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Global stocks

Essential Management Reaffirms Growth Trajectory In Line With Our Outlook

Business Strategy and Outlook

For more than 50 years, Essential Utilities–formerly Aqua America–was one of the few pure-play water utilities in the United States. But its $4.3 billion acquisition of Peoples Gas in March 2020 made the company nearly 50% larger and diversified its earnings mix. It is expected that the new gas business to contribute about 30% of earnings on a normalized basis.

 Essential’s gas and water utility earnings are mostly rate regulated. The management will have to prioritize infrastructure investment growth and a robust dividend, like most other utilities. Essential’s water utility acquisition strategy lifts our earnings-growth rate to 8% annually during the next five years, a little higher than most other utilities’ growth outlook.

 Although efficiency savings have reduced retail water use for several decades, Essential has been able to grow earnings and the dividend by replacing and upgrading infrastructure that is decades old. It is also expected that  Essential will grow by acquiring small, typically municipal-owned water systems. In the U.S., 85% of the population is served by a municipal water utility, offering a long runway of acquisition growth opportunities. 

Similarly,  expect little natural gas usage growth at Peoples Gas, which had been owned by a private equity group. But the gas business still should produce steady earnings growth as Essential replaces and upgrades the system infrastructure. 

Fair market value laws in several states support Essential’s water business acquisition strategy. These laws require Essential to pay municipalities at least the assessed value of the system it acquires and allow Essential to add these assets to rate base at the assessed value rather than historical cost. The municipalities benefit by ensuring they get fair prices, and Essential shareholders benefit by ensuring the company doesn’t overpay for growth. In many cases, these deals are immediately value-accretive. Recent FMV legislation in Kentucky and West Virginia opens acquisition opportunities near areas Essential already serves.

Financial Strength

Essential maintains a capital structure in line with its regulatory allowed capital structure for ratemaking purposes and leverage metrics in line with high investment-grade credit ratings and doesn’t expect that to change. It is expected Essential to issue new debt to fund growth investments and acquisitions in the coming years. It is not expecting any material new equity needs after raising $300 million in 2021. With constructive regulation, expect Essential will be able to use its cash flow to fund most of its equity investment needs during the next five years. Essential has paid an annual dividend since 1945 and increased it at least 5% for each of the last 25 years.  Essential will be able to continue growing the dividend at this rate or higher while staying below management’s 65% maximum pay-out ratio threshold, which is in line with Essential’s peer utilities.

Bulls Say’s

  •  Constructive regulation allows Essential to raise rates through surcharges or rate cases to reduce regulatory lag and enhance cash flow available to pay the dividend and invest in growth projects. 
  • Fair market valuation state laws allow Essential to make municipal water utility acquisitions immediately value-accretive for shareholders. 
  • Essential has raised its dividend 31 times in the last 30 years, including 29 consecutive increases of more than 5%.

Company Profile 

Essential Utilities is a Pennsylvania-based holding company for U.S. water, wastewater, and natural gas distribution utilities. The company’s water business serves 3 million people in eight states. Nearly three fourths of its water earnings come from Pennsylvania, primarily suburban Philadelphia. It also has a small market-based water business that provides water and water services to third parties, notably natural gas producers. Its $4.3 billion Peoples Gas acquisition that closed in March 2020 adds 750,000 gas distribution customers in Pennsylvania, West Virginia, and Kentucky.

(Source: MorningStar)

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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.

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Dividend Stocks Philosophy Technical Picks

Ingredion’s Specialty Ingredients Are Positioned for Long-Term Growth Despite Near-Term Volatility

Business Strategy and Outlook

Ingredion manufactures starches and sweeteners by wet milling and processing corn and other starch-based raw materials. The company steeps these raw materials in a water-based solution before separating the ingredients from co-products (animal feed and corn oil). The company’s long-term goal is for specialty ingredients to generate 38% of sales and nearly 60% of profits. Core ingredients are typically commodity-grade, providing no pricing power for Ingredion. Ingredion sells roughly half of its core products on a cost-plus basis. Specialty ingredients are value-added, requiring additional processing and, in many cases, proprietary formulations. 

Financial Strength

Ingredion is in good financial condition. As of Dec. 31, the company had just under $2.2 billion of debt and a little less than $0.7 billion in cash and cash equivalents on its balance sheet. On the M&A front, the company will probably continue to target smaller, tuck-in acquisitions rather than pursuing large, transformative deals. These acquisitions would likely focus on companies that offer new product lines and cater to small and midsize customers, as Ingredion aims to both expand its specialty ingredient portfolio and avoid being beholden to the strong bargaining power of large consumer packaged goods customers. The company should be able to finance these size acquisitions largely from free cash flow, which should allow Ingredion to maintain its solid financial position.

Ingredion shares fell nearly 10% on the day as the market responded negatively to the company’s results and management’s guidance. However, with shares now trading less than 10% above our bear case fair value estimate of $80 per share, the bad news is priced into the stock. Our bear case assumes average annual revenue growth of 1% over the next five years and midcycle operating margins of 11%, versus the 11.5% averaged by the company over the past decade.  

Bulls Say’s 

  • Ingredion benefits from its growing proportion of specialty ingredients that carry some degree of pricing power and generate higher profit margins. 
  • Through its investment in plant-based proteins and natural non-corn-based sweeteners, Ingredion is well positioned to capture growth from increasing consumer demand for alternative meat and reduced sugar products. 
  • Management has a strong record of managing growth and acquisitions and returning cash to shareholders.

Company Profile 

Ingredion manufactures ingredients for the food, beverage, paper, and personal-care industries. Sweeteners (syrups, maltodextrins, dextrose, and polyols) account for about 35% of sales, starches (for food and industrial use) around 45%, and co-products the balance. Value-added, specialty ingredients account for roughly one third of sales, with the balance being commodity-grade ingredients. With the majority of sales outside the U.S., Ingredion is a global player with good exposure to developing markets, including Latin America and Asia-Pacific.

(Source: Morningstar)

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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.

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Global stocks

Strong Demand and Pricing Power Persist for D.R. Horton Despite Higher Mortgage Rates

Business Strategy and Outlook

D.R. Horton is the largest U.S. homebuilder (by volume) with an extensive geographic footprint, wide product breadth, value focus, and financial flexibility. Management is focused on continuing to expand the business while generating sustainable returns on invested capital and positive cash flows throughout the housing cycle. Residential construction has been a bright spot of the U.S. housing market during the pandemic, and we expect continued housing market strength over the next decade with housing starts averaging 1.6 million units annually. While affluent urban dwellers migrating to the suburbs was a key source of demand in 2020-21, we expect first-time buyers to be a main contributor to future housing demand.

Recognizing the importance of the price-conscious first-time buyer in the continued recovery, D.R. Horton launched Express Homes, its true entry-level product, in spring 2014. This bet has paid off thus far as Express Homes has outperformed initial expectations and now accounts for over 30% of homes sold. Although competing products have entered the market, we believe D.R. Horton has a first-mover advantage that will boost its growth over the coming years. With ample land supply and product offerings catering to entry-level, move-up, higher-end, and active adult homebuyers, D.R. Horton is well positioned to capitalize on the demographic tailwinds driving the recovery.

Financial Strength

The average selling price of new orders increased 22% year over year to $383,600, and the average 30-year fixed mortgage rate has increased 50 basis points (to 3.55%) since the end of December 2021. While higher home prices and mortgage rates have worsened affordability, we think Horton offers more affordable homes than many of its competitors. Furthermore, Horton’s ASPs are not far from the median sales price of existing single-family homes ($364,300 in December). The company has $4 billion in total homebuilding liquidity, including $2 billion of unrestricted homebuilding cash and $2 billion capacity on a revolving credit facility.

D.R. Horton’s goal is to have at least $1.0 billion of liquidity at any given quarter-end, but is more likely to have $1.5-$2 billion available to ensure an adequate level of financial flexibility. The homebuilder has $3.3 billion of outstanding homebuilding debt with maturities staggered through fiscal 2028: $350 million is due in 2022, $700 million is due in 2023, $500 million is due in 2025, $500 million is due in 2026, $600 million is due in 2027, and $500 million is due in 2028.

Bulls Say’s

  • Current new-home demand is still robust and inventory of existing homes remains tight. The supply/ demand imbalance will take years to address and will support pricing power for homebuilders.
  • Demand for entry-level housing should remain strong as the millennial generation forms households. D.R. Horton’s Express Homes brand is positioned to capitalize on this underserved market.
  • D.R. Horton’s strategic relationship with publicly traded land developer Forestar and its growing property rental businesses should help fuel future growth.

Company Profile

D.R. Horton is a leading homebuilder in the United States with operations in 98 markets across 31 states. D.R. Horton mainly builds single-family detached homes (over 90% of home sales revenue) and offers products to entry-level, move-up, luxury buyers, and active adults. The company offers homebuyers mortgage financing and title agency services through its financial services segment. D.R. Horton’s headquarters are in Arlington, Texas, and it manages six regional segments across the United States.

(Source: Morningstar)

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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.

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Dividend Stocks Expert Insights

Littelfuse is a small but differentiated electrical protection supplier with semiconductor exposure

Business Strategy and Outlook:
Littelfuse is a differentiated supplier of electrical protection into cars and industrial applications. While the firm is a smaller player than other competitors in the components market under our coverage, it has aligned its portfolio toward secular themes of safety, efficiency, and connectivity to pursue growth. Littelfuse’s best organic growth opportunities will come from vehicle electrification; battery electric vehicles require five times
the circuit protection content of an internal combustion counterpart, and charging infrastructure presents a lucrative opportunity for the firm’s growing power semiconductor business.
Littelfuse’s passive components are small and inexpensive, yet vitally important to the safe and continuous function of mission-critical systems in end applications. Circuit protection products safeguard against
electrostatic discharge and overcurrent to prevent component failure and/or fire in cars, power grids, data centers, and manufacturing plants. Even though individual parts like fuses and relays don’t carry a hefty price
tag, Littelfuse’s application expertise helps the firm stave off commoditization and creates sticky customer
relationships.
Financial Strength:
Littelfuse is in good financial shape. As of Jan. 1, 2022, the firm held $637 million in total debt and $478 million in cash on hand. The firm is expected to satisfy its financial obligations with ease. Littelfuse has no more than $150 million coming due in a single year through 2026, and the firm averaged $226 million in free cash flow from 2017 to 2021. The firm has been forecasted to average $471 million in free cash flow per year over our explicit forecast. Littelfuse’s debt/adjusted EBITDA ratio of 1.29 times at the end of 2021 places it solidly at the low end of management’s long-term range of 1 times-2.5 times.
Bulls Say:
 Secular trends toward renewable energy and electric vehicles should boost demand for Littelfuse’s
products.
 Littelfuse has a foot in the door of the emerging silicon carbide semiconductor market, which could fuel
future rapid growth for the firm.
 Littelfuse’s sticky customer relationships have helped it earn excess returns on invested capital for 11
straight years, even in the face of cyclical downturns in 2019 and 2020.
Company Profile:
Littelfuse is a leading provider of circuit protection products (such as fuses and relays) and other passive
components, selling billions of units into the transportation, industrial, telecommunications, and consumer electronics end markets. The firm is also increasing its power semiconductor business, where it predominantly
serves industrial end markets and is breaking into electric vehicle charging infrastructure.
(Source: Morningstar)

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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.

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Property

Fundamentals for Equity Residential’s High Quality Apartments Seeing Strong Recovery from Pandemic

Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.

Business Strategy and Outlook:

Equity Residential has repositioned its portfolio over the past decade to focus on owning and operating high-quality multifamily buildings in urban, coastal markets with demographics that allow the company to maintain high occupancies and drive strong rent growth. The company has sold out of inland and southern markets and increased its operations in high-growth core markets: Los Angeles, San Diego, San Francisco, Washington, D.C., New York, Boston, and Seattle. These markets exhibit traits that create demand for apartments, like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers that draw younger people. The company regularly recycles capital by selling noncore assets or exiting markets and using the proceeds for its development pipeline or acquisitions with strong growth prospects, a strategy that has produced strong returns.

While Equity Residential has repositioned its portfolio into markets with strong demand drivers, analysts are cautious on its long-term growth prospects, given that many markets have historically seen high supply growth. The urban, luxury end of the apartment market where Equity Residential traditionally operates has seen the highest amount of new supply, competing directly with the company’s portfolio. Additionally, the pandemic has caused many millennials to consider moves to the suburbs, either into suburban apartments or their own single-family homes, though demand for new urban apartments has remained resilient as people begin to resume their prepandemic lifestyles. Equity Residential has created significant shareholder value through development, but the increased competition for apartment assets combined with high construction costs is making accretive deals more difficult to find and underwrite. As a result, Equity Residential’s development pipeline is now down to $700 million

Financial Strength:

Equity Residential is in good financial shape from a liquidity and solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which is believed will serve stakeholders well. Near-term debt maturities should be manageable through a combination of refinancing, asset sales, and free cash flow. The company should be able to access the capital markets when acquisition and development opportunities arise. As a REIT, Equity Residential is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by cash flow from operating activities, providing plenty of flexibility to make capital allocation and investment decisions.

Bulls Say:

  • Equity Residential’s portfolio of high-quality assets should see relatively consistent levels of demand long term from high-income earners and will likely see just a small hit to fundamentals during the current pandemic as most residents have not experienced job losses. 
  • Equity Residential has a history of finding accretive development opportunities to bolster its growth prospects. 
  • While current supply deliveries are near peak levels, rising construction costs and tighter lending standards should lead to lower supply growth.

Company Profile:

Equity Residential owns a portfolio of 310 apartment communities with around 80,000 units and is developing three additional properties with 1,136 units. The company focuses on owning large, high-quality properties in the urban and suburban submarkets of Southern California, San Francisco, Washington, D.C., New York, Seattle, and Boston.

(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.

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Dividend Stocks

Returning to Truist After Q4 Earnings; Increasing Our Fair Value Estimate to $66 From $63

Business Strategy and Outlook

Truist (the combination of BB&T and SunTrust), is set for its next step up in profitability, as merger-related costs are essentially cut in half in 2022 and then fall out completely in 2023. The combination has formed one of the better regionals in the U.S. from a competitive standpoint.Morningstar analysts like Truist’s insurance growth engine, and the bank has only been adding to its strength here with the acquisition of Regions Insurance Group in 2018, multiple smaller acquisitions in 2020, and Constellation Partners in 2021.Morningstar analyst also like the strength of the bank’s investment banking group, as well as its growing wealth business, and believe Truist will have room to increase non interest revenue over time. 

Morningstar analysts view the bank’s latest push into the Point of Sale consumer financing space with the acquisition of Service Finance in late 2021 as another positive. We expect the unit will drive multiple billions of dollars of loan originations for years to come, with solid yields on these loans, although expect competition to increase over time, as Truist is not the only bank making major moves in this space. 

Truist has made steady progress on its integration efforts (the acquisition closed in late 2019), with much of the remaining work set to be completed in 2022. The financials still remain a bit complex due to PAA and PPP related NII, one-time expenses, and additional bolt-on acquisitions taking place. Once the dust settles in 2023, we believe management’s goal of becoming a top-tier bank from the standpoint of efficiency and return on tangible equity is realistic.

After updating projections with the latest quarterly results, Morningstar analyst increased its fair value estimate to $66 per share from $63. This values Truist at roughly 2.6 times tangible book value as of December.

Financial Strength

Morningstar analysts think Truist is in good financial health and also do not have significant concerns about capital, and the bank had a common equity Tier 1 ratio of 9.6% as of the fourth quarter of 2021, roughly in line with management’s expectations.

Bulls Say 

  • A strong economy and higher rates are all positives for the banking sector and should propel revenue even higher. 
  • Truist’s now combined operations will allow the bank to reach new levels of operating efficiency and profitability, previously out of reach when BB&T and SunTrust were separate franchises. 
  • Truist keeps growing its insurance operations at an above market rate. Additional bolt-on acquisitions, higher interest rates, and the falling out of acquisition related expenses means Truist will see uniquely strong core revenue growth along with falling expenses.

Company Profile

Based in Charlotte, North Carolina, Truist is the combination of BB&T and SunTrust. Truist is a regional bank with a presence primarily in the Southeastern United States. In addition to commercial banking, retail banking, and investment banking operations, the company operates several nonbank segments, the primary one being its insurance brokerage business.

(Source: Morningstar)

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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.

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Technology Stocks

Fortive Delivers Solid Margin Expansion in Q4 Despite Cost Inflation and Supply Chain Challenges

Business Strategy and Outlook

Fortive, spun off from Danaher in 2016, has followed in its former parent’s footsteps and adopted the philosophy underpinning the proven Danaher Business System, which has its roots in the Toyota Production System. The Fortive Business System essentially involves acquiring moatworthy companies, expanding operating margins through Lean manufacturing principles, and redeploying cash flows into further mergers and acquisitions. 

Fortive targets companies with reputable brand names, large installed bases, and strong cash flows. Management has focused particularly on boosting recurring revenue in its portfolio, which has already increased from roughly 18% at the time of the spin-off to 38% in 2021, and we think it could reach 50% over the next five years. Driving this trend are acquisitions, divestments and the increasing importance of the firm’s software-as-a-service business. 

Management has pursued acquisitions to bolster its digital capabilities. Fortive seeks to leverage its large installed base and combine connected devices with software to offer customers an integrated package. We expect management’s focus on recurring revenue and digitalization to reinforce Fortive’s moat by increasing customer switching costs and enhancing its intangible assets. 

Under the leadership of CEO James Lico, who brings two decades of experience at Danaher, Fortive has delivered impressive midteens returns on invested capital as a stand-alone company. Given its impressive legacy of prudent capital allocation and driving operational improvement at acquired companies through FBS, Morningstar analysts believe that Fortive has solid prospects to continue compounding cash flows and creating value for shareholders.

Fortive Delivers Solid Margin Expansion in Q4 Despite Cost Inflation and Supply Chain Challenges

Despite ongoing supply-chain constraints, Fortive grew its fourth-quarter core sales 1% from the prior-year period. Fortive’s fourth-quarter core revenue was up 0.8% in intelligent operating solutions, up 2.6% in precision technologies, and down 0.8% in advanced healthcare solutions. Morningstar analysts think that Fortive’s ability to expand its margins despite supply-chain disruptions and cost inflation is a testament to its moat as well as strong execution. Morningstar analysts have increased its fair value estimate for Fortive to $88 from $86, which reflects slightly more optimistic near-term revenue growth and operating margin projections as well as time value of money. 

Financial Strength 

 Fortive is on solid financial footing. As of December 2021, Fortive owed roughly $4 billion in long-term debt and held approximately $0.8 billion in cash and equivalents. Additionally, the company had $2 billion available under its revolving credit facility. Morningstar analysts estimate that Fortive will have a net debt/adjusted EBITDA ratio of around 1.1 times in 2022, and  believe that the company will work toward reducing its leverage in the near term to protect its investment-grade credit rating.

Bulls Say

  • Management has an impressive record of capital allocation and improving operating margins of acquired companies. 
  • Fortive’s digital strategy can help reinforce its moat by combining its large installed base of equipment with complementary software to offer a comprehensive package and enhance customer loyalty.
  • Growth in recurring revenue and SaaS-based offerings, as well as the recent divestment of the automation and specialty unit, has reduced the cyclicality of Fortive’s portfolio.

Company Profile

Fortive is a diversified industrial technology firm with a broad portfolio of mission-critical products and services that include field solutions, product realization, health, and sensing technologies. The company serves a wide range of end markets, including manufacturing, utilities, medical, and electronics. Fortive generated roughly $5.3 billion in revenue and $1.2 billion in adjusted operating income in 2021.

 (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.

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Dividend Stocks

Snap-on Remains Resilient Despite Supply Headwinds

Display of Stock market quotes

Business Strategy and Outlook

Snap-on provides premium tools to vehicle repair shops and industrial customers. Snap-on will continue to be the top player in the tools industry. The company benefits from a strong brand reputation among repair professionals. Customers value Snap-on’s high-quality and strong performing products, in addition to its high-touch mobile van network. Snap-on’s tools and diagnostic products help customers complete repairs faster, improving productivity. Customers will continue to pay up for Snap-on’s tool durability, convenience, and flexible financing options. 

The company’s strategy focuses on providing technicians, shop owners, and dealerships a full line of products, ranging from tools to diagnostic and software solutions. Snap-on’s tools are considered the go-to products, exhibiting better durability and reliability than cheaper alternatives that break a lot quicker. Diagnostic products arm technicians with more information to identify issues faster. Snap-on has exposure to end markets that have attractive tailwinds. In automotive, Demand for vehicle repair work will be strong in the near term, largely due to vehicle owners taking in their cars for overdue servicing (delayed due to the COVID-19 pandemic).

Financial Strength

Snap-on’s remaining segments were resilient, despite the supply headwinds. The repair systems and information segment increased about 9% year on year. A key contributor to sales growth was increased demand for undercar equipment and diagnostic products, which help technicians quickly access repair data, boosting operational efficiency. Snap-on’s exposure to diagnostic products positively, given the proliferation of electronics in automobiles. Snap-on maintains a sound balance sheet. The industrial business does not hold any long-term debt, but the debt balance of the finance arm stood at $1.7 billion in 2021, along with $2.1 billion in finance and contract receivables.

As a lender, the finance arm helps drive sales in the industrial business by providing both customers and franchisees financing. With respect to financing for customers, Snap-on extends credit for large ticket purchases and leaves financing for smaller items to franchisees. Sales representatives bear the credit risk if customers fail to pay. Snap-on’s solid balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth but also returns cash to shareholders via dividends and share repurchases.

Bulls Say’s 

  • The growth in vehicle miles driven increases the wear and tear on vehicles, calling for more maintenance and repair work to keep them on the road, benefiting Snap-on. 
  • Auto manufacturers continue to tap Snap-on to create new tools and products to service new EV models. This alleviates concerns that EV adoption will threaten Snap-on’s viability. 
  • Sales representatives can add new customers on their designated service routes, increasing revenue per franchisee.

Company Profile 

Snap-on is a manufacturer of premium tools and software for repair professionals. Hand tools are sold through franchisee-operated mobile vans that serve auto technicians who purchase tools at their own expense. A unique element of its business model is that franchisees bear significant risk, as they must invest in the mobile van, inventory, and software. At the same time, franchisees extend personal credit directly to technicians on an individual tool basis. Snap-on currently operates three segments—repair systems and information, commercial and industrial, and tools. The company’s finance arm provides financing to franchisees to run their operations, which includes offering loans and leases for mobile vans.

(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.

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Dividend Stocks

Returning to U.S. Bancorp After Q4 Earnings; Increasing Our FVE to $61 Per Share From $60

Business Strategy and Outlook

U.S. Bancorp is one of the strongest and best-run regional banks we cover. Few domestic competitors can match its operating efficiency, and for the past 15 years the bank has consistently posted returns on equity well above peers and its own cost of equity. U.S. Bancorp’s exposure to moaty nonbank businesses and its consistently excellent core banking operations make us like the company’s positioning for the future. If we were to have a complaint, it would be that the bank was already on top of its game years ago, making it difficult for the firm to further optimize efficiency and returns, while peers seem to be gradually “catching up” over time. 

U.S. Bancorp has an attractive mix of fee-generating businesses, including payments, corporate trust, investment management, and mortgage banking. The payments and trust businesses tend to be highly efficient and scalable due to relatively fixed cost structures. Barriers to entry tend to be high as the initial investment and scale necessary to compete are prohibitive, although competition within payments has heated up in the last several years as software and technology offerings are increasingly important.

Financial Strength

The company’s balance sheet is sound, its capital investment decisions are exemplary, and its capital return strategy is appropriate. U.S. Bancorp is currently above management’s targeted common equity Tier 1 ratio of 8.5%-9%, with a ratio of 10% as of the fourth quarter of 2021, and we view the current goal as appropriate. Bancorp has avoided investing capital in value destroying products, such as GFC era MBS, while simultaneously pursuing value-adding acquisitions and organic growth. Over the last decade plus, U.S. Bancorp has generally maintained its position as the highest returning, most efficient franchise. 

On an EPS basis, wide-moat-rated U.S. Bancorp reported OK fourth-quarter earnings of $1.07 per share, roughly in line with the FactSet consensus of $1.10 and ahead of our estimate of $1.01. However, the trends for the bank’s payment-related fees were not the strongest. The beat was largely attributable to additional reserve releases, which is not a core earnings driver. On the other hand, payment fees, where U.S. Bancorp is more exposed as a percentage of revenue than any other bank we cover, were down across the board sequentially.

Bulls Say’s 

  • Strong fee revenue in moaty businesses, such as payments, helps insulate U.S. Bancorp from a flatter yield curve environment and drive higher returns on equity. 
  • The bank’s upcoming acquisition of MUFG Union Bank should provide additional revenue growth, expense synergies, and value for shareholders. 
  • As payments-related balances and fees come back in 2022, it should provide another earnings growth lever for U.S. Bancorp.

Company Profile 

As a diversified financial-services provider, U.S. Bancorp is one of the nation’s largest regional banks, with branches in well over 20 states, primarily in the Western and Midwestern United States. The bank offers many services, including retail banking, commercial banking, trust and wealth services, credit cards, mortgages, and other payments capabilities.

(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.

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Technology Stocks

Spirit AeroSystems Reports Improved Fourth Quarter and Is Confident in Pandemic Efficiency Gains

Business Strategy and Outlook

Spirit AeroSystems is the largest independent aerostructures manufacturer. The firm produces fuselages, wing structures, as well as structures that house and connect engines to aircraft. Spirit’s revenue has traditionally been almost entirely connected to the original production of commercial aircraft, but Spirit has a growing defense segment and recently acquired Bombardier’s maintenance, repair, and overhaul business. As commercial aerospace manufacturing is highly consolidated, it is unsurprising that Spirit has customer concentration. Historically, 80% of the company’s sales have been to Boeing and 15% have been to Airbus. Management targets a 40% commercial aerospace, 40% defense, and 20% commercial aftermarket revenue exposure. The firm acquired Fiber Materials, a specialty composite manufacturer focused on defense end markets, and Bombardier’s aftermarket business in 2020 to diversify revenue.

Financial Strength

Spirit AeroSystems has raised and maintained a considerable amount of debt since the grounding of the 737 MAX began in 2019. The company has $1.9 billion of cash on the balance sheet and about $3.9 billion of debt at the end of 2020, and access to another $950 million of debt if it so needs. The firm has $300 million debt coming due in 2021 and 2023, as well as $1.7 billion of debt coming due in 2025, and $700 million of debt coming due in 2028. Revenue of $1.1 billion and adjusted loss per share of $0.84 beat FactSet consensus by 0.1% and missed the same estimates by 29.9%, respectively, though much of the earnings miss was due to a forward loss associated with 787 production. 

Revenue increased 22.1%, primarily due to increased 737 MAX production increasing OE production-related revenue. Although we slightly lowered our long-term outlook for 737 MAX production in the third quarter, we continue to expect that increasing 737 MAX production will be the primary value driver for the firm. Management continues to expect it can generate 16.5% gross margins (including depreciation) at 737 MAX production of 42 per month from efficiencies achieved during the pandemic.

Bulls Say’s 

  • Commercial aerospace manufacturing has a highly visible revenue runway, despite COVID-19, from increasing flights per capita as the emerging market middle class grows wealthier. 
  • Spirit has restructured to become more efficient when aircraft manufacturing recovers. 
  • Spirit is diversifying its customer base, which we anticipate will make it less susceptible to customer specific risk.

Company Profile 

Spirit AeroSystems designs and manufactures aerostructures, particularly fuselages, for commercial and military aircraft. The company was spun out of Boeing in 2005, and the firm is the largest independent supplier of aerostructures. Boeing and Airbus are the firms and its primary customers, Boeing composes roughly 80% of annual revenue and Airbus composes roughly 15% of revenue. The company is highly exposed to Boeing’s 737 program, which generally accounts for about half of the company’s 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.