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Dividend Stocks

CPU Group – The Board declared a 40% franked interim dividend of 24cps, up +4%.

Investment Thesis:

  • Current expectations of aggressive interest rates increase globally. 
  • CPU is globally diversified with a revenue model that generates predictable recurring revenues and strong free cash flow generation.
  • Two main organic growth engines in mortgage servicing and employee share plans should lead to organic EPS growth.
  • Expectations of margin improvement via cost reductions program. 
  • Leveraged to rising interest rates on client balances, corporate action and equity market activity.
  • Potential for earnings derived from non-share registry opportunities due to higher compliance and IT requirements.
  • Solid free cash flow and deleveraging balance sheet.

Key Risks:

  • Increased competition from competitors such as recently listed Link and Equiniti which affect margins.
  • Cost cuts are not delivered in accordance with market expectations.
  • Sub-par performance in any of its segments, especially mortgage servicing (Business Services) as a result of higher regulatory and litigation risks; Register and Employee Share Plans as a result of subdued activity.
  • Exchanges such as ASX are exploring blockchain solutions to upgrade its clearing and settlement system (CHESS). This distributed ledger technology can bring registry businesses in-house and disrupt CPU.

Key Highlights:

  • Group Revenue (ex-MI) was up +4.5% (adjusting for the CCT acquisition, organic operating revenue growth was down -2.2% and excluding event-based revenues and CCT, operating revenue ex MI was up +3.6%) and including Margin Income as well as CCT, total revenue rose +4.6%.
  • EBIT increased +14.2% to $217.9m whilst EBIT excluding Margin Income increased +16.7% to $157.8m (adjusting for CCT, it was up +15.5% to $156.1m) with EBIT ex MI margin up +150bps to 14.4%, largely due to the growth in Employee Share Plans supported by cost management initiatives.
  • Management NPAT was up +16.5% to $137.4m and Management EPS increased by +4.5% to 22.76cps (excluding dilution from the Rights Issue and the contribution from CCT, legacy EPS increased +10.6%).
  • Net operating cash flow increased +63.8% to $203.3m, representing an EBITDA to cash conversion rate of ~66%, up +20%, which combined with capex and net MSR spend, delivered FCF $181.5m.
  • Net cash outflow was $633.4m, after spending $713m on acquisitions net of disposals and $101.9m on dividends.
  • Net debt +99.2% over FY21 to $1342.2m, increasing Net Debt/ EBITDA by +0.95x to 2.02x, at the higher end of target range.
  • The Board declared a 40% franked interim dividend of 24cps, up +4%.
  • Management continues to refine the portfolio and have reclassified the UK Mortgage Services business as an asset held for sale, anticipating the sale of the business in the foreseeable future.

Company Description:

Computershare Ltd (CPU) is a global market leader in transfer agency and share registration, employee equity plans, mortgage servicing, proxy solicitation and stakeholder communications. CPU also operates in corporate trust, bankruptcy, class action and a range of other diversified financial and governance services. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Western Union Is Shifting to Digital

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

Business Strategy and Outlook

Western Union’s primary macroeconomic exposure is to employment markets in the developed world, as the search for better economic opportunities is the fundamental driver for money transfers. While conditions have improved over time in the United States and Europe, with new entrants adding to the issues for legacy operators like Western Union. At this point, we don’t see a catalyst to improve the situation, and pandemic-related headwinds appear to be lingering. Recent geopolitical events could be an additional headwind. Another major issue for Western Union is the industry shift toward electronic methods of money transfer. The company has been actively building out its presence in electronic channels in recent years to adapt to the change in the industry. Western Union saw a sharp spike in digital transfers at the beginning of the pandemic, and growth has remained strong. Western Union achieved a 32% year-over-year increase in transaction growth in 2021 as this area of the company’s business jumped to about a quarter of revenue. 

Morningstar analysts believe the firm’s aggressive approach is the best strategy as Western Union positions itself to maintain its scale advantage despite the shift. From Morningstar analyst view, scale and market share across all channels will be the dominant factor in long-term competitive position, and Western Union appears to be maintaining its overall position. However, the growth that the company is seeing in digital transfers does not appear to be leading to strong overall growth.

Western Union Is Shifting to Digital

Western Union’s third-quarter results weren’t particularly impressive, as the company continues to battle some pandemic-related headwinds. However, from a long-term point of view,  focus is more on the company’s digital channel results, as Morningstar analysts believe sharing in this channel’s growth is key to maintaining the company’s scale advantage and wide moat over time. On that front, Western Union maintains double-digit growth in digital. Morningstar analysts view the company’s shares as undervalued, as the company has the potential to adapt to a shifting market. Thus, maintain a $26 fair value estimate.

Digital channels considered as the bright spot for the company. Growth in digital channels did moderate as the company lapped the spike it saw last year. However, year-over-year transaction and revenue growth of 19% and 15%, respectively, can be considered as a solid result. Digital transfers now account for about one quarter of revenue, and management believes it is on track to exceed $1 billion in digital revenue in 2021. As per Morningstar analysts perspective, Western Union’s ability to scale across both cash and digital channels is a significant advantage as the overall market shifts to digital.

Financial Strength 

Financial Strength Western Union’s capital structure is fairly conservative, as management sees a strong credit profile as an advantage in attracting agents. The company carried $3.0 billion in debt at the end of 2021, resulting in debt/EBITDA of 2.3 times; this is a reasonable level, given the stability of the business. Western Union also typically holds a substantial amount of cash. Net debt at the end of 2021 was approximately $1.8 billion, and we expect the company to hold a net debt position of about $2 billion over time. Given recent changes to tax laws, it’s possible Western Union might not hold as much cash as it has historically, as it will no longer incur a tax penalty upon repatriation. This could help free management’s hand, as the company historically has returned the bulk of its free cash flow to shareholders through stock repurchases and dividends

Bulls Say

  • The demographic factor that has historically driven industry growth–namely, the differential between population growth in developing and developed countries–remains in place for the foreseeable future. 
  • Western Union didn’t see a major drop-off during the last recession or the pandemic, highlighting the stability of the business. 
  • While the motives for immigrants to relocate to wealthier countries are well understood, developed countries also have incentive to open their borders, as negligible native population growth makes immigration a necessity for long-term GDP growth.

Company Profile

Western Union provides domestic and international money transfers through its global network of about 500,000 outside agents. It is the largest money transfer company in the world and one of only a few companies with a truly global agent network.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Commodities Trading Ideas & Charts

PG&E Investing Heavily in California Energy Policy Projects

Business Strategy and Outlook

PG&E emerged from bankruptcy on July 1, 2020, after 17 months of negotiating with 2017-18 Northern California fire victims, insurance companies, politicians, lawyers, and bondholders. The new PG&E is well positioned to grow rapidly, given the investment needs to meet California’s aggressive energy and environmental policies. PG&E is set to invest more than $8 billion annually for the next five years, leading to 8% annual growth. California’s core ratemaking regulation is highly constructive with usage-decoupled rates, forward-looking rate reviews, and allowed returns well above the industry average. Morningstar analysts expect California regulators to support premium allowed returns to encourage energy infrastructure investment to support the state’s clean energy goals, including a carbon-free economy by 2045. This upside is partially offset by the uncertain future of PG&E’s natural gas business, which could shrink as California decarbonizer its economy.

PG&E will always face public and regulatory scrutiny as the largest utility in California. That scrutiny has escalated with the deadly wildfires and power outages. Legislative and regulatory changes during and since the bankruptcy have reduced PG&E’s financial risk, but the state’s inverse condemnation strict liability standard remains a concern. CEO Patti Poppe faces a tall task restoring PG&E’s reputation among customers, regulators, politicians, and investors. 

Financial Strength 

Following the bankruptcy restructuring, PG&E has substantially the same capital structure as it did entering bankruptcy with many of the same bondholders after issuing $38 billion of new or reinstated debt. PG&E’s $7.5 billion securitized debt issuance would eliminate $6 billion of temporary debt at the utility and further fortify its balance sheet. The post bankruptcy equity ownership mix is much different. PG&E raised $5.8 billion of new common stock and equity units in late June 2020, representing about 30% ownership. Another $3.25 billion of new equity came from a group of large investment firms.  analysts expect PG&E to maintain investment-grade credit ratings. Morningstar analysts estimate PG&E will invest more than $8 billion annually during the next few years. Tax benefits and regulatory asset recovery should result in minimal new equity and debt needs at least through 2023.Morningstar analysts expect PG&E will be prepared to reinitiate a dividend in 2024 after meeting the terms of its bankruptcy settlement. 

Bulls Says

  • California’s core rate regulation is among the most constructive in the U.S. with usage-decoupled revenue, annual rate true-up adjustments, and forward-looking rate setting. 
  • Regulators continue to support the company’s investments in grid modernization, electric vehicles, and renewable energy to meet the state’s progressive energy policies. 
  • State legislation passed in August 2018 and mid-2019 should help limit shareholder losses if PG&E faces another round of wildfire liabilities.

Company Profile

PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.3 million electricity customers and 4.6 million gas customers in 47 of the state’s 58 counties. PG&E operated under bankruptcy court supervision between January 2019 and June 2020. In 2004, PG&E sold its unregulated assets as part of an earlier post bankruptcy reorganization

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

GM Will Likely Look Very Different and More High Tech in 2030 Than It Is Now

Business Strategy and Outlook:

GM is having a competitive lineup in all segments, combined with a reduced cost base, finally enabling the firm to have the scale to match its size. The head of Consumer Reports automotive testing even said Toyota and Honda could learn from the Chevrolet Malibu. The GM’s earnings potential is excellent because the company has a healthy North American unit and a nearly mature finance arm with GM Financial. Moving hourly workers’ retiree healthcare to a separate fund and closing plants have drastically lowered GM North America’s break-even point to U.S. industry sales of about 10 million-11 million vehicles. It has more scale to come from GM moving its production to more global platforms and eventually onto vehicle sets over the next few years for even more flexibility and scale. Exiting most U.S. sedan segments also helps.

GM makes products that consumers are willing to pay more for than in the past. It no longer has to overproduce trying to cover high labor costs and then dump cars into rental fleets (which hurts residual values). GM now operates in a demand-pull model where it can produce only to meet demand and is structured to do no worse than break even at the bottom of an economic cycle when plants can be open. The result is higher profits than under old GM despite lower U.S. share. It now seeks roughly $300 billion in revenue by 2030 from many new high-margin businesses such as insurance, subscriptions, and selling data, while targeting 2030 total company adjusted EBIT margin of 12%-14%, up from 11.3% in 2021 and 7.9% in 2020. GM takes actions such as buying Cruise, along with GM’s connectivity and data-gathering via OnStar, position GM well for this new era. Cruise is offering autonomous ride-hailing with its Origin vehicle and GM targets $50 billion of Cruise revenue in 2030. GM is investing over $35 billion in battery electric and autonomous vehicles for 2020-25 and is launching 30 BEVs through 2025 with two thirds of them available in North America. Management also targets over 2 million annual BEV sales by mid-decade and in early 2021 announced the ambition to only sell zero-emission vehicles globally by 2035.

Financial Strengths:

GM’s balance sheet and liquidity were strong at the end of 2021, apart from $11.2 billion in underfunded pension and other postemployment benefit obligations, an improvement from $30.8 billion at year-end 2014. Management targets automotive cash and securities of $18 billion and liquidity of $30 billion-$35 billion. GM had calculated that at year-end 2021, the automotive net cash and securities, excluding legacy obligations but including Cruise, of $7.7 billion, about $5.26 per diluted share. Global pension contributions in 2022 are expected at about $570 million, with about $500 million of that amount for non-U.S. plans. 

Auto and Cruise debt at Dec. 31 is $17.0 billion, mostly from senior unsecured notes and capital leases. Credit line availability after an April 2021 renewal is about $17.2 billion across three lines with one of those lines being a 364-day $2 billion line allocated exclusively to GM Financial. The other two automotive lines are a $4.3 billion line expiring in April 2024 and an $11.2 billion line. The $11.2 billion line has $9.9 billion available until April 2026 while the remaining portion is available until April 2023. GM fulfilled its UAW VEBA funding obligations in 2010. GM had calculated in 2021 that the automotive and Cruise debt/adjusted EBITDA at 1.3, excluding legacy obligations and equity income. Automotive debt maturities including capital leases are about $463 million in 2022.

Bulls Say:

  • GMNA’s break-even point of about 10 million-11 million units is drastically lower than it was under the old GM. The company’s earnings should grow rapidly as GM becomes more cost-efficient.
  • GM’s U.S. hourly labor cost is about $5 billion compared with about $16 billion in 2005 under the old GM.
  • GM can charge thousands of dollars more per vehicle in light-truck segments. Higher prices with fewer incentive dollars allow GM to get more margin per vehicle, which helps mitigate a severe decline in light- vehicle sales and falling market share.

Company Profile:

General Motors Co. emerged from the bankruptcy of General Motors Corp. (old GM) in July 2009. GM has eight brands and operates under four segments: GM North America, GM International, Cruise, and GM Financial. The United States now has four brands instead of eight under old GM. The company lost its U.S. market share leader crown in 2021 with share down 280 basis points to 14.6%, but it is expected that GM to reclaim the top spot in 2022 due to 2021 suffering from the chip shortage. GM Financial became the company’s captive finance arm in October 2010 via the purchase of AmeriCredit.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

GM Will Likely Look Very Different and More High Tech in 2030 Than It Is Now

Business Strategy and Outlook:

GM is having a competitive lineup in all segments, combined with a reduced cost base, finally enabling the firm to have the scale to match its size. The head of Consumer Reports automotive testing even said Toyota and Honda could learn from the Chevrolet Malibu. The GM’s earnings potential is excellent because the company has a healthy North American unit and a nearly mature finance arm with GM Financial. Moving hourly workers’ retiree healthcare to a separate fund and closing plants have drastically lowered GM North America’s break-even point to U.S. industry sales of about 10 million-11 million vehicles. It has more scale to come from GM moving its production to more global platforms and eventually onto vehicle sets over the next few years for even more flexibility and scale. Exiting most U.S. sedan segments also helps.

GM makes products that consumers are willing to pay more for than in the past. It no longer has to overproduce trying to cover high labor costs and then dump cars into rental fleets (which hurts residual values). GM now operates in a demand-pull model where it can produce only to meet demand and is structured to do no worse than break even at the bottom of an economic cycle when plants can be open. The result is higher profits than under old GM despite lower U.S. share. It now seeks roughly $300 billion in revenue by 2030 from many new high-margin businesses such as insurance, subscriptions, and selling data, while targeting 2030 total company adjusted EBIT margin of 12%-14%, up from 11.3% in 2021 and 7.9% in 2020. GM takes actions such as buying Cruise, along with GM’s connectivity and data-gathering via OnStar, position GM well for this new era. Cruise is offering autonomous ride-hailing with its Origin vehicle and GM targets $50 billion of Cruise revenue in 2030. GM is investing over $35 billion in battery electric and autonomous vehicles for 2020-25 and is launching 30 BEVs through 2025 with two thirds of them available in North America. Management also targets over 2 million annual BEV sales by mid-decade and in early 2021 announced the ambition to only sell zero-emission vehicles globally by 2035.

Financial Strengths:

GM’s balance sheet and liquidity were strong at the end of 2021, apart from $11.2 billion in underfunded pension and other postemployment benefit obligations, an improvement from $30.8 billion at year-end 2014. Management targets automotive cash and securities of $18 billion and liquidity of $30 billion-$35 billion. GM had calculated that at year-end 2021, the automotive net cash and securities, excluding legacy obligations but including Cruise, of $7.7 billion, about $5.26 per diluted share. Global pension contributions in 2022 are expected at about $570 million, with about $500 million of that amount for non-U.S. plans. 

Auto and Cruise debt at Dec. 31 is $17.0 billion, mostly from senior unsecured notes and capital leases. Credit line availability after an April 2021 renewal is about $17.2 billion across three lines with one of those lines being a 364-day $2 billion line allocated exclusively to GM Financial. The other two automotive lines are a $4.3 billion line expiring in April 2024 and an $11.2 billion line. The $11.2 billion line has $9.9 billion available until April 2026 while the remaining portion is available until April 2023. GM fulfilled its UAW VEBA funding obligations in 2010. GM had calculated in 2021 that the automotive and Cruise debt/adjusted EBITDA at 1.3, excluding legacy obligations and equity income. Automotive debt maturities including capital leases are about $463 million in 2022.

Bulls Say:

  • GMNA’s break-even point of about 10 million-11 million units is drastically lower than it was under the old GM. The company’s earnings should grow rapidly as GM becomes more cost-efficient.
  • GM’s U.S. hourly labor cost is about $5 billion compared with about $16 billion in 2005 under the old GM.
  • GM can charge thousands of dollars more per vehicle in light-truck segments. Higher prices with fewer incentive dollars allow GM to get more margin per vehicle, which helps mitigate a severe decline in light- vehicle sales and falling market share.

Company Profile:

General Motors Co. emerged from the bankruptcy of General Motors Corp. (old GM) in July 2009. GM has eight brands and operates under four segments: GM North America, GM International, Cruise, and GM Financial. The United States now has four brands instead of eight under old GM. The company lost its U.S. market share leader crown in 2021 with share down 280 basis points to 14.6%, but it is expected that GM to reclaim the top spot in 2022 due to 2021 suffering from the chip shortage. GM Financial became the company’s captive finance arm in October 2010 via the purchase of AmeriCredit.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Johnson Controls’ Service Offerings Are Gaining Traction

Business Strategy and Outlook

Before 2016, the market had long viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls is now a more profitable and less cyclical pure-play building technology firm that manufacturers heating, ventilation, and air-conditioning systems; fire and security products; and building automation and control products.

In early 2019, Johnson Controls sold its power solutions business to a consortium of investors for $11.6 billion of net proceeds that the firm used to pay down debt and repurchase shares. Johnson Controls’ prudent capital allocation strategy in tandem with its simplified business model that is clearly showing improving fundamentals have been catalysts for the stock.

 As a pure play building technologies and solutions business, Johnson Controls stands to benefit from secular trends in global urbanization and increased demand for energy-efficient and smart building products and solutions.The COVID-19 pandemic will increase the market opportunity for healthy building solutions, such as air filtration and touchless access controls. These secular tailwinds should allow Johnson Controls to grow faster than the economies it serves. Indeed, over the next three years (through fiscal 2024), the firm is targeting revenue growth at a 6%-7% compound annual rate, compared with expectations of 4%-5% market growth. Key levers behind Johnson Controls’ targeted outperformance include continued product innovation (supporting market share gains and pricing); increased service penetration (a higher margin opportunity); and the firm’s participation in meaningful growth themes (for example, energy efficiency, smart buildings, and indoor air quality solutions).

Financial Strength

After selling its power solutions segment in April 2019, which netted Johnson Controls $11.6 billion, the firm paid down $5.3 billion of debt and repurchased 191 million shares (21% share reduction) for approximately $7.5 billion. The firm’s balance sheet is now in great shape, with a net debt/2021 EBITDA ratio of about 1.8, which is below management’s targeted range of 2.0-2.5. The firm finished its fiscal 2021 with $7.7 billion of debt, about $1.3 billion of cash on the balance sheet, and $3 billion available on two credit facilities. The firm’s significant liquidity as dry powder for additional buybacks or acquisitions

Bulls Say’s

  •   Johnson Controls should benefit from secular trends in global urbanization and increased demand for energy-efficient and smart building solutions. 
  • The COVID-19 pandemic should increase the market opportunity for air filtration and touchless access control solutions. 
  • Johnson Controls’ free cash flow conversion has been improving, exceeding 100% in 2020-21. A 100% free cash flow conversion is in line with other world-class firms

Company Profile 

Johnson Controls manufactures, installs, and services HVAC systems, building management systems and controls, industrial refrigeration systems, and fire and security solutions. Commercial HVAC accounts for about 40% of sales, fire and security represents another 40% of sales, and residential HVAC, industrial refrigeration, and other solutions account for the remaining 20% of revenue. In fiscal 2021, Johnson Controls generated over $23.5 billion in revenue.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

LNK results reflects Operating NPATA of $55.9m for 1H22, up +9% relative to the pcp, and included a $19.5m contribution from PEXA

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Investment Thesis:

  • LNK is currently under a takeover offer by D&D, which the LNK Board has unanimously recommended. 
  • Leveraged to ongoing outsourcing of administration by retail super funds.
  • LNK still has exposure to any further upside in PEXA’s valuation. 
  • New contract wins in Fund Administration and increased market activity.
  • Successfully delivering on its offshore expansion story. 
  • Efficiency benefits from the cost out program. 
  • Clarity around Brexit will remove uncertainty / potential discount assumed in current valuation / share price.  
  • Value accretive bolt-on acquisitions. 
  • Favourable currency movements. 

Key Risks:

  • LNK does not receive all the regulatory approvals for the current takeover offer from D&D. 
  • Lower market activity and business / investor confidence. 
  • Loss of major client contract(s) in Fund Administration.
  • Adverse changes in super regulatory environment – e.g. super account consolidation.
  • Lack of product development.
  • Adverse currency movements.

Key Highlights:

  • Link Administration Holdings Ltd (LNK) reported strong 1H22 results ahead of expectations, with the Company upgrading its FY22 guidance.
  • LNK’s results reflect – Operating NPATA of $55.9m for 1H22, up +9% relative to the pcp, and included a $19.5m contribution from PEXA.
  • Statutory Loss of $81.7m was due to a non-cash impairment charge of $81.6m related to the BCM business and rationalisation of LNK’s premises footprint.
  • According to management, the GTP remains on track to deliver the committed gross annualised savings of $75m by the end of FY22.
  • For 1H22, the GTP delivered gross savings of $14.9m (including D&A).
  • D&D takeover offer unanimously recommended by LNK Board – total consideration of $5.68 per share.
  • As per LNK’s announcement on 22 December 2021, the Company has entered a scheme of implementation deed with Dye & Durham (D&D) to have 100% of its shares acquired at $5.50 per share plus a fully franked 3cps interim dividend (which declared at the 1H22 results)
  • Investors may also receive a further 15cps if LNK reaches an agreement to sell its Banking and Credit management (BCM) business prior to or up to 12 months after the implementation of the scheme. LNK shareholders are expected to vote on the scheme in May 2022.
  • BCM sales does not proceed and investors miss out on the additional 15cps value.
  • There are contingencies in the offer, which also relates to the Woodford Matters (if there are fines before the completion of the scheme this may delay or put the takeover into jeopardy).

Company Description:

Link Administration Holding Ltd (LNK) is the largest provider of superannuation fund administration services to super fund in Australia. Further, the Company is also a leading provider of shareholder management and analytics, share registry and other services to corporates in Australia and globally. The Company has 5 main divisions: (1) Retirement & Super Solutions (RSS), (2) Corporate Markets (CM), (3) Technology & Operations (T&O), (4) Fund Solutions (FS) and (5) Banking & Credit Management (BCM). LNK was listed on the ASX in October 2015. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Jack Henry Remains Committed to the Idea That Slow and Steady Wins the Race

price of btc is going to breakout

Business Strategy and Outlook

 Jack Henry remains committed to the idea that slow and steady wins the race. While its larger peers both completed big mergers in 2019 that expanded their operations into new areas, Jack Henry continues to build out its competitive position organically. Overall, this approach should allow Jack Henry to maintain its wide moat and continue to modestly outperform its larger peers.

The company has not been without challenges recently. Jack Henry’s business is quite stable, with much of its revenue recurring under long-term contracts and related to essential services for banks and credit unions. Jack Henry and its peers saw only a modest impact from the financial crisis in 2008, which is to be believed was essentially a worst case for the industry from a macro perspective. However, growth stalled a bit as banks looked to reduce spending during the pandemic. But much of the decline in growth has come from a falloff in deconversion fees, given that M&A activity among banks declined significantly due to the uncertainty created by COVID-19. These fees fall almost entirely to the bottom line, and as such can have an outsize impact on margins and profitability. However, while this weighed on recent results, from a long-term perspective, holding onto more clients can only be construed as a positive. Management’s guidance for fiscal 2022 suggests a full return to normalized growth, and the stage seems set for this to occur

 Jack Henry has generally outperformed its larger peers in terms of growth, and expect this to continue. The company notched up over 40 competitive core takeaways in fiscal 2021, suggesting that it continues to pick up incremental share, although the high switching costs around this service make this a very slow process. On the negative side, margins have been under some pressure recently as the company developed and migrated clients to a new card processing platform. Jack Henry’s competitive position is a little weaker on this side, given its relative lack of scale, but at this point see this is a one-time issue and margins should rebound now that this initiative is complete.

Financial Strength

Jack Henry’s balance sheet is strong. Historically, the company has generally carried no or just a nominal amount of debt, and it had only $100 million in debt at the end of fiscal 2021. The company’s conservative balance sheet structure, along with the underlying stability of the business, creates significant flexibility in terms of returning capital to shareholders. While the company does pursue acquisitions, historically these have been limited to small, bolt-on deals that can be covered with free cash flow. Most of the company’s free cash flow is returned to shareholders, with dividends and share buybacks equating to about 90% of free cash flow over the past five years.

Bulls Say’s

  •  The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts. 
  • Jack Henry’s organic approach to growth has allowed the company to build out a relatively streamlined set of products, which allows the company to concentrate its resources and maintain relatively strong margins. 
  • Jack Henry has outperformed its larger peers in terms of organic growth over time, suggesting the company is steadily improving its share.

Company Profile 

Jack Henry is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing for U.S. banks and credit unions, with a focus on small and midsize banks. Jack Henry serves about 1,000 banks and 800 credit unions.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

J.B. Hunt’s Intermodal Rate Backdrop Holding Strong, 2022 Freight Outlook Favorable

Business Strategy and Outlook

 At its core, J.B. Hunt is an intermodal marketing company; it contracts with the Class I railroads for the line-haul movement of its domestic containers. It was one of the first for-hire truckload carriers to venture into intermodal shipping, forming a partnership with Burlington Northern Santa Fe in the West in 1990. Years later, it struck an agreement with Norfolk Southern in the East. Hunt has established a clear leadership position in intermodal shipping, with a 20%-plus share of a $22 billion-plus industry. The next-largest competitor is Hub Group, followed by Schneider National’s intermodal division and XPO Logistics’ intermodal unit. Intermodal made up slightly less than half of Hunt’s total revenue in 2021.

Hunt isn’t immune to downturns, but over the past decade-plus it’s reduced its exposure to the more capital-intensive truckload-shipping sector, which represents about 28% of sales (including for-hire and dedicated-contract business) versus 60% in 2005. Hunt is also shifting its for-hire truckload division to more of an asset-light model via its drop-trailer offering while investing meaningfully in asset-light truck brokerage and final-mile delivery.

 Rates in the competing truckload market corrected in 2019, driving down intermodal’s value proposition relative to trucking. Thus, 2019 was a hangover year and fallout from pandemic lockdowns pressured container volume into early 2020. However, truckload capacity has since tightened drastically, contract pricing is rising nicely across all modes, and underlying intermodal demand has rebounded sharply on the spike in retail goods consumption (intermodal cargo is mostly consumer goods) and heavy retailer restocking. Hunt is grappling with near-term rail network congestion that’s constraining volume growth, but the firm is working diligently with the rails and customers to minimize the issue. The expectation is that  2.5%-3.0% U.S. retail sales growth and conversion trends to support 3.0%-3.5% industry container volume expansion longer term, with 2.0%-2.5% pricing gains on average, though Hunt’s intermodal unit should modestly outperform those trends given its favorable competitive positioning.

Financial Strength

J.B. Hunt enjoys a strong balance sheet and is not highly leveraged. It had total debt near $1.3 billion and debt/EBITDA of about 1 time at the end of 2021, roughly in line with the five-year average. EBITDA covered interest expense by a very comfortable 35 times in 2021, and expect Hunt will have no problems making interest or principal payments during our forecast period. Hunt posted more than $350 million in cash at the end of 2021, up from $313 million at the end of 2020. Historically, Hunt has held modest levels of cash, in part because of share-repurchase activity and its preference for organic growth (including investment in new containers and chassis, for example) over acquisitions. For reference, it posted $7.6 million in cash and equivalents at the end of 2018 and $14.5 million in 2017. The company generates consistent cash flow, which has historically been more than sufficient to fund capital expenditures for equipment and dividends, as well as a portion of share-repurchase activity. It is expected that trend to persist. Net capital expenditures will jump to $1.5 billion in 2022 as the firm completes its intermodal container expansion efforts, but after that it should also have ample room for debt reduction in the years ahead, depending on its preference for share buybacks. Overall, Hunt will mostly deploy cash to grow organically, while taking advantage of opportunistic tuck-in acquisitions (a deal in dedicated or truck brokerage isn’t out of the question, but and suspect the final mile delivery niche is most likely near term).

Bulls Say’s

  •  Intermodal shipping enjoys favorable long-term trends, including secular constraints on truckload capacity growth and shippers’ efforts to minimize transportation costs through mode conversions (truck to rail). 
  • It is believed that the intermodal market share in the Eastern U. S. still has room for expansion, suggesting growth potential via share gains from shorter-haul trucking. 
  • J.B. Hunt’s asset-light truck brokerage unit is benefiting from strong execution, deep capacity access, and tight market capacity. It’s also moved quickly in terms of boosting back-office and carrier sourcing automation.

Company Profile 

J.B. Hunt Transport Services ranks among the top surface transportation companies in North America by revenue. Its primary operating segments are intermodal delivery, which uses the Class I rail carriers for the underlying line-haul movement of its owned containers (45% of sales in 2021); dedicated trucking services that provide customer-specific fleet needs (21%); for-hire truckload (7%); heavy goods final-mile delivery (6%), and asset-light truck brokerage (21%).

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Jack Henry & Associates: margins under pressure as company developed and migrated clients to a new card processing platform

Business Strategy and Outlook

Jack Henry remains committed to the idea that slow and steady wins the race. While its larger peers both completed big mergers in 2019 that expanded their operations into new areas, Jack Henry continues to build out its competitive position organically. Overall, it is seen this approach should allow Jack Henry to maintain its wide moat and continue to modestly outperform its larger peers. 

The company has not been without challenges recently. Jack Henry’s business is quite stable, with much of its revenue recurring under long-term contracts and related to essential services for banks and credit unions. Jack Henry and its peers saw only a modest impact from the financial crisis in 2008, which is likely was essentially a worst case for the industry from a macro perspective. However, growth stalled a bit as banks looked to reduce spending during the pandemic. But much of the decline in growth has come from a falloff in deconversion fees, given that M&A activity among banks declined significantly due to the uncertainty created by COVID-19. These fees fall almost entirely to the bottom line, and as such can have an outsize impact on margins and profitability. However, while this weighed on recent results, from a long-term perspective, holding onto more clients can only be construed as a positive. Management’s guidance for fiscal 2022 suggests a full return to normalized growth, and the stage seems set for this to occur. 

Jack Henry has generally outperformed its larger peers in terms of growth, and is believed for this to continue. The company notched up over 40 competitive core takeaways in fiscal 2021, suggesting that it continues to pick up incremental share, although the high switching costs around this service make this a very slow process. On the negative side, margins have been under some pressure recently as the company developed and migrated clients to a new card processing platform. It is held Jack Henry’s competitive position is a little weaker on this side, given its relative lack of scale, but at this point see this is a one-time issue and margins should rebound now that this initiative is complete.

Financial Strength

Jack Henry’s balance sheet is strong. Historically, the company has generally carried no or just a nominal amount of debt, and it had only $100 million in debt at the end of fiscal 2021. The company’s conservative balance sheet structure, along with the underlying stability of the business, creates significant flexibility in terms of returning capital to shareholders. While the company does pursue acquisitions, historically these have been limited to small, bolt-on deals that can be covered with free cash flow. Most of the company’s free cash flow is returned to shareholders, with dividends and share buybacks equating to about 90% of free cash flow over the past five years.

Bulls Say’s

  • The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts. 
  • Jack Henry’s organic approach to growth has allowed the company to build out a relatively streamlined set of products, which allows the company to concentrate its resources and maintain relatively strong margins. 
  • Jack Henry has outperformed its larger peers in terms of organic growth over time, suggesting the company is steadily improving its share.

Company Profile 

Jack Henry is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing for U.S. banks and credit unions, with a focus on small and midsize banks. Jack Henry serves about 1,000 banks and 800 credit unions. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.