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Commodities Trading Ideas & Charts

One Step Forward With Cost-Cuts, Two Steps Back As Revenue Falls In Aurora’s Path To Profit In Q3

Business Strategy & Outlook

Aurora cultivates and sells cannabis predominantly in Canada but also exports into the global medical market. Aurora considers itself a medical cannabis company first but has benefited from the legalization of recreational cannabis in Canada in 2018. Recreational now accounts for nearly 40% of gross sales, although this share is slightly lower than peers. The Canadian medical market is expected to grow slowly at roughly 1.5% as recreational legalization takes customers. Robust recreational growth of roughly 15% is forecasted, driven by the conversion of illicit-market consumers into the legal market and new cannabis consumers. Aurora has expanded its global medical exports, currently shipping to more than 20 countries. 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 Aurora. Continued growth in its medical exports has helped Aurora see volume and price growth even as its domestic market has struggled during pandemic lockdowns. Roughly 20% average annual growth is projected through 2031. 

The U.S. is envisioned to change federal law to recognize states’ choices on legality within their borders, unlocking the fastest-growing and largest potential cannabis market, which will estimatedly be more than 5 times larger than the Canadian market. At present, Aurora would not benefit from a change in U.S. federal law on THC cannabis, as its only exposure is through hemp-derived CBD products through its May 2020 acquisition of Reliva. Aurora is one of the few Canadian producers with no standing deals with a U.S. multistate operator, although it believes it would be able to draw an attractive partner should the law change. Aurora has not entered a major strategic partnership. This forces it to rely more heavily on equity market access while its peers can rely on the deep pockets of a large partner for capital. This raises the risk of massive equity dilution to avoid running out of cash. In fact, shares outstanding nearly doubled from March 2020 to March 2021.

Financial Strengths

Aurora’s financial health has been a lingering concern but is improving. At the end of its third quarter of fiscal 2022, the company had about CAD 334 million of convertible notes compared with a market capitalization of roughly CAD 700 million. The notes are due in 2024, so the company has some time. Subsequent to quarter-end, the company repurchased CAD 128 million of the notes funded with shares issued under its at-the-market equity program. Aurora continues to generate cash losses. This is particularly concerning because the company has limited capital markets access and no major strategic partner backing it. However, since announcing its restructuring program, the company has significantly reduced its cash burn and positive EBITDA is nearing. 

Aurora’s access to debt markets is limited. Consequently, the company has relied on equity offerings to fund its cash needs, leading to significant dilution for existing shareholders. In fact, shares roughly doubled from March 2020 to March 2021. Having sizable leverage while remaining unprofitable creates additional risk for Aurora. This creates a wide range of possible valuation outcomes for shares amid the significant risk of value destruction. With Aurora shares having fallen over the last several months along with the broader cannabis sector, any share issuances would be even more dilutive.

Bulls Say

  • Aurora has rationalized its production facilities and head count, significantly reducing its cash burn. 
  • Cannabis cultivation is complicated, including challenging operational ramp-ups and optimization. Aurora’s strategic focus on its cultivation operations will help it achieve lower production costs than peers. 
  • Aurora’s international exposure can deliver high margin sales to help its path to profitability

Company Description

Aurora Cannabis, headquartered in Edmonton, Canada, cultivates and sells medicinal and recreational cannabis through a portfolio of brands that include Aurora, CanniMed, Daily Special, MedReleaf, and San Rafael ’71. Although the company primarily operates in Canada, it has expanded internationally through medical cannabis exporting agreements or cultivation facilities in more than 20 countries.

(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

Xero Continuing to Create Value Despite Technology Sector Malaise

Business Strategy and Outlook

Xero has grown quickly since incorporation in 2006 to become the largest provider of accounting software as a service, or SaaS, to the SME market in Australia and New Zealand. The company is expected to continue leveraging this strong position to expand quickly in other regions such as the United Kingdom and the United States. SME accounting software users have historically shown little inclination to switch providers, and Xero enjoys annual customer retention rates of over 80%. The inconvenience and operational risks of switching accounting software providers have tended to outweigh the relatively modest potential benefits. The highly fragmented nature of SME and accountant customers and the relatively small annual value per customer mean that suppliers need scale to support ongoing research and development and marketing costs.

Incumbent providers typically have economic moats based on customer switching costs, with large enterprise software providers, like SAP and Oracle, reluctant to enter the SME market because of the level of customer fragmentation and switching costs. However, the transition from desktop- to cloud-based products offers a rare opportunity for relatively new providers to win market share via the transition of customers to cloud-hosted SaaS products that offer material productivity improvements. Switching costs are expected to recapture their earlier resilience once customers transfition to cloud products and accounting software becomes more integrated with third-party software. Relatively low profits are an acceptable price to pay for rapid growth and associated strategic benefits. The capital-light business model should enable returns on invested capital, or ROICs, to comfortably exceed the weighted average cost of capital, or WACC, from fiscal 2020, supporting the narrow economic moat rating. A revenue CAGR of 15% is forecasted over the next decade, driven by an 10% CAGR in subscribers, and an average revenue per user, or ARPU, CAGR of 3%.

Financial Strength

Xero is in good financial health but needs to maintain high revenue growth rates to increase profits and justify its market capitalisation. The company had net cash of NZD 51 million and available liquid resources of NZD 1.1 billion as at March 31, 2022. EBIT margins are projected to expand to around 26% by fiscal 2032, in line with peer companies. As the company matures, the capital-light business model is anticipated to enable strong cash generation. Strong customer retention rates of over 80% should mean earnings volatility will be relatively low in the long term.

Bulls Say’s

  • Xero is experiencing strong revenue and customer growth driven by the transition of desktop accounting software to the cloud, a trend projected to continue for at least the next decade. 
  • Xero operates in the software sector, which is typically an industry with low capital intensity and strong cash generation. Xero is expected to generate strong returns on invested capital and free cash flow in the long term. 
  • Xero has already achieved dominant positions in the New Zealand and Australian cloud accounting markets and is a leading competitor in the U.K. and U. S. markets.

Company Profile 

Xero is a provider of cloud-based accounting software, primarily aimed at the small and medium enterprise, or SME, and accounting practice markets. The company has grown quickly from its base in New Zealand and surpassed local incumbent providers MYOB and Reckon to become the largest SME accounting SaaS provider in the region. Xero is also growing internationally, with a focus on the United Kingdom and the United States. The company has a history of losses and equity capital raisings, as it has prioritised customer growth.

(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

Labor Constraints Derailing Norfolk Southern’s Carloads but Improvement Likely and Pricing Healthy

Business Strategy & Outlook

Norfolk Southern is a well-managed enterprise, and from the start of the rail renaissance in 2004 through 2008, it posted the highest margins among U.S. Class I railroads. However, its operating ratio

(expenses/revenue) deteriorated to 75.4% in 2009 and remained stuck between 69% and 73% from 2010 to 2015. This pales in comparison to progress made by peers Union Pacific and Canadian Pacific, which lack Norfolk’s exposure to Appalachian coal. However, by 2017 the rail was back on track, and it has achieved record ORs in each year since, including an adjusted 60.1% in 2021. In recent years, Norfolk renewed its commitment to pricing discipline and margin gains, particularly via precision railroading initiatives, which have driven more efficient use of locomotive assets, labor, and fuel. The incremental gains as the firm continues to refine its PSR playbook. Of note, in late 2019, former Canadian National CEO Claude Mongeau (2010-16) joined Norfolk’s board of directors to help bolster the rail’s PSR efforts.

Norfolk hauls coal from Illinois and Appalachian mines, and transfers Powder River Basin coal eastward from the Western rails. Thus, coal-demand headwinds and changes in environmental regulations will probably remain a factor over the long run, despite near-term improvement off pandemic lows. That said, coal runs in unit trains hauling exclusively coal (often using customers’ cars), thus the rail can continue to adjust its train and crew starts to match demand conditions. Norfolk generated healthy volume growth near 5% on average within its intermodal franchise over the past decade. In fact, intermodal revenue surpassed coal in 2014 and is now the highest-volume segment (roughly 60% of 2020-21 carloads versus 9% for coal). Capital projects targeting capacity and velocity improvement have helped the rail capitalize on net positive truck-to-rail conversion activity over the years. Norfolk’s domestic intermodal volume face labor and congestion-related constraints lingering into first-half 2022, but the intermodal as a key long-term growth opportunity.

Financial Strengths

At year-end 2021, Norfolk Southern held an ample $839 billion of cash and equivalents compared with $13.8 billion of total debt ($12.1 billion in 2020). Historically, the rail generates steady free cash flow, despite investing heavily in its network (capital expenditure averaged 16% of revenue over the past five years). Norfolk deploys this cash on dividends and share repurchases, and occasionally borrows to boost these returns to shareholders. Share repurchases eased briefly 2020 due to pandemic risk to cash flow, but they ramped back up by year-end, and the repurchase activity to remain active in the years ahead. Norfolk Southern operates with a straightforward capital structure composed mostly of senior notes. In terms of liquidity, the rail also has an $800 million revolving credit facility and a $400 million accounts receivable securitization program for short-term needs–both programs are fully available and undrawn as of third-quarter 2021.

Bulls Say

  • Norfolk Southern reignited operating ratio improvement in 2016 after stagnating over the preceding six years. With help from precision railroading, the rail reached OR records in each of the past four years.
  • Norfolk Southern runs one of the safest railroads in the U.S., as measured by injuries per hours worked; this boosts service levels and helps to keep costs down.
  • Compared with trucking, shipping by rail is less expensive for long distances (on average) and is four times more fuel-efficient per ton-mile. These factors should help support longer-term incremental intermodal growth.

Company Description

Class-I railroad Norfolk Southern operates in the Eastern United States. On roughly 21,000 miles of track, the firm hauls shipments of coal, intermodal traffic, and a diverse mix of automobile, agriculture, metal, chemical, and forest 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
Dividend Stocks

NortonLifeLock Is a Big Fish in a Murkier Pond; Maintain FVE; Shares Fairly Valued

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy & Outlook

 The NortonLifeLock is a strong player in the consumer-oriented security space. With offerings ranging from security, identity protection, and privacy, NortonLifeLock has its fingers in many consumer-focused pies. However, as at the overall consumer-focused cybersecurity space, the cutthroat competition, a lack of pricing power, and a lack of evident customer switching costs. With these factors top of mind, the NortonLifeLock’s future growth prospects to not be in excess of low single digits. The business’ overall strategy relies on three levers for growth: international expansion, partner-based revenue streams, and bundled offerings. While all three strategies can help the firm attain more customers or increase its average revenue per user, ARPU, it pertinent to differentiate between its sound strategies and the bearish outlook on the overall industry.

As per industry’s outlook, NortonLifeLock’s three key end markets—security, identity protection, and privacy—are teeming with competitors. At the same time, it is important to

highlight NortonLifeLock’s strategies that are sound and will allow the firm to grow despite a challenging competitive landscape. First, the firm’s focus on international expansion is well reasoned, and the growth potential in Asia and EMEA. Second, the firm’s emphasis on bundling can allow it to create more sticky clients. Lastly, the firm’s emphasis on partner-based revenue streams can allow it to create more certainty around its top line. Embedding NortonLifeLock’s offerings in an existing

ecosystem of applications within a company can allow it to grow its installed base organically.

All in all, cognizant of both NortonLifeLock’s strengths as a strong player in the consumer-focused cyber safety space and the challenging landscape the firm occupies. While the firm’s strategies in maneuvering the space as sound, the industry’s competitive dynamics will restrict NortonLifeLock’s future growth potential.

Financial Strengths

The NortonLifeLock’s financial position is healthy. Since the enterprise security business, Symantec, was sold to Broadcom in 2019, NortonLifeLock has operated as a leaner, more agile organization—substantially improving its gross and operating margins. This transformation, which was done via cost reductions and narrowing the business’ line of focus to consumer-oriented end markets, has also allowed the firm to return more capital to shareholders via share buybacks and dividends.

Over the explicit forecast, the NortonLifeLock’s financial position to remain steady. While the firm carries more than $2 billion in long-term debt on its balance sheet, one cannot foresee the firm having any repayment issues due to its strong cash flow generation profile. Going forward, one cannot expect to see a material change in NortonLifeLock’s capital structure. The firm to raise capital by issuing debt rather than equity.

Bulls Say

  • NortonLifeLock’s bundling offers allow the company to land and expand customers that want one unified vendor for their security and identity protection needs.
  • The firm has a solid cash generation profile along with its commitment to return shareholder capital via dividends and share buybacks.
  • International expansion remains a viable area for topline growth as the company can potentially increase its number of paid users in the European and Asian markets.

Company Description

NortonLifeLock is a cybersecurity pure-play that offers security, identity protection, and privacy solutions to individual consumers. The firm’s security and identity protection offerings, via Norton and LifeLock, respectively, have long maintained their positions as two of the most recognizable consumer-focused security and identity-protection 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
Global stocks

Solid Execution Is Helping Narrow-Moat Hormel Navigate a Challenging Environment

Business Strategy & Outlook

 The Hormel’s narrow moat is secured by a strong portfolio of brands with demonstrated pricing power, entrenched retail relationships due to the firm’s number-one and -two positions in several categories, and a position as one of the leading providers of proteins to the food-service industry, differentiating itself by servicing these clients with its own salesforce. The long-term transition from a commodity protein producer to a branded consumer product company has served Hormel well, helping to stabilize prices and demand for its strong brands.

While competitive pressures are unlikely to abate, the firm is working to stabilize its competitive position. Hormel has shifted its mix to include more on-trend fare (Applegate natural and organic meats and cheeses, snacking platforms, Hispanic offerings, and labor-saving products for food service, to name a few). As a key part of its strategy to expand into snacking, Hormel acquired Planters from no-moat Kraft Heinz for $3.4 billion in 2021. While Planters has suffered from underinvestment the past few years, Hormel is funneling additional resources to enhance innovation and marketing, which will help stabilize the brand’s market share. In 2022, Hormel will take another step to reduce its mix of commodity sales from 10%-15% of revenue currently, by 5%-10%. It will shed $350 million (3% of sales) of commodity pork revenue as well as non-value-added turkey sales (to be quantified during the first-quarter report). These efforts, which should enhance profit margins, reduce volatility, and further support Hormel’s competitive edge as its strong brands become a greater portion of the mix. The Hormel has a significant opportunity to expand its businesses internationally, as only 8% of revenue is from outside the United States currently. Spam and Skippy both have international appeal and are being launched globally. Also, the acquisition of Ceratti, a Brazil-based producer of deli products, gives Hormel access to the fast-growing Brazilian market. The Hormel can use this business as a foundation to launch its legacy brands across Latin America.

Financial Strengths

Hormel has a long tradition of a conservatively managed balance sheet, with average debt/adjusted EBITDA of just 0.5 over the last decade compared with the peer average of around 3.0. Therefore, the $3.4 billion Planters acquisition does not strain the balance sheet, taking leverage to a very manageable 2.3 times for fiscal 2021 (and 1.9 times using net debt), falling to below 1 in 2024 and beyond.

Hormel’s free cash flow (cash flow from operations fewer capital expenditures) as a percentage of revenue averaged 7% over the past three years, compared with 10% for its peer set. This metric has increased as the company has focused on shortening its cash-conversion cycle, and to continue to improve to 10% over the next five years. Hormel’s priorities for cash are dividend increases, reinvesting in the business through capital expenditures and acquisitions, and opportunistic share repurchases. The company has an impressive record of increasing dividends consecutively for 56 years and remains committed to maintaining this trend. The forecasted annual dividend increases (averaging a mid-single-digit clip) and expect the company to maintain a 50% payout ratio. While anticipate that the firm will remain a consolidator, No one can include any unannounced future tie-ups given the uncertainty surrounding timing, nature, and terms. Rather, the model that the company engages in share repurchases (forecasting a 1% reduction in shares outstanding on average annually over the next 10 years), spending a view as prudent if completed at a discount to assessment of the firm’s intrinsic value.

Bulls Say

  • Hormel is a well-managed company with a demonstrated ability to extract value from acquisitions, maintain financial discipline, and prioritize shareholder interests.
  • Hormel is embarking on a large international expansion, which should allow it to capitalize on its brand equity as it customizes its mix to align with regional preferences.
  • Jennie-O Turkey has experienced several challenges, with three-year average operating margins of 7%, but steps to overhaul the segment should return profitability to the low-double-digit rate of long term.

Company Description

Hormel Foods is a protein-focused branded food company. Its brands include its namesake Hormel, Spam, Jennie-O, Dinty Moore, Applegate, Wholly Guacamole, and Skippy. The vast majority of the company’s revenue is U.S.-based: 64% U.S. retail, 28% U.S. food service, and 8% international. By product type, in fiscal 2021, 23% of revenue was shelf-stable foods, 18% was poultry (branded and commodity), 55% was other perishable food, and 3% was other, primarily nutritional products. The company holds the number-one market position in shelf-stable meat, shelf-stable ready meals, pepperoni, natural/organic deli meat, and guacamole and the number-two position in turkey, bacon, chilled ready meals, and peanut butter.

(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

Wide-Moat James Hardie’s Fiscal 2022 Largely as Expected; Shares Look Attractive

Business Strategy & Outlook

 The supportive of Hardie’s strategy. Hardie’s primary strategic objectives are to expand fibre cement’s share of the U.S. exterior siding market and to shift its sales mix to higher-margin products. The goals are mutually reinforcing and achievable. Hardie has been a key beneficiary of the secular decline of vinyl siding owing to the durability advantages of fibre cement. Hardie estimates vinyl’s share of the U.S. exterior siding market has declined from approximately 40% in 2008 to around 25% in fiscal 2021.This trend to persist with Hardie continuing to be a major beneficiary. The Hardie will be able to leverage its research and development capabilities to penetrate other siding categories such as brick, stone, and stucco. Hardie’s fibre cement product innovations can mimic the appearance of these product categories while being less labor-intensive to install than brick and stone and resolving the performance issues of stucco. Hardie is tailoring its product innovations towards higher margin product categories by focusing on the aesthetic performance of the product, generating an emotional attachment from the consumer, and stimulating less price elastic demand. This strategy is supplemented by Hardie’s marketing campaign which aims to communicate Hardie’s value proposition directly to homeowners. Overall, the Hardie will be successful in continuing to expand fibre cement’s share of the exterior siding market while simultaneously shifting its sales mix towards higher margin products.

The Hardie’s intention to further integrate operations with customers. Customer integration provides the facilitation of knowledge between Hardie and its customers, unlocking working capital benefits and providing opportunities for strategic initiatives. The Hardie’s entrenched customer relationships as a key aspect of the business’ wide economic moat.

Financial Strengths

Hardie declared a final dividend of USD 30 cents per share, taking its fiscal 2022 dividends to USD 70 cents per share. Dividends will be unfranked for Australian taxation purposes. An annual payout ratio of 60% of underlying earnings, the midpoint of Hardie’s 50%-70% targeted payout range. 

Hardie runs a conservative balance sheet with leverage— defined as net debt/adjusted EBITDA (excluding the impact of asbestos transactions)—typically within a targeted range of 1-2. Net debt/adjusted EBITDA stood at 0.8 at the end of fiscal 2022. Hardie’s asbestos-related liability—the AICF trust—has a gross carrying value at fiscal 2022 year-end of USD 1.1 billion and remains an overhang. However, payments to fund the liability are capped at 35% of operating cash flow after adjusting for asbestos liability-related payments. While this reduces cash flows available to shareholders over the medium term, the liability shouldn’t constrain the business’ ability to reinvest within itself. The liability being extinguished within the next decade, likely by fiscal 2027.

Bulls Say

  • James Hardie is poised to benefit from the secular growth of fibre cement siding at the expense of vinyl, brick, stone, and stucco.
  • James Hardie’s strategy of shifting its sales mix to higher-margin products will expand its EBIT margins and enhance return on invested capital.
  • James Hardie’s wide economic moat should protect its ability to earn above its cost of capital over the economic cycle.

Company Description

James Hardie is a producer of fibre cement construction materials. Hardie predominantly serves the residential construction industry with its flagship fibre cement siding product range. The group’s key segment is North America, where it derives around 70% of group earnings from the sale of fibre cement exterior siding and 10% from the sale of fibre cement interior boards. In 2021, the group acquired Fermacell, an exterior and interior products business headquartered in Germany and with operations throughout Europe

(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

InterContinental Demand Broadening to Business Travel From Leisure Trips

Business Strategy & Outlook

 The InterContinental to retain its brand intangible asset and expand room share in the hotel industry in the next decade. Renovated and newer brands supporting a favorable next-generation traveler position as well as its industry-leading loyalty program will drive this growth. The company currently has a mid-single-digit percentage share of global hotel rooms and 11% share of all industry pipeline rooms. Its total room growth averaging 3%-4% over the next decade, above the 1.8% supply increase for the U.S. industry.

With 99% of rooms managed or franchised, InterContinental has an attractive recurring-fee business model with high returns on invested capital and significant switching costs (a second moat source) for property owners, as managed and franchised hotels have low fixed costs and capital requirements, and contracts lasting 20-30 years have meaningful cancellation costs for owners. The InterContinental’s brand and switching cost advantage to strengthen, driven by new hotel brands, renovation of existing properties, technology integration, and a leading loyalty program, which all drive developer and traveler demand for the company. InterContinental has added six brands since 2016; it now has 16 in total. InterContinental announced in August 2021 a new luxury brand, with details to be provided soon. Additionally, the company announced a midscale concept in June 2017, Avid, which the company sees as addressing an underserved $20 billion market with 14 million guests, under a normal demand environment. Also, InterContinental has recently renovated its Crowne Plaza (13% of total room base) and Holiday Inn/Holiday Inn Express (62%) properties, which will support its brand advantage. Beyond this, the firm has over 100 million loyalty members, providing an immediate demand channel for third-party hotel owners joining its brand.

Financial Strengths

InterContinental’s financial health remains good, despite COVID-19 challenges. InterContinental entered 2020 with net debt/EBITDA of 2.6 times, and its asset-light business model allows the company to operate with low fixed costs and stable unit growth, which led to $584 million in cash flow generation in 2021. During 2020, InterContinental took action to increase its liquidity profile, including suspending dividends and deferring discretionary capital expenditures. Also, the company tapped $425 million of its $1.3 billion credit facility, which has since been repaid. As a result, InterContinental has enough liquidity to operate at near zero revenue into 2023. The banking partners would work to provide InterContinental liquidity as needed, given that the company holds a brand advantage, which will drive healthy cash flow as travel demand returns. InterContinental’s EBIT/interest coverage ratio of 5.2 times for 2019 was healthy, and it to average 9.0 times over the next five years after temporarily dipping to 3.4 times in 2021. The company generates about $2.3 billion in free cash flow (operating cash flow minus capital expenditures) during 2022-26, which it uses to pay down debt, distribute dividends, and repurchase shares (with the last two starting in 2022).

Bulls Say

  • InterContinental’s current mid-single-digit percentage of hotel industry room share is set to increase as the company controls 11% of the rooms in the global hotel industry pipeline.
  • InterContinental is well positioned to benefit from the increasing presence of the next-generation traveler though emerging lifestyle brands Kimpton, Avid, Even, Hotel Indigo, Hualuxe, and Voco.
  • InterContinental has a high exposure to recurring managed and franchised fees (around 95% of total operating income), which have high switching costs and generate strong ROIC.

Company Description

InterContinental Hotels Group operates 884,000 rooms across 16 brands addressing the midscale through luxury segments. Holiday Inn and Holiday Inn Express constitute the largest brand, while Hotel Indigo, Even, Hualuxe, Kimpton, and Voco are newer lifestyle brands experiencing strong demand. The company launched a midscale brand, Avid, in summer 2017 and closed on a 51% stake in Regent Hotels in July 2018. It acquired Six Senses in February 2019. Managed and franchised represent 99% of total rooms. As of Dec. 31, 2021, the Americas represents 57% of total rooms, with Greater China accounting for 18%; Europe, Asia, the Middle East, and Africa make up 25%.

(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

Current Inflationary Environment Provides Demand Tailwinds for No-Moat TreeHouse Foods

Stock market graph with screen

Business Strategy and Outlook

Despite being the largest pure-play private-label food manufacturer in the U.S., TreeHouse’s performance has historically been stymied by poor execution, including lacklustre service levels and disjointed go-to-market efforts. Still, revamped leadership, strategy, and recent activist involvement have mostly remedied internal issues, and it is believed that the private label should continue to ascend, supported by secular trends across the U.S. retail and demographic landscape, once pandemic disruption subsides. While it is expected the windfalls from this rise to accrue disproportionately to retailers (who function as brand owners in this context), TreeHouse now has the right commercial and operational infrastructure in place to capture its fair share of growth and profitability. Management has reoriented the business strategy to align more with market dynamics instead of product categories. For categories that are either in early or mature stages of growth (snacking and beverages), the team is looking to grow the top line profitably through volume leverage and value-added innovation. For categories that are in stagnation or decline (typically centre-of-store wares), the goal is to maintain share and improve profitability through different manufacturing or order fulfilment processes. Ultimately, these mandates appropriately balance clarity with nuance and should allow it to optimize its asset base.

 Portfolio optimization is also a core strategy pillar, and it has rationalized many underperforming areas of the assortment. It has also divested secularly challenged business lines like nuts and ready-to-eat cereal. The firm is expected to be more aggressive in discontinuing or monetizing suboptimal assets. In this context, in March 2022, management announced its exploring strategic alternatives to maximize shareholder value through divesting its stagnant businesses (meal preparation) and realigning operations around the high-growth snacking and beverages business. While recent deals executed under the current management team have been more favourable, it is viewed this strategy with some scepticism considering the firm’s mixed track record regarding acquisitions thus far.

Financial Strength

TreeHouse’s financial health looks reasonable to us, though it does leave a bit to be desired. The company has leveraged up meaningfully in the past to fund acquisitions (like Flagstone in 2014 and Ralcorp in 2016), constraining its ability in recent years to make value accretive investments. Leverage is quite high (project 4.5 times net debt/adjusted EBITDA for 2022), although its expected this will fall below 2.5 times by 2025. As management continues work to divest assets (it recently completed the RTE cereal business sale, and one shouldn’t be surprised to see more portfolio grooming), even more cash should be available for debt paydown. TreeHouse generates a good bit of free cash flow, averaging in the mid-single-digit range as a percent of sales in recent years. While the company will continue to invest a fair amount of capital in modernizing and streamlining its production/warehousing, it is believed margin improvement, along with process changes (like increasing made-to-order products, which reduces inventory requirements and waste) will allow free cash flow to normalize in the mid- to high-single-digit range. TreeHouse also has other cash flow levers, including its receivables sales program, whereby it monetizes its receivables more quickly in partnership with a financial intermediary. The company is still responsible for administering and collecting the receivables, but net-net, it is expected this program will continue to reduce its working capital funding needs during any given period. The firm’s debt covenants are fairly restrictive. Most of the debt is secured, and maximum allowable leverage is 4.5 times, although the firm received a temporary waiver to exceed this ratio in February, given pandemic-related headwinds. Some of its notes also inhibit dividend payments. Longer term, as business fundamentals improve, debt is paid down, and the firm’s credit rating improves, it is anticipated it will have more favourable access to capital markets

Bulls Say’s

  • The private label industry should continue to benefit from secular trends across the grocery retail landscape and demographic trends in the U.S. 
  • If the coronavirus induces prolonged recessionary conditions in the U.S., private label will likely outperform, and TreeHouse would benefit disproportionately as a market leader. 
  • Its massive manufacturing apparatus should allow the company to benefit from the secular shift toward small, niche brands, by way of co-packing arrangements.

Company Profile 

Treehouse Foods, the largest private label manufacturer in the U.S., is the product of a slew of acquisitions, the most significant being the 2016 acquisition of Ralcorp, Conagra’s former private brands business. The firm plays in over 25 categories, including snacks like pretzels and cookies, meals like pasta and dry dinners, and single-serve beverages like pods and ready-to-drink coffee. Retailers represent its most significant end-market, where it sells products for resale under retailer brands, but it also serves foodservice customers (providing a similar service as its retail business), industrial (selling bulk food for repackaging and repurposing), and branded consumer goods firms (under co-packing arrangements). Over 90% of its revenue comes from the US.

(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

Norwegian’s Return to Profitability on the Near-Term Horizon with Entire Fleet Deployed

Graphic of investment stock market data analysis business

Business Strategy and Outlook

Changes to consumer behaviour surrounding travel as a result of the coronavirus have altered the economic performance of Norwegian Cruise Line Holdings, affecting its ability to generate excess economic rents over an extended horizon. As consumers returned to cruising after the 15-month sailing halt that ended in July 2021, cruise operators added COVID-19-related protocols, which have proven successful (as evidenced by lower positivity rates than on land) to reassure passengers of the safety of cruising in addition to the value proposition the holiday provides. Still, it’s expected Norwegian could intermittently see pricing competition as global supply returns to market, limiting near-term yield upside (also impacted by the redemption of future cruise credits through year end). On the cost side, inflated spending on the procurement of goods and higher oil prices could keep costs exacerbated in 2022. However, it is expected both pricing and costs to normalize over time, rising at a low single digit rate longer-term. Altogether, these factors lead to average returns on invested capital, including goodwill, these are set to fall below 10.5% weighted average cost of capital estimate over a multiyear period, supporting no-moat rating. Norwegian has carved out a compelling position in cruising, thanks to its freestyle offering, the product still has to compete with other land-based vacations and discretionary spending for wallet share. However it’s harder to capture the same percentage of spending over the near term, given the perceived risk of cruising, heightened by previous media attention.

While liquidity issues appear to be alleviating for cruise operators, Norwegian was able to liberally access the debt and equity markets since the beginning of the pandemic. Such capital market efforts signalled Norwegian’s dedication to weathering a return to normalcy for demand. Given that the firm should return to profitability in the back half of 2022, the $2.1 billion in cash of Norwegian’s balance sheet (as of March 2022) should provide ample dry powder for the firm to operate with over the near-term

Financial Strength

Norwegian has accessed significant liquidity since the beginning of the pandemic, most recently raising around $2.1 billion in debt in February 2022 to retire expensive, early pandemic issued notes with rates above 10%. These efforts signal Norwegian’s dedication to optimize its balance sheet opportunistically. Given that cash demands should largely be covered by advance ticket sales with the fleet fully redeployed, the liquidity constraints are becoming less worrisome, and that cash on the balance sheet ($2.1 billion as of March 2022) should provide cushion for a smooth operating conditions. Although the company is set to remain cash flow negative in 2022, it is expected it could achieve positive EBITDA performance for the full year. However, when considering the plethora of debt raises since the beginning of the pandemic, Norwegian is likely to remain above its 2.5-2.75 times net debt/adjusted EBITDA target it had previously sought to achieve. It doesn’t have Norwegian reaching around this range until 2028 as it slowly pays down debt and finances new ship purchases, implying a return to investment grade is a longer-term focus. Additionally, the firm surpassed its debt/capital covenant of less than 70%, ending 2021 at around 84% (with restrictive covenants waived into 2022), indicating a higher risk balance sheet.

Bulls Say’s

  • As Norwegian is smaller than its North American cruise peers, it has the ability to deploy its assets nimbly as cruising demand rises, allowing for strategic pricing tactics. 
  • The further rescission of COVID-related travel policies (particularly internationally) could allow cruises to appeal to a wider cohort of consumers, leading to demand growth faster than it is currently expect. 
  • Norwegian has capitalized on leisure industry knowledge from its prior sponsors as well as the addition of high-end Regent Seven Seas and Oceania brands, gathering best practices and leverage with vendors

Company Profile 

Norwegian Cruise Line is the world’s third-largest cruise company by berths (at nearly 60,000), operating 28 ships across three brands (Norwegian, Oceania, and Regent Seven Seas), offering both freestyle and luxury cruising. The company has redeployed its entire fleet as of May 2022. With nine passenger vessels on order among its brands through 2027 (representing 24,000 incremental berths), Norwegian is increasing capacity faster than its peers, expanding its brand globally. Norwegian sailed to around 500 global destinations before the pandemic

(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

Aggregates producer Vulcan Materials is well positioned to benefit from the ongoing recovery of U.S

Display of Stock market quotes

Business Strategy and Outlook

Aggregates producer Vulcan Materials is well positioned to benefit from the ongoing recovery of U.S. construction spending. It is forecasted strengthening demand growth for the public sector and modest growth for the private sector. Accounting for roughly half of shipments, public-sector demand is generally more stable, and projects, primarily highway construction, are more aggregate-intensive per dollar of spending. At a national level, it is expected public infrastructure spending to grow by 6% per year on average, an acceleration from the last couple of decades. Federal funding power has weakened as better vehicle mileage and inflation have diminished the buying power of the $0.18 per gallon gasoline tax, unchanged since 1993. The FAST Act, passed in December 2015, provided stability and near-term funding certainty, but didn’t solve the still-weakening gas tax. However, long-term federal funding was passed in late 2021, totalling $1.2 trillion.

The outlook for road spending differs considerably from state to state. Differences in population growth, road conditions, funding mechanisms, and overall state fiscal health influence spending. Vulcan’s largest states by revenue–Texas, California, Virginia, Tennessee, and Georgia–have significant road spending needs and strong finances to support high growth. Private-sector demand consists of residential and nonresidential construction, including commercial and industrial properties. Nonresidential construction is the most important driver in the category, as spending is more material-intensive per dollar than residential construction. It is forecasted that the nonresidential spending growth to slow to 4% in the longer term, as many key sectors to make more efficient use of their construction spending. Additionally, it is expected residential starts to converge the long-term housing-start forecast of 1.5 million by 2030. Residential construction historically supports nonresidential construction growth.

Financial Strength

At the end of the fourth quarter of 2021, net leverage was roughly 2.5 times net debt/adjusted EBITDA, compared with the company’s target of roughly 2-2.5 times. Continued improvement in construction markets should help leverage to improve further, falling below 1 times net debt/adjusted EBITDA by the end of 2024, all else equal. The weighted average debt maturity is 11 years (as of year-end 2021), so maturities look quite manageable.

In June 2021, Vulcan announced the acquisition of U.S. Concrete. Given the healthy balance sheet before the close, the deal is unlikely to hamper Vulcan’s financial health. This case is bolstered by the relatively smaller size of U.S. Concrete. With the poorly timed and expensive acquisition of Florida Rock Industries in 2007, Vulcan’s debt surged from roughly $500 million to $3.7 billion. Combined with the recession that devastated construction activity, Vulcan’s leverage soared to more than 8 times debt/adjusted EBITDA. The company took difficult but important steps to protect its cash flow and improve its balance sheet in the aftermath. The company learned a lesson, given its current approach to M&A with more discipline. The acquisition of Aggregates USA in 2017 exemplifies Vulcan’s more disciplined, balance sheet-friendly approach

Bulls Say’s

  • Vulcan has a favourable geographic footprint in states that have a strong need for increased road work and the capability to fund it. 
  • Not-in-my-backyard tendencies make the permitting process incredibly difficult for new quarries, forming high barriers to entry and protecting Vulcan’s business from incoming entrants. 
  • Vulcan has made significant progress on its costcutting initiatives, demonstrated by its improving cost per ton despite relatively flattish demand.

Company Profile 

Vulcan Materials is the United States’ largest producer of construction aggregates (crushed stone, sand, and gravel). Its largest markets include Texas, California, Virginia, Tennessee, Georgia, Florida, North Carolina, and Alabama. In 2021, Vulcan sold 222.9 million tons of aggregates, 11.4 million tons of asphalt mix, and 5.6 million cubic yards of ready-mix. As of Dec. 31, 2021, the company had nearly 16 billion tons of aggregates reserves

(Source: Morning Star)

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