For Exelon Corp

Business Strategy and Outlook

After spinning off its merchant generation and retail energy segment, Constellation Energy, through a distribution to Exelon shareholders, the new Exelon is now a pure-play electric and gas transmission and distribution utility providing investors a more stable earnings profile. The separation is considered positive for shareholders. A standalone regulated utility strengthens Exelon’s narrow moat and lowers the company’s cost of capital. Exelon’s regulated utilities support the current outlook for 7% earnings growth through 2026, the midpoint of the company’s 6%-8% earnings growth guidance. The company is estimated to spend $36 billion of capital investment through 2026. This investment plan supports the current earnings forecast and dividend growth in line with earnings growth. Exelon operates a diverse set of regulated utilities, including five utilities in the Northeast and the largest investor-owned utility in Illinois.

Regulatory relationships have at times been strained across its Northeast utilities, resulting in low allowed returns. Alternative recovery mechanisms help reduce regulatory lag and risk across the regions for Exelon’s growth capital. Low earned returns below allowed regulated returns should gradually increase to within management’s 9% to 10% goal. Relationships at the company’s most important subsidiary, ComEd, will likely remain strained given allegations of inappropriate lobbying practices tied to the passage of previous utility legislation. Exelon subsequently entered into a deferred prosecution agreement with federal prosecutors. Recent Illinois legislation will bring significant changes to the state’s regulatory framework. Current performance base-rate making, which ties allowed returns to the average 30-year Treasury rate, have produced some of the lowest returns among U.S. utilities. After 2023, Illinois utilities may opt in for a four-year rate plan beginning in 2024. Under the multi year plan, ComEd would be allowed to “true-up” earned returns to allowed returns and continue usage-decoupled rates. Regulators could issue incentives and penalties based on performance. The legislation will likely lead to higher returns for the subsidiary

Financial Strength

With over 4.0 times interest coverage, Exelon’s financial health is sound for a regulated utility, particularly given its stable, low-risk business model. With the current forecast for $36 billion of capital spending planned through 2026, Exelon will be a frequent debt issuer. The company has manageable long-term debt maturities and anticipated to be able to refinance its debt as it comes due, maintaining its current debt/capital ratio. The company is expected to issue $1.0 billion in equity to fund its capital investment plan, in line with management’s expectations. Total debt/EBITDA is expected to remain in the 4.5-5.0 times range. Exelon will target a 60% dividend payout ratio. Dividend growth is projected to remain in line with the current 7% annual earnings per-share growth forecast through 2026. 

Bulls Say’s

  • Exelon’s divestiture of its merchant generation eliminates its earnings sensitivity to cyclical commodity prices that have dragged down returns recently. 
  • Exelon has good regulated growth investment opportunities that should support earnings and dividend growth. 
  • Nearly all of the company’s growth capital is recovered through constructive regulatory mechanisms that reduce regulatory lag.

Company Profile 

Exelon serves approximately 10 million power and gas customers at its six regulated utilities in Illinois, Pennsylvania, Maryland, New Jersey, Delaware, and Washington, D.C.

(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
Dividend Stocks

Admiral’s investments in proprietary tech have created returns that far exceed anything generated by its peers

Business Strategy and Outlook

Admiral is a rare example of an insurance company with a narrow economic moat. Furthermore, Admiral’s persistent competitive advantage is built on its proprietary technology intangible assets. Admiral’s investments in proprietary tech have created returns that far exceed anything generated by peers, and it has done so in a persistent and reliable way. These investments range from information technology hardware to software to data and Admiral’s latest round of investments have gone into probability-based machine learning that has then been built bespoke. This internal development and customisation of technology, to make it proprietary, is the reason behind Admiral’s market-leading profitable growth. Using its technology and data Admiral has been able to select the most profitable risks. And furthermore, it is the latest round of investments into artificial intelligence, Admiral seems well placed to drive improvements in its U.K. motor loss ratio. This is because Admiral has historically looked to select drivers that pay by credit card and one way to utilise probability-based learning is to predict fraudulent claims more accurately. This is done through analysis of interdependence between credit-based data features, which Admiral Loans is only likely to strengthen. 

Admiral has historically underwritten policyholders exhibiting higher risk. In its establishment, younger drivers and drivers based in London were all part of the business’ perimeter of nonstandard risks. On one side, Admiral’s historical preference for younger drivers further places the business at an advantage versus the rest. The live Financial Conduct Authority, or FCA, general insurance pricing rules aim to stamp out the practice of price walking, an activity that has been much more prevalent in older generations. Going further, Admiral’s latest round of investments add to its runway for success. Probability-based machine learning has high application when using inter-related data features to identify lower-risk policyholders within higher-risk datasets. Admiral’s perimeter of insuring urban-based nonstandard risk policyholders plays into this

Financial Strength

Admiral’s float investment strategy focuses on low-risk, low volatility, preservation of capital. Admiral typically does this by investing in government bonds, corporate bonds, private credit, cash and money market instruments. As at end-2021 Admiral held 69.3% of its full investment portfolio, excluding cash, in fixed income and debt securities. This has risen from 60.5% a few years ago. Admiral’s allocation to money market funds stands at 28.4% as at end-2021 and this is an allocation that the business has pared back from 35.9% since the same 2019 time frame. In full-year 2021 Admiral generated a 2.0% investment yield. In future it is anticipated that this will rise to 2.1% over 2022 and climb by 10 basis points on average per year until it reaches a long-term 2.5% rate. Across Admiral’s entire investment portfolio, also in 2022 the business will generate 0.7% of gains, with a 50% harvesting rate. It is forecasted these annualised investment gains will climb over the medium term to a long-term 1.4%. Admiral’s total long-term investment return will therefore settle at around 3.7%. On the surface, leverage appears to be one Admiral’s downsides. For example, up until 2013 the business looks like it performed well, maintaining financial prudence of zero debt level. In 2014 this debt started to rise with the July 2014 issuance of GBP 200 million in subordinated notes. These notes have a July 2024 redemption date and 5.5% fixed interest rate. Since 2017 Admiral’s leverage looks to have climbed but this is ultimately because of the 2017 formation of Admiral Loans. Since it was established, Admiral Loans has issued GBP 446.5 million in loan-backed securities that are backing Admiral’s sale of personal loans. Excluding this GBP 446.5 million as at end-2021, Admiral’s debt as a percentage of equity falls from 47.6% to 15.9%, which shows a much better profile. It is forecasted Admiral will reach around a 47.5% debt-to-equity level

Bulls Say’s

  • Admiral’s U.K. motor returns on new investment far outstrip anything achieved by peers, driven by its proprietary tech. 
  • Admiral still only holds a 15.5% share of the U.K. motor insurance market with a big ensuing industry shakeout. 
  • Admiral has a long runway for growth in U.K. home and international car segments, and significant room for improvement in these loss rates.

Company Profile 

Admiral is a personal lines insurance company that operates predominantly in the U.K. Primarily, the business is a motor insurer with the U.K. motor and international car business accounting for over 95% of Admiral’s gross written premiums. The business also has a nascent but growing U.K. household insurance division. When Admiral started out in 1993 the business was established to sell motor insurance to nonstandard risk policyholders. These nonstandard risks included younger drivers, women drivers, drivers wanting to pay by credit card, and drivers based in London. Over the years Admiral has continued to expand its wheelhouse of nonstandard risk selection.

(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

Near-Term Investments Should Position Starbucks Well for Long-Term Category Gains

Business Strategy & Outlook: 

Starbucks is the largest specialty coffee chain in the world, generating some $29 billion in sales during fiscal 2021. The firm’s attention to premium-quality coffee distinguishes it from chained competitors (alleviating pressure from quick-service restaurant competitors and at-home consumption), allowing Starbucks to charge substantially higher prices while creating a buzz around what has historically been a commoditized product. While the subindustry has attracted significant competitive attention, Starbucks’ premium positioning has allowed the firm to outflank competitors, leveraging its brand to raise prices 6.8% annually in the U.S. over the last five years, healthily in excess of category inflation. Commanding unit economics, with payback periods in the ballpark of a year and a half (against three to six years in the broader QSR space), should pave the way for mid-single-digit unit growth through 2031, as the firm increases penetration in its core company-owned markets (the U.S. and China), and with license partners in more than 80 global markets. 

Starbucks’ recent strategic focus on streamlined operations, adjacent menu innovation, digital engagement, and selective store closures strikes us as appropriate, with new openings concentrated in underpenetrated middle America and Chinese markets. While the firm’s trade area initiative created growth headwinds in 2020, as the firm closed 800 underperforming units in the U.S. and Canada, it should provide a durable foundation for unit development as the chain adjusts to a world that seems poised to skew toward off-premises sales, closer to home. Finally, the firm’s ongoing investments in its loyalty program, with nearly 27 million active users in the U.S. at the end of the second quarter of 2022, should resonate with an audience that has grown increasingly amenable to digital ordering, with more than half of order volume now driven by program participants. Starbucks remains a compelling long-term “growth at scale” story and the anticipating average top-line growth of nearly 11% through 2026 and adjusted EPS growth averaging 12.2% in base-case scenario.

Financial Strengths: 

Starbucks’ financial strength as sound. The company targets a lease-adjusted debt/EBITDAR of 3 times, consistent with an investment-grade credit rating. The calculations suggest that it was in compliance with this target at the end of fiscal 2021, with a lease adjusted debt/EBITDA ratio of 2.6 times. The firm also has access to an untapped $3 billion credit facility and a $3 billion commercial paper program. With few hard assets, the operating income-based leverage metrics are a more appropriate proxy for restaurant businesses’ liquidity and solvency. Starbucks’ debt/EBITDA returned to normalized levels in fiscal 2021, finishing the year around 2.3 times leverage, well below 5.3 times during a trying 2020. The EBITDA/interest coverage (11.6 times) in fiscal 2022. Starbucks’ strong free cash flow to the firm conversion (averaging 8.9% of sales through 2024) offers the flexibility to invest in technological improvements, new restaurant openings, and menu innovation. The firm shall prioritize growth capital expenditures (estimated at $5.7 billion through 2024), dividends ($7.2 billion), and share repurchases ($11.5 billion), with management targeting a long-term 50% dividend payout ratio. While share repurchases were suspended during the second quarter of fiscal 2022, and expect them to be ultimately reinstated in fiscal 2023 based on the firm’s investment opportunity priorities and $4.0 billion in cash and cash equivalents on the balance sheet at the end of the second quarter of fiscal 2022.

Bulls Say: 

  • Starbucks’ “stars for everyone” initiative should drive continued adoption of the firm’s loyalty program, materially increasing customer lifetime value.
  • Leading market share in China and exposure to a growing middle class contribute to a compelling growth narrative for the company.
  • Strength in the cold beverage platform could drive volume toward underpenetrated afternoon dayparts, helping prop up average unit volume with minimal incremental labor costs.

Company Description: 

Starbucks is one of the most widely recognized restaurant brands in the world, operating nearly 34,000 stores across more than 80 countries as of the end of fiscal 2021. The firm operates in three segments: North America, international markets, and channel development (grocery and ready-to-drink beverage). The coffee chain generates revenue from company-operated stores, royalties, sales of equipment and products to license partners, ready-to-drink beverages, packaged coffee sales, and single-serve products.

(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
Shares Small Cap

Demand for Boats Remains Strong, Boosting Selling Prices and Profits at Narrow-Moat Malibu

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy & Outlook: 

Malibu is a long-established name in performance sport boats, venturing into the sterndrive and saltwater segments via acquisitions in recent years. It is believed that its brand, innovative products, and consistent pricing power contribute to a brand intangible asset, which underpins the narrow moat rating. Supporting its market leadership, it’s demonstrated an ability to meet evolving customer preferences, bringing new products to market quickly, with new models and 30-40 new features rolled out annually in the performance sport segment. And it has capitalized on its brand strength by expanding into adjacent categories, such as trailers and accessories, which shall continue. However, Malibu hasn’t rested only on innovation to grow profits, also curating savings through streamlined production and rising efficiencies (through vertical integration). As evidence, efforts at Pursuit’s new plant had increased the EBT margin at the brand to 14% in 2021 (from 9% in 2020). With continuous improvements to the manufacturing process, Malibu should be able to limit expense growth over time. Additionally, Malibu shall grow via strategic acquisitions. 

The addition of Cobalt, Pursuit, and Maverick within the last five years has provided robust sales growth for the firm (averaging 33%), thanks to a strategy based on fit and the ability to raise shareholder value. As a result, the model expects tie-ups every other year in the $140 million price range, providing a volume bump of more than 500 incremental units on average. While such transactions should drive sales growth, and remain confident in Malibu’s ability to also maintain consumer interest in its legacy brands. The Malibu’s sales shall grow 10% on average over the next decade, including acquisitions. While demand for outdoor recreational products has been elevated with social distancing measures due to the pandemic, and maintained sales growth stemming from market share gains and expansion into whitespace categories. As a result of its success, Malibu should generate competitive adjusted returns on invested capital, including goodwill, that average 24% over the next decade.

Financial Strengths:

Malibu has maintained a healthy balance sheet, with leverage historically rising modestly as a result of its acquisition strategy. However, with adjusted EBITDA growing faster than debt in recent years, the leverage ratio has remained at less than 1 at the end of fiscal 2021, barring the pursuit of any transformational acquisitions. For access to liquidity, Malibu has a $170 million revolving credit facility (2024 maturity) and a $100 million term loan (2022-24 maturity). The company drew down its revolver as a precaution as COVID-19 spread domestically, but had repaid the loan prior to 2020 year-end (and now has around $57 million outstanding as of March 31). In normal operating periods, expecting cash on hand, cash from operations, and utilization of the credit facility to allow Malibu to fund its capital expenditures, which finance projects, tooling, and production improvements. In addition, the firm has agreements with third-party lenders to provide floor plan financing for dealers. Furthermore, Malibu has historically maintained flexibility in its capital structure through stock repurchases. The board of directors authorized the repurchase of up to $70.0 million of Class A Common Stock and the LLC Units, which is valid until Nov. 8, 2022. However, the modest repurchases over the near term, given the team’s penchant to spend strategically on acquisitions. Over the long term, Malibu should be able to generate enough free cash flow to finance both acquisitions and consistent share repurchases.

Bulls Say:  

  • Vertical integration across the brand portfolio could provide margin expansion.
  • The firm’s long-term annual sales growth goal of 10% should be attainable thanks to Malibu’s penchant for consistent acquisitions in underpenetrated categories. 
  • Malibu’s strong balance sheet, with low leverage and healthy free cash flow/equity, should offer the company the flexibility to withstand cyclical downturns and finance bolt-on acquisitions from cash on hand.

Company Description: 

Malibu Boats is a leading designer and manufacturer of power boats in the United States. It is the market leader in performance sport boats, sold under its Malibu and Axis brands. It acquired Cobalt Boats, a leading producer of sterndrive boats, in 2017 number-one market share position in the U.S. in the 24-foot to 29-foot segment), and Pursuit Boats, which makes high-end offshore and outboard motorboats in 2018. In 2021, it purchased Maverick Boat Group, a leading seller of flat fishing boats, with exposure to bay, dual-console, and center-console boats. Malibu has also expanded into boat trailers and accessories, and in 2020 began producing its own engines for its performance sport boats. Malibu’s target market includes a wide range of water enthusiasts who embrace active lifestyles.

(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

Maintaining $135 FVE as FMC Reports Solid Q1; Shares Slightly Undervalued

Business Strategy & Outlook

FMC is a pure-play crop chemicals producer. The company is one of the five largest patented crop protection companies globally. FMC acquired Cheminova in 2015, increasing exposure to Europe and expanding its portfolio of crop chemicals. In late 2017, FMC acquired DuPont’s divested crop chemicals portfolio, which included blockbuster insecticide Rynaxypyr. At the same time, the company divested noncrop chemicals businesses. FMC is fairly balanced from a geographical standpoint among North America, Latin America, Asia, Europe, the Middle East, and Africa. Latin America is the largest region, contributing 32% of revenue in 2021, while the remaining regions accounted for 20%-25% each. The company is also balanced from a crop exposure standpoint, with soybeans being the largest at nearly 20% of total revenue.

As emerging-market food consumption rises, demand for patented crop chemicals should rise to facilitate yield improvements. FMC’s pipeline of new premium products should generate sales growth

above the general crop chemical industry. Both acquisitions greatly enhanced FMC’s research and development pipeline, which should allow the company to continue producing new crop chemicals as

older products roll off patent. The company plans to launch 10 new molecules over the next decade that feature new modes of action. FMC also plans to launch new biologicals, or environmentally

friendly pesticides. These new products should help farmers fight resistant pests, which are increasingly rendering older crop chemicals ineffective and require new crop chemicals.

FMC’s product portfolio currently skews toward insecticides, which generate over half of revenue. As genetically modified seeds, which are equipped with traits to fight insects, expand to new markets such as China and India over the next decade, the insecticide demand falling over the long term. Conversely, GMO seeds increase herbicide demand. For FMC, most of its new products in the pipeline are herbicides and fungicides, which should result in a more balanced portfolio among the three primary types of crop protection chemicals as new products are commercialized over the next decade.

Financial Strengths

FMC is in good financial health. To calculate a net debt/adjusted EBITDA ratio of roughly 2.5 times as of March 31, 2022. FMC’s leverage ratios fluctuate throughout the year as the company is subject to seasonality. With no large planned capital additions, the company should maintain its financial health and should be able to meet all its financial requirements, including dividends, going forward.

Bulls Say

  • FMC has transformed its portfolio to focus on crop chemicals, which should see strong growth prospects as yield gains are needed to support rising food consumption from emerging markets.
  • FMC has a large presence in Brazil, one of the few places with meaningful growth potential in arable land.
  • FMC’s pipeline should allow the company to continue expanding profits as the patents expire for its two largest molecules over the next decade.

Company Description

FMC is a pure-play crop chemical company. The company has diversified its sales to create a balanced crop chemical portfolio across geographies and crop exposure. Through acquisitions, FMC is now one of the five largest patented crop chemical companies and will continue to develop new products through its research and development pipeline.

(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

Ferguson set out to clean up its balance sheet following the great financial crisis

Business Strategy and Outlook

 Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Between 2008 and 2020, Ferguson’s exposure to the U.S. RMI market (as a percentage of sales) increased from 31% to 60%, while U.S. new construction revenue exposure decreased from 58% to 32%. It is forecasted that the U.S. R&R spending to grow at a 4%–5% compound annual rate this decade. While R&R spending surged during the pandemic, and don’t think demand for home projects is set to stall. Instead, it is believed that the pandemic stepped sales up to a structurally higher base for more normalized growth going forward. In terms of U.S. residential construction, it is believed to have a 1.6 million-unit production pace is maintainable for much of the decade, and the forecast is 15.7 million cumulative starts between 2022 and 2031.

Ferguson has built leading positions across most of its end markets through its roll-up acquisition strategy. The company typically acquires local competitors, gaining access to new brands, suppliers, regions, and customers. It is expected that Ferguson will continue to this strategy, which should augment its scale-driven competitive advantage. Ferguson’s pricing strategy has transformed from being primarily localized to more standardized across the group over the past decade. In the past, branch managers had more discretion over pricing in order to react to local competitive dynamics. Today, the company employs a more disciplined approach to pricing, allowing it to take better advantage of its economies of scale. Ferguson sold its Wolseley U.K. business for approximately $420 million in February 2021. This business struggled to generate value for the group despite being one of the largest distributors in the United Kingdom. There were very few synergies between geographies and little overlap in suppliers. Ferguson’s strategic shift to the United States will be a tailwind for the firm’s prospects, and  Ferguson’s primary listing on the New York Stock Exchange could increase interest from U.S. investors.

Financial Strength

Ferguson set out to clean up its balance sheet following the great financial crisis, and its improved net debt/EBITDA from 3.5 times before the 2008 crisis to 0.8 times as of Jan. 31, 2022. Net debt at the end of the second quarter of fiscal 2022 (January 2022) was $2.2 billion. Ferguson’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy that augments growth with acquisitions but also returns cash to shareholders. In terms of liquidity, it is believed that the company can meet its near-term debt obligations, given its strong cash balance. Its cash position at the end of the second quarter of fiscal 2022 stood at $828 million. It also found comfort in Ferguson’s ability to tap available lines of credit to meet any short-term needs. Also, it was encouraged by the countercyclical nature of industrial distributors’ free cash flow generation, which results from the ability to drawdown inventory during times of economic malaise. Ferguson generated over $1 billion of free cash flow during the great financial crisis, and is expected that the current economic weakness to push free cash flow levels materially higher as working capital requirements ease.  Ferguson enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  •  Ferguson’s roll-up strategy in the U.S. should lead to market share gains, boosting revenue growth in excess of the market average. 
  • Ferguson’s strategic shift to the U.S. away from international markets has strengthened group operating margins. 
  • Ferguson generates strong free cash flow throughout the economic cycle despite serving cyclical end markets

Company Profile 

Ferguson distributes plumbing and HVAC products primarily to repair, maintenance, and improvement, new construction, and civil infrastructure markets. It serves over 1 million customers and sources products from 34,000 suppliers. Ferguson engages customers through approximately 1,600 North American branches, over the phone, online, and in residential showrooms. In fiscal 2021, Ferguson derived 94% of its nearly $23 billion of sales in the U.S. According to Modern Distribution Management, Ferguson is the largest industrial and construction distributor in North America. The firm sold its U.K. business in 2021 and is now solely focused on the North American market.

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

Ferragamo’s New CEO Has Similar Goals to Predecessors but a Bigger Budget; Shares Fairly Valued

Business Strategy & Outlook

Salvatore Ferragamo is an Italian monobrand company mainly known for its footwear and accessories.  The firm benefits from relatively strong control over distribution (almost 70% of revenue is retail, versus more than 70% for Burberry, Prada, and Gucci, but in line with Hugo Boss), while its strong

representation in airport locations (about 150 travel retail stores) positions it well to benefit from growth in global travel flows and tourist luxury spending (about half of industry spending is done while travelling).

The Ferragamo has not carved a moat. It is a relatively small player in the fragmented luxury footwear category (43% of revenue). The luxury footwear industry is fragmented and largely wholesale (thus prone to discounting), with fast product life cycles, exposing industry players to fashion risk. The leather goods category (44% of Ferragamo’s revenue) as more conspicuous, but Ferragamo is much less established there than market leaders (with 1% market share versus over 15% for Louis Vuitton, 10% for Gucci and 6.5% for Hermes). Moreover, its more affordable price points (EUR 800-1,500 handbags versus EUR 800-4,000 for luxury peers) reduce the prestige value of purchases. The Ferragamo’s pricing power as in line with or toward the lower end of a luxury coverage.

The company is taking actions that could bring it back to the industry average growth after several years of underperformance. The actions such as increasing the firm’s share of “newness” to engage the existing and younger consumer, reining in a subpar distribution channel, and focusing on retail efficiency and supply chain transformation with more flexibility, less pre-committed inventory, and more capacity open to late orders. Still, Ferragamo’s lack of critical mass versus very well-established competition in leather goods and generally a more competitively intense environment in footwear could make a turnaround challenging.

Financial Strengths

Ferragamo’s financial position is solid, with net cash on the balance sheet. Dividend payments have been suspended as the pandemic hit in 2020 and 2021 but resumed from 2022. 

To consider a low use of debt to be appropriate, given the operating leverage of the business model (the estimation is around 60%-70% of operating expenses to be fixed in a normal environment) and its cyclicality (revenue declined by 10% during the financial crisis in 2009 and over 30% in 2020). The capital expenditures to be boosted in the near term to over 7% from 3%-5% in the recent five years, focusing on renovations, supply chains and technology, in line with new management’s strategic plan. To moderate after 2026. The average free cash flow margin to be around 9% (versus 7% in 2019 and 23% in 2021). The Ferragamo to be able to meet its financial obligations and business investment needs in the future.

Bulls Say

  • Ferragamo is an early entrant in emerging markets, with strong presence and brand recognition in Asia and South America. This positions it to benefit from middle-class growth in those markets.
  • Ferragamo has an above-industry presence in airport locations. Around half of luxury purchases are already done while travelling and the number of outbound travelers is expected to grow as incomes rise.
  • Ferragamo’s profitability could improve as new collections and store refurbishments drive improving store density (currently on the lower end of the peer group).

Company Description

Founded in 1927, Salvatore Ferragamo is an Italian monobrand company mainly known for its footwear and accessories. The company generates about 43% of revenue in the footwear category, 44% in leather goods, 6% in apparel, 6% in accessories. It was one of the pioneers in establishing a

presence in Asia, where it generates 38% of sales, and other emerging markets (6% of sales in Central and South America). Ferragamo generates 19% of revenue in Europe, 29% in the U.S., and 8% in Japan.

(Source: Morningstar)

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