Category: Research

Business Strategy & Outlook

While COVID-19, inflation, and currency concerns continue to be overhangs on Booking’s near-term travel demand, the company is exhibiting solid financial health. Further, Booking’s global online travel agency leadership position is to increase over the next decade, driven by a healthy position in Asia-Pacific, continued leadership in Europe, and an expanding presence in vacation rentals, restaurant bookings, experiences, flights, and payments, all of which are backed by leading marketing and technology scale. Booking has built a leading network (the source of its narrow moat) of hotel properties and other services, which drives an increasing user base. This network effect is continuing to expand in both developed and emerging markets, as well as vertical markets such as rentals, attractions, flights, and payments (where it looks to focus near-term investment) resulting in a full connected trip offering. In developed markets, replicating Booking’s leading network in Europe is proving costly and time consuming for key competitors, given around 60% of all hotels in the region are small boutique establishments. In emerging markets, the firm has a presence in China with its Trip.com and Meituan-Dianping partnerships, and in its own Booking.com and Agoda.com platforms, which is crucial. This expanding network positions Booking well for the increasing global shift to booking via mobile applications. Booking.com is a top-10 travel iOS application in 157 markets versus 73 for Airbnb, and 28 for Expedia, according to App Annie on Oct. 3, 2022.

Focused entry from Google, Facebook, Alibaba, Amazon, and others could double the current handful of players that have dominant scale, leading to a meaningful impact on profitability. That said, replicating Booking’s network would require significant time and expense, and most of the aforementioned operators are to deploy a metasearch model (don’t control hotel relationships) versus directly competing against Booking’s OTA model (control hotel relationships).

Financial Strengths

Booking’s financial health is extremely sound, and the company has enough liquidity to operate at anemic travel demand levels while still investing in key growth areas into 2024. Debt/adjusted EBITDA was 1.5 times in 2019, but spiked to 13.7 times in 2020, due to incremental debt raised and weaker industry demand caused by the COVID-19 outbreak. That said, the ratio quickly declined to 3.8 times in 2021 and it is to reach 1.8 times in 2022, as the company pays down debt and travel recovers as the pandemic is contained.

Although Booking suspended share repurchases in 2020-21 due to near-term demand uncertainty stemming from COVID-19, it has resumed this shareholder return activity in 2022. The company is to complete its $15 billion authorization announced in May 2019 over the next few years. It is expected Booking to continue to generate strong free cash flow (operating cash flow minus capital expenditures) totaling almost $32 billion the next five years (2022-26). In addition to repurchases, Booking is to begin paying out 35% of its income in a form of a dividend starting in 2026, at that point the company will have solidified its position in current growth areas of the industry (vacation rentals, experiences bookings, payment facilitation, flight content, emerging market regions, and mobile applications). Finally, the firm could swallow a large acquisition in the space, should one present itself, given its free cash flow generation, cash, and untapped revolver position.

Bulls Say

• Outsize online travel bookings growth witnessed the past few years in emerging markets should continue over the next 10 years, given low penetration levels and increased online usage, and Booking is well positioned.
• Mobile application usage is increasing rapidly, and Booking has a dominant global position, which aids the 50%-plus of room nights that comes from direct traffic.
• Booking is strengthening its network effect through organic initiatives and in fast-growing markets like experiences, vacation rentals and payments, resulting in a fully connected trip.

Company Description

Booking is the world’s largest online travel agency by revenue, offering booking and payment services for hotel and alternative accommodation rooms, airline tickets, rental cars, restaurant reservations, cruises, experiences, and other vacation packages. The company operates a number of branded travels booking sites, including Booking.com, Agoda, OpenTable, and Rentalcars.com, and has expanded into travel media with the acquisitions of Kayak and Momondo. Transaction fees for online bookings account for the bulk of revenue and profits.

(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.

Business Strategy & Outlook

Carnival remains the largest company in the cruise industry, with nine global brands and 91 ships as of October 2022. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, in years prior to the pandemic, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing. However, international travel has waned as a result of COVID-19, which could spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon. As consumers have resumed cruising since the summer of 2021 (after a year-plus no-sail halt), cruise operators have been able to reassure passengers of both the safety and value propositions of cruising (offering a holiday product at 25%-50% less than land alternatives).

On the yield side, Carnival is to see some pricing pressure as future cruise credits continue to be redeemed through 2023, a headwind partially mitigated by the return of capacity via rising occupancy. And on the cost side, higher spend to maintain tighter health protocols should begin to alleviate in 2023, helping manage expenses. Higher than normal dry dock days could temper profits as the fleet is redeployed, crimping near-term profitability. As of Sept. 30, 2022, 95% of capacity was already deployed and eight of the company’s nine brands will have their entire fleets sailing by year-end. These persistent concerns, in turn, should lead to average returns on invested capital including goodwill, that are set to languish below the 10.4% weighted average cost of capital estimate until 2028, which supports no-moat rating.

Financial Strengths

Carnival has secured adequate liquidity to survive its slow resumption of cruising, with around $7 billion in cash and investments at the end of September 2022. This should help finance the little cash burn remaining through the end of the redeployment ramp-up, which earlier in the pandemic had run around $500 million or more per month. The company has raised significant levels of debt since the onset of the pandemic with $35 billion in total debt, up from around $12 billion at the end of 2019. The company is focused on reducing debt service as soon as reasonably possible in order to reduce future interest expense. It has also actively pursued the extension of maturities, limiting the cash demand on debt service over the near term. By math, Carnival has more than one year’s worth of liquidity to operate successfully in a no-revenue environment. There’s no imminent credit crunch in the near term, as long as capital markets continue to function properly. Liquidity remains accessible, as Carnival was able to issue $1 billion in senior unsecured notes during its second quarter (due 2030), which was set to help refinance certain 2023 debt maturities while supporting capital spend. In August, Carnival was also able to extend the maturity (to 2024) of its convertible notes while maintaining the original rate (5.75%). Additionally, in order to free up cash to support operating expenses, Carnival eliminated its dividend in 2020 ($1.4 billion in 2019). Another $4.8 billion in current customer deposits were on the balance sheet, offering working capital that can be utilized to run the business and indicating demand for cruising still exists. And equity markets have also been accommodating, with the company facilitating a $500 million at-the-market equity raise in early 2022, indicating access to cash remains.

Bulls Say

• As Carnival continues to deploy its fleet, passenger counts and yields could rise at a faster pace than the current capacity limitations are repealed.
• A more efficient fleet composition (after pruning 23 ships since the onset of the pandemic) may benefit the cost structure to a greater degree than initially expected, as sailings fully resume.
• The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators had capacity for nearly 4 million passengers in 2020, which provides an opportunity for long-term growth with a new consumer.

Company Description

Carnival is the largest global cruise company, with 91 ships in its fleet at the end of fiscal 2021, with all of its capacity set to be redeployed in 2022. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival’s brands attracted about 13 million guests in 2019, prior to COVID-19.

(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.

Business Strategy & Outlook

Netflix is a pioneer in subscription video on demand and is now the largest online video provider in the U.S. and the world. The economic moat rating of narrow is based on intangibles resulting from the use of data stemming from the firm’s massive worldwide subscriber base. From its origin in the U.S., Netflix expanded rapidly into markets abroad as the service now has more subscribers outside of the U.S. than inside. The firm has used its scale to construct a massive data set that tracks every customer interaction. It then leverages this customer data to better purchase content as well as finance and produce original material such as “Stranger Things.” However, the firm has recently ramped up its production using more traditional methods. Many consumers use, and will continue to use, SVODs like Netflix as a complementary service, especially as SVOD prices increase and pay television bundle prices decrease (due to the shift to over-the-top, or OTT, delivery). With a number of new services from media firms launched over the last five years, many consumers now pay for or have access to multiple services. 

One potential issue for these platforms is the potential for consumers to move between the services with minimal friction. This usage pattern and increased competition will constrain Netflix’s ability to raise prices without inducing greater churn. Netflix will trial an ad-supported tier in fourth-quarter 2022 into 2023 as the firm looks to capture potential subscribers that were unwilling to pay the ad-free price. While the potential audience could be large, particularly in emerging markets, management will need to ensure that the lower-priced tier doesn’t cannibalize the full-price subscriber base in more saturated markets like the U.S. Netflix will expand further into local-language programming to augment its offering in many countries. This will generate a competitive response from the firm’s global and local rivals, which will augment their own first-party content budgets. In turn, Netflix’s international expansion will continue to hamper margin expansion.   

Financial Strengths

Netflix’s financial health is poor due to its weak free cash flow generation, large number of content investments that require outside funding (primarily debt), and content obligations. Debt has been taken on to fund additional content investments and international expansion. The company’s weak free cash flow due to this spending is a concern, as one doesn’t see the need to spend decreasing in the near future. The net cash burn was over $2 billion in 2017, over $3 billion in 2018, and $3.5 billion in 2019. While the firm generated positive free cash in 2020 due to pandemic-related production shutdown, Netflix returned to a slight cash burn in 2021. As of June 2022, Netflix has $14.2 billion in senior unsecured notes that do not have borrowing restrictions, but a relatively small amount due in the near term ($700 million due 2022, $400 million due 2024, and $800 million due 2025), as the firm generally issues debt with a 10-year maturity. Netflix also has a material quantity of noncurrent content liabilities ($3.0 billion recognized on the balance sheet and $15.6 billion not yet reflected on the balance sheet).

Bulls Say

• Netflix’s internal recommendation software and large subscriber base give the company an edge when deciding which content to acquire in future years.
• Netflix has built a substantial content library that will benefit the firm over the long term.
•  International expansion offers attractive markets for adding subscribers.

Company Description

Netflix’s primary business is a streaming video on demand service now available in almost every country worldwide except China. Netflix delivers original and third-party digital video content to PCs, internet connected TVs, and consumer electronic devices, including tablets, video game consoles, Apple TV, Roku, and Chromecast. In 2011, Netflix introduced DVD-only plans and separated the combined streaming and DVD plans, making it necessary for subscribers who want both to have separate plans.

(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.

Business Strategy & Outlook

One was not enthralled with Coty’s leadership prior to the pandemic, which lacked beauty experience, but Sue Nabi, a successful 20-year veteran of wide-moat L’Oreal who took the reins in September 2020, has the qualifications to right the ship. Her strategic priorities are on target, as she seeks to increase Coty’s exposure to high-growth markets where it has been underexposed. Specifically, she looks to accelerate Coty’s prestige division by expanding from its core fragrance portfolio into makeup, build a skincare portfolio across mass and prestige, enhance its digital capabilities, further penetrate China, stabilize its mass-beauty business, and become an industry leader in sustainability. One can impressed by the progress Coty has realized to date, with improvement in each objective despite the challenges presented by the pandemic, and the further progress in the years to come.

Coty is the second-largest global player in fragrance, with a portfolio of licensed brands, such as Calvin Klein and Gucci. Its prestige business (62% of fiscal 2022 sales, largely fragrance) generally reports mid-single-digit organic growth (in line with the category). However, mass beauty (38%, primarily cosmetics) has faced consistent sales declines, as Coty’s brands (CoverGirl, Max Factor, Rimmel) have suffered from historical underinvestment while many new brands have entered the market. One can be optimistic that Nabi’s strategy will improve Coty’s growth profile, but the less sanguine on the firm’s ability to secure a moat. Collectively, Coty has not demonstrated brand strength, preferred relationships with its channel partners, or a cost advantage, and thus conclude it does not possess an economic moat. The fallout from the pandemic put Coty in violation of its debt covenants, but a $1 billion convertible preferred equity investment from private equity firm KKR (which it has since converted to common and sold), and the sale of a majority stake of its salon/retail haircare business for nearly $3 billion in proceeds should secure Coty’s liquidity position, giving the firm the necessary breathing room to allow Nabi’s turnaround strategy to advance.

Financial Strengths

Since the acquisition of the P&G beauty business in fiscal 2017, Coty’s net debt/adjusted EBITDA has remained over 4 times. It ended fiscal 2022 with leverage at 4.6 times, just under the 4.75 limit imposed by the firm’s debt covenants. The Coty’s leverage to fall over the next five years, to below 3 times by fiscal 2025. Cash was tight for Coty heading into the pandemic, given the $600 million January 2020 investment in Kylie Cosmetics. But KKR’s $1 billion convertible preferred equity investment and the suspension of dividends on common shares (both announced in May 2020) provided much needed liquidity. These moves as prudent, given the uncertain environment caused by the global pandemic. Between September and November 2021, KKR converted its entire preferred stock position to common shares, which it then sold on the open market, saving Coty $77 million in annual preferred dividend payments. The firm to reinstate a dividend on its common shares in fiscal 2024, averaging a 20%-30% payout ratio over the long term. Outside of funding operations, Coty’s top priority for cash is debt reduction, which is sensible, given its relatively high leverage ratio. The Coty is likely to resume acquisitions once its debt leverage falls below 4 times, but as it is uncertain as to the magnitude and timing of potential deals, one has not modelled unannounced transactions. The firm will refrain from share repurchase until fiscal 2024, at which time it will repurchase 2%-8% of shares annually, in the absence of acquisitions. The share repurchases as a prudent use of cash when shares trade below the assessment of its intrinsic value.

Bulls Say

• Coty is a major player in the fast-growing beauty industry and is the second-largest global provider of fragrances, one of the four major beauty categories, representing 15% of the total beauty market. 
• CEO Sue Nabi, an accomplished veteran of the beauty industry, has the experience and qualifications to reinvigorate Coty’s business. 
• Coty plans to increase its exposure to fast-growing markets (skincare, prestige cosmetics, China, e-commerce), where it has historically been underexposed, which should enhance its growth profile.

Company Description

Coty is a global beauty company that sells fragrances, colour cosmetics, and skin/body care. The firm licenses brands such as Calvin Klein, Hugo Boss, Gucci, Burberry, and Davidoff for its prestige portfolio. Coty’s most popular colour cosmetic brands are CoverGirl, Max Factor, Rimmel, Sally Hansen, and Kylie. Coty also holds a minority stake in a salon and retail haircare business, including brands Wella, Clairol, OPI, and GHD. Francois Coty founded the firm in 1904 and it remained private until its 2013 IPO. It had focused on prestige fragrances and nail salon brands until the 2016 acquisition of Procter & Gamble’s beauty business. This nearly doubled the firm’s revenue base, and launched it into mass-channel cosmetics and professional hair care.

(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.

Business Strategy & Outlook

Brown-Forman has established itself as a stalwart in matured spirits, an enclave of the distillation industry that is particularly attractive. In addition to brand recognition and distribution, companies in this industry benefit from scarcity value, the result of the consumer perception surrounding the aging of this type of alcohol and the pricing power that this begets. Against this industry backdrop, it is believed Brown-Forman’s portfolio, anchored by the Jack Daniel’s brand, boasts some of the highest cachet globally. The firm made its bones in whiskey, with Jack Daniel’s Tennessee Whiskey being the best-selling American whiskey in the world, but it also has strong tequila brands like el Jimador and Herradura. The resonance of its trademarks is reflected in its ability to parlay them into numerous line extensions, such as Jack Daniel’s Tennessee Honey, Apple, and ready-to-drink beverages. These provide stimulus to its top line, not only by maintaining mind share among its core consumers, but by expanding the types of palates to which its drinks appeal. Brown-Forman is also benefiting from growth abroad, buoyed by the broader resurgence in global demand for bourbon. The developed markets like the United Kingdom as well as developing economies like Mexico to be increasingly pertinent to its overall trajectory.

Still, the company’s path will not be completely unencumbered. Tariff relief remains a near-term tailwind, but dollar strength figures to slow demand for (proportionately) more expensive U.S. exports. Go-to-market changes also add a degree of execution risk. Despite a successful transition to owned distribution in the U.K, where it previously partnered with Bacardi, future transitions (such as in Taiwan) may not yield similar results. Additionally, while COVID-19 accelerated secular trends in developed markets, developing markets face a more precarious outlook, particularly amid a backdrop of swelling inflation in non discretionary spending categories. Nevertheless, it is expected that Brown-Forman’s embedded advantages and experienced management team will help the company navigate these risks.

Financial Strengths

Brown-Forman is in solid financial health, and from the vantage point, the coronavirus pandemic has not altered this reality. The company has a manageable balance sheet and commendable cash flow generation. Net leverage currently sits well below 2 times EBITDA, with ample capacity to tilt the capital structure toward debt as financial opportunities dictate. Still, management has historically been quite conservative with mergers and acquisitions, and there’s no transformative transactions on the horizon. The stellar cash generation will continue supporting dividends and increases, as well as appreciable reductions in the share count. Moreover, the firm’s commitment to shareholder returns should not impinge on its liquidity, even amid COVID-19. In addition to $899 million in balance sheet cash as of the end of the first quarter of 2022, the company maintains consistent access to capital markets primarily through a commercial paper program (backed by its revolving credit facility) facilitating borrowings of up to $800 million. 

Bulls Say

• Brown-Forman has a foothold in multiple matured spirits categories, where market structure and consumer perception spawn robust pricing and operating margins.
• Flavored line extensions in the Jack Daniel’s family should foster brand resonance among a new generation of alcohol consumers.
• COVID-19 impacts in important markets like the U.S. have proven muted, thanks to a confluence of portfolio and consumer demand dynamics.

Company Description

Brown-Forman is the largest U.S.-domiciled producer of distilled spirits. The firm reports only a single operating segment, and whiskey represents its primary business driver, generating roughly three quarters of sales, undergirded by the Jack Daniel’s brand as well as bourbons such as Woodford Reserve and Old Forrester. Notable non whiskey offerings include tequilas such as el Jimador and Herradura. The firm operates globally, with products sold in more than 170 countries, and adapts its route-to-consumer model depending on regulation as well as the prevailing competitive dynamics in a given market. For example, it sells through distributors in the U.S. but operates its own logistics apparatus in many other countries. The company remains under the control of the Brown family.

 (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.

Business Strategy & Outlook

Johnson & Johnson stands alone as a leader across the major healthcare industries. The company maintains a diverse revenue base, a developing research pipeline, and exceptional cash flow generation that together create a wide economic moat. J&J holds a leadership role in diverse healthcare segments, including medical devices, consumer healthcare products, and several pharmaceutical markets. Contributing close to 50% of total revenue, the pharmaceutical division boasts several industry-leading drugs, including immunology drugs Remicade, Stelara and Tremfya as well as cancer drugs Darzalex and Imbruvica. The medical device group brings in almost one third of sales, with the company holding controlling positions in many areas, including orthopaedics and Ethicon Endo-Surgery’s surgical devices. The consumer division largely rounds out the remaining business lines, but the firm is planning to divest its consumer healthcare group in early 2023, which will leave the remaining company more focused on drugs and devices. 

Research and development efforts are resulting in next-generation products. The pharmaceutical segment has recently launched several new blockbusters. However, relative to the company’s size, J&J needs to increase the number of meaningful drugs in late-stage development to support long-term growth. The company has also created new medical devices, including innovative contact lenses, minimally invasive surgical tools and robotic instruments. These multiple businesses generate substantial cash flow. J&J’s healthy free cash flow (operating cash flow fewer capital expenditures) is over 20% of sales. Strong cash generation has enabled the firm to increase its dividend for over the past half century, and this to continue. It also allows J&J to take advantage of acquisition opportunities that will augment growth. Diverse operating segments coupled with expected new products insulate the company more from patent losses relative to other Big Pharma firms. Further, in contrast to most of its peers, J&J faces the majority of its near-term patent losses on hard-to-make complex drugs, which should likely slow generic drug competition.

Financial Strengths

Johnson & Johnson holds one of the strongest financial positions in the healthcare sector with projected debt/ EBITDA of close to 0.9 for 2022. The acquisitions of Actelion and Momenta did put a dent in the company’s cash balance, but with annual free cash flow of close to $25 billion, J&J is in sound financial shape. Even with expected further bolt-on acquisitions and share repurchases, the company should remain on solid financial footing. From an operating standpoint, patent losses are mitigated by several diverse operating lines in medical devices and consumer products so cash flows should remain relatively stable. Additionally, the share repurchases over the next several years will drawdown the share count.

Bulls Say

• The majority of J&J’s near-term patent losses are for products that are hard to manufacture, which should limit the intensity of generic competition. 
• Diverse healthcare segments help insulate J&J from downturns in the economy, offering a defensive growth opportunity with a steady and likely growing dividend.
• Several of J&J’s key drugs and pipeline drugs are specialty drugs that tend to carry strong pricing power as well as lower regulatory hurdles for approval.

Company Description

Johnson & Johnson is the world’s largest and most diverse healthcare firm. Three divisions make up the firm: pharmaceutical, medical devices and diagnostics, and consumer. The drug and device groups represent close to 80% of sales and drive the majority of cash flows for the firm. The drug division focuses on the following therapeutic areas: immunology, oncology, neurology, pulmonary, cardiology, and metabolic diseases. The device segment focuses on orthopaedics, surgery tools, vision care, and a few smaller areas. The last segment of consumer focuses on baby care, beauty, oral care, over-the-counter drugs, and women’s health. Geographically, just over half of total revenue is generated in the United States.

(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.

Business Strategy & Outlook

Sanofi’s wide line up of branded drugs and vaccines and robust pipeline create strong cash flows and a wide economic moat. Growth of existing products and new product launches should help offset upcoming patent losses. Sanofi’s existing product line boasts several top-tier drugs, including immunology drug Dupixent. Dupixent looks well positioned to reach peak sales over EUR 14 billion, with an initial focus on the moderate to severe atopic dermatitis market. The additional indications in areas such as the more recently added severe asthma indication will help the drug serve additional patients. 

While Sanofi shares profits on the drug with Regeneron, the very high sales expected for the drug should provide a strong tailwind to overall growth for the company. Additionally, Sanofi holds a strong position with several vaccines and rare disease drugs that should hold up well as pricing pressures and competition tend to be less severe in these areas. The company also harnesses its research and development group to bring new drugs to emerging markets. While pricing in emerging markets is not usually as strong as in developed markets, the company can still leverage its investment in developing new drugs for developed markets by bringing the drugs to emerging markets. The rapid economic growth in emerging markets has created new geographic markets for Sanofi’s drugs. A history of acquisitions and robust cash flow from operations means Sanofi could take advantage of further growth opportunities through external collaborations. Sanofi’s acquisition focus on immunology drugs and rare disease drugs will continue following several deals in this area.

Financial Strengths

Sanofi is to remain on solid financial footing, closing 2021 with a debt/EBITDA ratio of 2 times. Further, the company generates stable cash flows that should enable the firm to meet its dividend payments and still accumulate significant cash reserves. The company redeployed its cash through bolt-on acquisitions in the neighborhood of $2 billion-$5 billion each year to augment its internal research and development. The recent sale of Regeneron stock of close to $12 billion may open up the possibility of a larger acquisition.

Bulls Say

• Sanofi is launching immunology drug Dupixent, which holds strong pricing power and major blockbuster potential across several indications.
• Sanofi’s strong entrenchment in rare-disease drugs should translate into steady pricing power as payers tend not to push back on pricing in this area. 
• With a wide product offering in vaccines, consumer health and insulins, Sanofi is well positioned for the fast-growing emerging markets.

Company Description

Sanofi develops and markets drugs with a concentration in oncology, immunology, cardiovascular disease, diabetes, and vaccines. However, the company’s decision in late 2019 to pull back from the cardiometabolic area will likely reduce the firm’s footprint in this large therapeutic area. The company offers a diverse array of drugs with its highest revenue generator, Dupixent, representing just over 10% of total sales, but profits are shared with Regeneron. About 30% of total revenue comes from the United States and 25% from Europe. Emerging markets represent the majority of the remainder of revenue.

(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.

Business Strategy & Outlook

Merck’s combination of a wide line-up of high-margin drugs and a pipeline of new drugs should ensure strong returns on invested capital over the long term. Further, following the divestment of the Organon business in June 2021, the remaining portfolio at Merck holds a higher percentage of drugs with strong patent protection. On the pipeline front, after several years of only moderate research and development productivity, Merck’s drug development strategy is yielding important new drugs. Merck’s new products have mitigated the generic competition, offsetting the recent major patent losses. In particular, Keytruda for cancer represents a key blockbuster with multi-billion-dollar potential: It holds a first mover advantage in one of the largest cancer indications of non-small cell lung cancer with excellent clinical data. Also, the new cancer drug combinations will further propel Merck’s overall drug sales. However, the intense competition in the cancer market with several competitive drugs likely to report important clinical data over the next couple years in earlier stage cancer settings. Other headwinds include generic competition, notably to diabetes drug Januvia, likely to intensify in 2023. After several years of mixed results, Merck’s R&D productivity is improving as the company shifts more toward areas of unmet medical need. Owing to side effects or lack of compelling efficacy, Merck experienced major setbacks with cardiovascular disease drugs anacetrapib, Tredaptive, Rolofylline, and TRA along with Telcagepant for migraines. Safety questions ended the development of osteoporosis drug odanacatib. Despite these setbacks, Merck has some solid successes, including a successful launch for its PD-1 drug Keytruda in oncology. Following this success, Merck is shifting its focus toward areas of unmet medical need in specialty-care areas, and Keytruda is leading this new direction. Keytruda’s leadership in non-small cell lung cancer will be a key driver of growth for the company over the next several years.

Financial Strengths

Merck remains on solid financial footing. The company closed 2021 with debt/capital of 46%, and strong cash flows expected over the next several years should further strengthen the balance sheet. Also, with the spinoff of Organon, Merck received a one-time payment from Organon of $9 billion. Merck redeployed this capital through the acquisition of Acceleron to help fortify its late-stage pipeline. Merck has signalled a strong willingness to make acquisitions, and historically it has tended to make several bolt-on acquisitions each year. Given that Merck hasn’t made any major acquisitions since the Schering-Plough deal in 2009, it will make a larger acquisition over the next two to three years. Beyond acquisitions, the steady future dividends, supported by a payout ratio of close to 50% relative to adjusted earnings per share.

Bulls Say

• Keytruda looks best positioned in the immuno-oncology landscape, buoyed by a first-mover advantage in the important indication of first-line non-small cell lung cancer.
• The growth in Merck’s high margin cancer drugs should help expand the company’s overall operating margin.
• Merck supports a strong dividend yield that looks secure based on a wide diversified portfolio of drugs.

Company Description

Merck makes pharmaceutical products to treat several conditions in a number of therapeutic areas, including cardiometabolic disease, cancer, and infections. Within cancer, the firm’s immuno-oncology platform is growing as a major contributor to overall sales. The company also has a substantial vaccine business, with treatments to prevent hepatitis B and pediatric diseases as well as HPV and shingles. Additionally, Merck sells animal health-related drugs. From a geographical perspective, just under half of the firm’s sales are generated in the United States.

(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.