Category: Shares

Categories
Global stocks Shares

Activewear Is a Growth Category, but Under Armour Lacks a Competitive Edge

Business Strategy & Outlook

The Under Armour as lacking an economic moat, given its failure to build a competitive advantage over other athletic apparel firms. Between 2008 and 2016, Under Armour’s North American sales (around 70% of its consolidated base) increased to $4 billion from $700 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). However, its North America sales have not grown over the past five years as it restructured and demand for performance gear, Under Armour’s primary category, has lagged that of athleisure. While sales of all activewear have been strong during the pandemic, the long-term benefits for Under Armour will be limited as compared with global brands wide-moat Nike and narrow-moat Adidas. A Under Armour has fallen behind on innovation and its product is not sufficiently differentiated.

Under Armour has recently had problems in both its direct-to-consumer and wholesale businesses. Although sales through its direct-to-consumer channels increased to $2.3 billion in 2021 from $1.5 billion in 2016 (calendar years), Nike and others have experienced much greater direct-to-consumer growth in this period. Under Armour has opened its own stores as wholesale distribution has slowed, but 90% of them in North America are off-price. Still, its direct-to-consumer revenue will rise to 61% of total revenue in fiscal 2032 from 42% in its last fiscal year. This should allow Under Armour to have better control over its brand, but one cannot see evidence that it allows for premium pricing and see it as a defensive move. The Under Armour’s international segment will produce growth over the long term, but the firm faces significant competition from global and native operators with established brands and distribution networks. According to Euromonitor, the combined sportswear markets in Asia-Pacific and Western Europe were about $160 billion in 2021, greater than North America’s roughly $140 billion. As Under Armour generates only about 30% of its revenue in Europe and Asia-Pacific, it has room for growth, but it lacks strong retail partnerships and brand recognition.

Financial Strengths

The Under Armour has enough liquidity to get through COVID-19 even as the effects have not fully passed. Prior to the crisis, the firm’s long-term debt consisted only of $593 million in 3.25% senior unsecured notes that mature in 2026. Then, in May 2020, Under Armour completed an offering of $500 million in 1.5% convertible senior notes that mature in 2024. However, as this additional funding has proven to be unnecessary, the firm has already paid down more than 80% of this convertible debt. Even after these debt repayments, at the end of March 2022, the firm had $1 billion in cash and $1.1 billion in borrowing capacity under its revolver. Thus, the Under Armour to operate in a net cash position for the foreseeable future. Under Armour’s free cash flow to equity has recovered from the pandemic impact, totaling about $850 million over the past two fiscal years. The forecast about $5.6 billion in free cash flow generation over the next decade. Although the firm does not pay dividends, it recently authorized its first share buyback program. The firm repurchased $300 million in shares in February 2022, and the forecast another $20 million in buybacks in fiscal 2023. Moreover, Under Armour’s restructuring has reduced base operating expenses by about $200 million, and the forecast its capital expenditures will remain low at about 2% of sales. The firm may use some of its free cash flow for acquisitions, but one cannot forecast acquisitions due to the uncertainty concerning timing and size. Although its growth has been largely organic, the firm acquired three fitness apps for a combined $710 million in past years as part of a strategy that has been mostly abandoned. It has also made some smaller investments, such as an investment of $39.2 million in its Japanese licensee, Dome, in 2018 to raise its ownership stake to 29.5%. Under Armour later had to write down this investment because of restructuring at Dome.

Bulls Say

  • Under Armour quickly became no-moat Kohl’s second biggest brand after its introduction in 2017. This partnership allows Under Armour to reach more female customers. Kohl’s is expanding shelf space for activewear. 
  • Under Armour’s restructuring has produced an average annual savings of $200 million. The firm can reinvest these savings into marketing and international expansion while improving its operating margins.
  • Under Armour could gain shelf space and distribution as Nike has reduced or eliminated shipments to some major sportswear retailers.

Company Description

Under Armour develops, markets, and distributes athletic apparel, footwear, and accessories in North America and other territories. Consumers of its apparel include professional and amateur athletes, sponsored college and professional teams, and people with active lifestyles. The company sells merchandise through wholesale and direct-to-consumer channels, including e-commerce and more than 400 total global factory house and brand house stores. Under Armour also operates a digital fitness app called MapMyFitness. The Baltimore-based company was founded in 1996.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

Waiting to Hear Seven’s Voice on Capital Management

The Japan Finance and market, Data Chart.

Business Strategy & Outlook: 

Seven, which generates the majority of its earnings through Seven Network’s free-to-air TV and broadcast video on demand units, offers exposure to the AUD 3.8 billion total Australian television advertising market. It is a media segment that has remained largely flat during the past 10 years, after consistently enjoying growth of about 6% in the preceding decade. The slowing growth has been caused by proliferating digital media alternatives, rapidly changing entertainment consumption habits, and increasing high-speed broadband adoption. Indeed, the structural headwinds have been such that the free-to-air television industry’s share of the Australian total advertising pie has slumped from more than 35% in the mid-2000s to just over 20% now, as advertisers follow eyeballs to digital media platforms. 

Within this mature industry, Seven Network commands the number-one or two position, with a 38%-40% rating and revenue share of the commercial metropolitan free-to-air television market. Its library of extensive sports and general entertainment programming has aided in the rise of these share metrics in recent years. Seven Network can maintain revenue shares at the 38.0% level on a long-term, midcycle basis. The key investment consideration comes down to Seven Network’s EBIT margin outlook. This is important in the face of increasing competition for viewers (from proliferating new digital entertainment options) and for content (from digital upstarts and incumbent television broadcasters). The group’s exposure to the even more structurally challenged print media industry is another key issue facing investors in Seven West Media. Earnings from the newspaper division have slumped from almost AUD 140 million in fiscal 2011 to AUD 28 million in fiscal 2021. However, combined profits from the print media business now account for less than 10% of the group’s total.

Financial Strengths:

The strong progress in balance sheet repair in recent years has vaporised the key concern regarding the group’s financial position. This is reflected in company’s net debt/EBITDA forecast of 0.8 by the end of fiscal 2022.

Bulls Say:  

  • Seven West Media commands a strong position in the Australian free-to-air television industry, with leading ratings and revenue shares.
  • The unique antisiphoning regime in Australia ensures that Seven Network will continue to have a stronghold on marquee live sports programming, such as the Australian Football League, cricket, and other sports events of national importance. 
  • Seven Network creates and produces about 70% of its television programming (excluding sports), far more than its peers, allowing the company to capture much of the content value chain in proliferating media channels.

Company Description: 

Seven West Media operates Seven Network, a free-to-air television network spread across five capital cities, as well as in regional Queensland. It also owns most of the newspapers circulating in Western Australia (including the monopoly Perth title called West Australian Newspapers), as well as the country’s second-largest magazine publishing group (Pacific Magazines). In the Australian online space, it operates broadcast on demand, or BVOD, service called 7plus.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

Stericycle’s self-help measures and significant exposure to the growing United States medical waste market

price of btc is going to breakout

Business Strategy and Outlook

Since its founding in 1989, Stericycle has been extremely acquisitive, having acquired over 500 companies. On the surface, this acquisitive strategy led to a lengthy period of impressive growth and the firm built unmatched scale. However, acquisitions began to stray from Stericycle’s core competencies and poor integration efforts caused inefficiencies to build. After decades of strong growth and profitability, Stericycle’s financial performance began to deteriorate in 2017. However, with a refreshed management team, led by CEO Cindy Miller, it is now seen Stericycle has turned the corner. With Miller at the helm, Stericycle has divested low-margin, noncore businesses, most notably, environmental solutions. The enterprise resource planning implementation project continues, and it is likely to be completed within the next couple of years. A common ERP system will streamline Stericycle’s operations and improve the firm’s financial planning and analysis. Finally, Miller has implemented much needed oversight and standardization, for example, customer contracts are now reviewed by a deal review committee. 

Management’s turnaround efforts are taking hold. Despite the global pandemic, Stericycle’s regulated waste and compliance services business reported 2% organic growth in 2020 (after flat organic growth in 2019 and a 2% organic decline in both 2018 and 2017), and consolidated gross margin improved 60 basis points year over year after six consecutive years of gross margin contraction. In 2021, RWCS registered nearly 6% organic revenue growth, and the secure information destruction services business reported 5% organic growth. 

Stericycle’s self-help measures and significant exposure to the growing United States medical waste market should result in solid top-line growth and margin expansion over the next five years. It is foreseen, Stericycle’s revenue to grow at about a 4% five-year compound annual rate and adjusted EBITDA margin to expand to around 23.5% by 2025-26 from (17.5% to 18.5% during 2019-21). Most importantly, it is alleged for return on new invested capital will rebound to the low double digits by 2024.

Financial Strength

Stericycle’s debt balance increased by over $1.5 billion in 2015 a result of the Shred-It acquisition. As the company’s financial performance deteriorated in subsequent years, the firm’s net debt/EBITDA ratio swelled to approximately 4.5. However, the current management team is committed to rightsizing the balance sheet, and the firm’s leverage ratios have already become more palatable (net debt/adjusted EBITDA was about 3.4 as of December 2021). Stericycle ended its first-quarter 2022 with $1.65 billion of net debt. The firm’s outstanding balance on its credit facility and term loan (approximately $540 million) is due in 2026, $600 million of 5.375% senior notes is due in 2024, and $500 million of 3.875% senior notes is due in 2029. Over the next five years, it is projected Stericycle will generate approximately $1.7 billion of free cash, so about the firm’s ability to service its outstanding debt is not a concern, and it is held, management’s goal of reducing its net debt/adjusted EBITDA ratio below 3 is achievable. Stericycle has plenty of liquidity with $60 million of cash on the balance sheet and over $790 million available on its $1.2 billion credit facility.

Bulls Say’s

  • Stericycle’s turnaround efforts will prove successful, materially improving the firm’s profitability and free cash flow. 
  • Medical waste volume should grow faster than U.S. GDP due to an aging population that requires more medical procedures. Stericycle’s leading position in an expanding market should improve the firm’s financial prospects. 
  • Stericycle is past the apex of pricing pressure related to private practice consolidation and a customer class action lawsuit. Going forward, the firm should realize annual price increases above inflation.

Company Profile 

Stericycle is the largest provider of medical waste disposal and data destruction (primarily paper shredding) services in the United States. Its next closest national competitor in the medical waste disposal space is Sharps Compliance, which generated $76 million of sales in fiscal 2021 (about 4% of Stericycle’s global regulated waste and compliance revenue). Stericycle’s data destruction business (Shred-It) is about twice the size of its closest competitor (Iron Mountain’s information destruction segment). Stericycle has a global presence, with about 20% of its revenue earned outside North America. 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

Commerzbank’s latest strategy is the right one toward a better future, despite the herculean task ahead

Business Strategy and Outlook

Commerzbank generates about 70% of its operating income in the highly competitive German market, where banks without profit-maximizing motives (savings and cooperative banks) dominate the retail space and German as well as international competitors vie for the coveted German corporate market. In this competitive environment, Commerzbank has too long stuck to its large branch network strategy, failing to digitize processes sufficiently to compete in today’s changing banking landscape. Management is addressing these shortcomings with a highly ambitious plan. Until 2024, the bank aims to reduce its cost base by EUR 1.4 billion, or about 20% of its 2020 level. The largest cost savings will come from a reduction of about 10,000 in head count and 550 branch closures. After such a massive cut to its business, management believes it can achieve a return on tangible equity of 7%.

It is true that Commerzbank is addressing the obvious hurdles toward a more profitable future with its current plan. Yet given the competitive market in Germany, the reorganization may also provoke customer churn and bring revenue down with it. Commerzbank has been coveted as a takeover target by multiple European banks over the last couple of years. This was partially owed to its strong position in the German corporate market, but also the potential gains to be made via a heavy cost-cutting initiative. Commerzbank has now switched course, in experts view, and is taking matters into its own hands rather than hoping for a white knight. It is unexpected for European cross-border banking consolidation to commence anytime soon. As such, it is held, Commerzbank’s latest strategy is the right one toward a better future, despite the herculean task ahead.

Financial Strength

Commerzbank is in good financial health. The bank has cleaned up its balance sheet after its acquisition of Dresdner Bank in 2008 and derisked its exposure to bad loans in shipping, commercial real estate, and public finance. At the end of the first quarter of 2022, the bank posted a common equity Tier 1 ratio of 13.5% versus a requirement of 9.4%.

Bulls Say’s

  • Commerzbank is addressing its large cost base, setting the bank up for greater profitability in the future. 
  • The bank is in good financial health and has successfully run down its bad exposures in shipping, public finance, and commercial real estate. 
  • The efficiency program, cost-cutting efforts, and digitalization strategy will create a leaner and more agile Commerzbank.

Company Profile 

Commerzbank operates primarily in Europe. Germany contributes about 70% to total income. The bank operates two business segments: private and small-business customers as well as corporate clients. In its private and small-business segment, the group runs its branch business, a mobile bank with a focus on the Polish market, an online broker, and an asset manager for physical assets. Its corporate client business provides cash management and trade finance solutions to small and medium-size enterprises and large corporates. 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Narrow-Moat Alcon Has Defensive Characteristics, Refractive Is Most Exposed To Recession Risks

Business Strategy and Outlook

As a global leader in eyecare, Alcon provides products and equipment for various vision conditions such as refractive errors, cataracts, and advanced vitreoretinal problems. The firm is the second-biggest player in contact lenses and has a robust portfolio in liquid eyecare solutions for allergies and dry eye. Despite a strong market position, Alcon remains in turnaround mode following years of underinvestment as a Novartis subsidiary. The company has committed significant capital to the turnaround program with greater sales and marketing spending, and capital expenditures that are expected to total over $1.5 billion over the next three years. Looking past expected lumpiness of near-term results, management’s turnaround efforts will largely pay off and there is a positive view of the outlook on the core business. 

Alcon’s strategy centers on growth in premium product lines, implementing cost-saving initiatives to drive margin expansion, and capitalizing on secular long-term growth in global eyecare. Specifically, the firm has identified three main areas of growth for the business: advanced intraocular lenses (PanOptix, Vivity), premium daily contact lenses (Total1, Precision1), and liquid eyecare (Systane, Pataday). Within each of these markets, Alcon has a premium product that should allow for near-term above-market growth. Alcon’s leading position in phacoemulsification for cataract surgery, with a 50% market share, helps pull in demand for standard intraocular lenses, or IOL, from bundling, and Alcon now holds a greater-than-50% share in IOLs, as well. The firm recently launched a value-priced phaco system that should generate share gains in emerging markets, which have been slower to adapt phaco because of higher up-front costs. Alcon’s standard IOL business is expected to grow about in line with market, and the introduction of PanOptix to the U.S. market should enable above-market growth for the advanced lens portfolio. PanOptix is the first trifocal in the U.S., and this lens has benefited from its first-mover advantage, with the product achieving 75% share of advanced IOL sales in the U.S. and Japan.

Financial Strength

Alcon’s financial strength is satisfactory. The firm took on $3.5 billion of debt in early 2019 related to the spin-off from Novartis, and the company ended 2021 with a moderate degree of leverage (debt/EBITDA ratio of 2.6). Interest coverage is a moderate concern to us in the near term given that interest expenses are projected to exceed operating income in 2021. This is partly due to the refinancing of $2 billion of debt in 2019, which resulted in higher interest expense. Still, this also lengthened the maturity of the debt, giving Alcon improved longer-term financial stability. Given current assumptions about operating income growth over the coming years, interest coverage is not anticipated to be a long-term concern, and the coverage ratio is expected to surpass 10 times by the back half of the 10-year forecast period. In early 2019, about a month before Alcon once again became a public firm, the company acquired fluid-based intraocular lens maker Powervision for $285 million. The firm is likely to make a few similarly sized tuck-in acquisitions over the next few years, in the range of $50 million to $500 million, such as the $475 million acquisition of Ivantis in November 2021. With Alcon’s total market cap at around $35 billion, this acquisition range is meaningful but not necessarily material to the overall business, and the company has enough free cash flow to pursue acquisitions of this size. Positive free cash flow to the firm is projected throughout the 10-year explicit forecast period, indicating the firm has ample financial flexibility.

Bulls Say’s

  • Alcon stands to benefit from several secular trends in eyecare: an increasing prevalence of myopia, demand for better eyecare from a growing middle-class in emerging markets, and growth driven by an aging population. 
  • As a stand-alone public firm, Alcon will have the necessary financial flexibility to make investments for the longer term, and patient investors could be well rewarded. 
  • Alcon’s product pipeline (fluid-based intraocular lenses, accommodating contact lenses, Systane line expansion) will help the firm maintain and expand its position as the global leader in eyecare.

Company Profile 

Alcon, headquartered in Fort Worth, Texas, is the global eyecare leader with a diverse portfolio in ophthalmology including contact lenses, eye drops, surgical equipment, and related surgical products. Novartis purchased Alcon from Nestle in 2010 and, following nine years as a Novartis subsidiary, the company was spun-off as a public company in April 2019. The company reports five distinct segments: implantables (16% of revenue), consumables (31%), equipment (9%), contact lenses (27%), and ocular health (17%). The company is geographically diversified, with only about 40% of revenue from the U.S. market, and the firm has a strong presence in the European Union and Japan.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Rocket’s Earnings Fall in Q1 as Higher Rates Bite Into Refinance Volumes; Fair Value Estimate to $14

price of btc is going to breakout

Business Strategy and Outlook

While Rocket Companies offers a variety of products and services, the firm is best known for its Rocket Mortgage segment, which provides Rocket with most of its revenue. The mortgage industry is fractured and highly competitive, but Rocket has distinguished itself by operating as an entirely digitally lender, originating and servicing its mortgages through its mobile app and website. Rocket has made substantial investments in automating the mortgage process and has been an industry leader in increasing loan processing speed and removing pain points for consumers. These investments along with its control over the appraisal and titling process, through its ownership of Amrock, have allowed the firm to offer an industry-leading mortgage experience to borrowers while also enjoying a cost structure advantage over its competitors. 

As a digital lender Rocket is able to scale its capacity for mortgage volume up or down quickly since each loan requires less manual attention. This flexibility will be needed as rising mortgage rates push mortgage origination volume well below their 2020 and 2021 highs. Rocket is particularly exposed to this trend as it is strongest in refinance activity and price sensitive first-time homebuyers. As origination activity is curtailed by higher interest rates, Rocket’s revenue and earnings is anticipated to fall from 2021, particularly as pricing in the mortgage secondary market has cooled down. That said, through the full cycle Rocket is expected to gain market share from other lenders. Consumers have become more comfortable with conducting their finances digitally during the pandemic, and digital lenders, like Rocket, have benefited from this tailwind. Rocket has had strong success in expanding its partner network. New partnerships with firms like Mint and Morgan Stanley, in which these firms offer Rocket’s mortgages to their customers, will help drive growth. While Rocket’s revenue and earnings will likely remain volatile, a symptom of the cyclical nature of the mortgage industry, the company’s strong competitive position and trends in consumer behavior will provide it with long-term secular growth.

Financial Strength

Rocket operates in a highly cyclical industry, as a result its revenue and earnings have the potential to drop sharply due to economic factors completely out of its control. While Rocket does resell the mortgages it makes within days of origination, the sheer volume of mortgages that Rocket creates means that the company has billions in mortgage debt on its balance sheet at any given point in time. At the end of December, Rocket had more than $19 billion in mortgages, which were financed by equity and less than $13 billion in funding facilities. The combination of volatile revenue and substantial funding needs means that Rocket’s financial strength is an important factor to watch, particularly during slower markets. Despite this, there are no significant concerns about Rocket’s financial health at this time. The company has a strong balance sheet and has been able to maintain constant profitability, even during slow periods for mortgage origination. Rocket had over $2.1 billion in cash at the end of December 2021 and only $6 billion in debt not directly tied to its mortgage holdings. With net debt of roughly 1.5 times the projected 2023 EBITDA, Rocket should have more than enough financial resources to see it through a slow mortgage market, should one develop.

Bulls Say’s

  • Rocket has been steadily gaining market share in both its direct-to-consumer and partner network mortgage origination channels. 
  • Rocket’s digital origination model gives it a cost advantage over its peers and allows it to respond rapidly to market developments. 
  • Rocket has been able to sign major partnerships to expand its partner network. Deals with Morgan Stanley and Intuit’s Mint represent major wins for the company

Company Profile 

Rocket Companies is a financial services company that was originally founded as Rock Financial in 1985 and is currently based in Detroit. Rocket Companies offers a wide array of services and products but is best known for its Rocket Mortgage business. The company’s mortgage lending operations are split between its direct-to-consumer lending, which sees borrowers accessing the company’s lending arm directly through either its mobile app or website, and its partner network where mortgage brokers and other firms use Rocket’s origination process to offer loans to their customers. The company has rapidly gained market share in recent years and is now the largest mortgage originator in the U.S. as well as the servicer for more than 2 million loans.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Materials Cost Headwinds Now A Major Cost Problem For Toyota But Balance Sheet Remains Strong

Business Strategy and Outlook

Toyota’s vision includes making compact cars a priority for emerging markets with attractive design but lower costs, having designers and engineers as equal partners, and scale from the Toyota New Global Architecture, which develops many vehicles using common parts, something critical for Toyota to keep pace with the likes of Volkswagen. A big change on the parts side is that the company uses more parts on a global standard as opposed to Toyota-specific standards. The long-term goal is for vehicles that share a platform to have 70%-80% common parts. Giving local designers more control is finally letting Toyota make more exciting vehicles. Toyota is thinking about the future with its Monet autonomous vehicle services joint venture with SoftBank and other Japanese automakers, such as Honda, its battery joint venture with Panasonic, and Woven City, a laboratory city of the future in Japan run on hydrogen fuel cells. Toyota is also working on solid state batteries and has an JPY 8 trillion electrified vehicle plan for 2022-30.

 More plants outside Japan will also help Toyota deal with foreign exchange risk, which can dramatically affect earnings. In calendar 2021, about 80% of Toyota’s light vehicle sales were outside Japan, but only 61% of production was based outside Japan. The company has long pledged to produce at least 3 million vehicles a year in Japan, but this promise becomes very hard to keep when the yen is strong. Every JPY 1 change in the U.S. dollar affects Toyota’s operating income by an estimated JPY 40 billion, more than twice the impact at Honda. Management has said that the Japanese operations break even at JPY 85/$1, and below JPY 80/$1 is where management has to reconsider its Japanese production levels, especially for compact cars. Still, in May 2020, President Akio Toyoda said 3 million units and Japan employment will be maintained no matter how bad the economic situation is because people make things society needs.

Financial Strength

Toyota is in excellent financial shape, and its balance sheet is one of the strongest in the auto sector. The company has a small debt load and substantial cash holdings. Flexibility is important because it gives the company plenty of room to acquire more capital in the debt markets, if needed. As of the end of fiscal 2022, Toyota’s consolidated cash and cash equivalent balance was JPY about 6.1 trillion. Excluding the captive finance company, the firm held about JPY 4.3 trillion in cash at the end of fiscal 2022, more than offsetting JPY 2.6 trillion of debt. This huge net cash position gives Toyota the capability to invest in many experimental efforts around hydrogen, EVs, and autonomous vehicles without drastically hurting financial health. As of year-end fiscal 2021, the consolidated company had access to about JPY 8.3 trillion of unused long-term and short-term credit lines. Debt/EBITDA excluding the financing arm has fallen to 1.3 after peaking at 2.8 times in fiscal 2009. For fiscal 2022, excluding the financing arm Toyota generated free cash flow equal to about 6.7% of revenue. Toyota does not seem to have any problems meeting debt maturities or raising more capital in a recession should it need the funds. In April 2020, it raised JPY 1.25 trillion in short-term debt to combat COVID-19 damage. 

Bulls Say’s

  • Its popular vehicles usually allow Toyota to use fewer incentives than the Detroit Three, boosting the firm’s profits and improving the resale value of vehicles. 
  • Toyota’s manufacturing process is the gold standard of the auto industry. 
  • Significantly lower pension and retiree healthcare costs give Toyota a cost advantage over the Detroit Three, although this advantage is less than it used to be.

Company Profile 

Founded in 1937, Toyota is one of the world’s largest automakers with 10.38 million units sold at retail in fiscal 2022 across its light vehicle brands. Brands include Toyota, Lexus, Daihatsu, and truck maker Hino; market share in Japan is about 52%, while U.S. share is over 15%. The firm also owns large stake in Denso, a parts supplier, at least 16% of Subaru (with a deal to raise that to 20%), and holds investments in many other firms, including shares of Uber Technologies and about 5% in each of Mazda and Suzuki. Fiscal 2022 sales excluding financial services were JPY 29.1 trillion. Toyota also has a financing arm and manufactures homes and boats..

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Avita’s First-Quarter Sales Growth Compensates for Margin Contraction

Business Strategy & Outlook

The Avita’s RECELL to pose a significant challenge to the standard of care for larger burns, currently a skin graft sourced from elsewhere on the patient’s body. The Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.

Despite the technology in Avita’s RECELL system being in use since the Bali bombings in 2002, the product has had limited commercial success as it entered the market as an investigational device. This limited the reimbursement and take-up of the product. RECELL relaunched in the U.S. following randomized clinical trials and FDA approval in late 2018. Currently, it’s approved for treating second and third degree burns in pediatric and adult patients.

The treatment of severe burns in the U.S. is concentrated across the 136 burn centers, making commercial roll-out of RECELL straightforward. Of the approximately 14,000 adults with second- or third-degree burns treated at these burn centers each year and Avita could ramp-up to 34% share or 4,800 patients per year by fiscal 2026. The cost of RECELL compares favorably with a skin graft in this setting, as RECELL has a list price of USD 7,500 per single-use unit versus the USD 17,000 to USD 20,000 cost of a skin graft. It also has the benefits of shorter length of stay and fewer

additional procedures.

Outside of burn centers, the opportunity set is far more fragmented and because the burns are less severe, the cost of skin grafts average USD 2,000. As such a limited take-up outside of burn centres, reaching 3% by fiscal 2031. Avita has received regulatory approval for an updated RECELL device that makes handling easier in a regular hospital environment. The company will seek to justify reimbursement on a holistic cost of treatment and roll out the updated version in second-half fiscal 2022.outpatients.

Financial Strengths

Having raised AUD 120 million in equity funding in November 2019, and a further USD 69 million in February 2021, Avita is in a solid financial position with no debt, and USD 95 million in cash and marketable securities as at March 31, 2021. Based on roll-out and product launch dates, no one can expect Avita will need to raise further capital before becoming self-maintaining. The operations of the company to be a net consumer of cash in fiscal years 2022, 2023, and 2024 as it scales up operations, and become free cash flow positive thereafter. Key operational cash requirements include the salesforce and clinical trials and approvals for new indications. There

is little capital investment required as the owned factory where it assembles the RECELL systems in the U.S., is currently running at only 10% capacity. Consequently, one cannot expect it will require additional physical space for the next five years. Avita does not pay a dividend and one cannot forecast this to change. The company will become free cash flow positive in the forthcoming years, it will choose to reinvest this either in expanding geographies or new indications outside the scope of the current trials, such as cosmetic dermatology.

Bulls Say

  • The Avita’s RECELL system as a sound alternative treatment for large second- and third-degree burns treated in burn centers. It compares favorably on price and ease of use with new products and the existing standard of care being skin grafts.
  • The company requires little invested capital and is expected to generate very high returns once it ramps up its commercial roll-out.
  • RECELL has achieved an estimated 20% market share in fiscal 2021 in its key addressable market since launching in 2019 and set to expand its use for other indications.

Company Description

Avita is a single product company. Its RECELL system is an innovative burn treatment device which creates Spray-on Skin from a small skin sample within 30 minutes, thus avoiding or reducing the need for skin grafts. It’s approved for the treatment of adult patients in the U.S. with pediatric clinical trials and expanded indications in soft-tissue reconstruction and vitiligo underway. It is currently in roll-out across the approximately 136 U.S. burn centers. Despite having product approval in Australia, Europe, Canada, and China, Avita is not actively marketing in those territories and focusing instead on the U.S. region. However, it is expected to launch in Japan via distribution partner Cosmotec in second-half fiscal 2022. Avita is domiciled, and has its primary listing, in the U.S.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

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

Business Strategy & Outlook: 

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

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

Financial Strengths: 

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

Bulls Say: 

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

Company Description: 

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

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

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

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

Business Strategy & Outlook: 

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

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

Financial Strengths:

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

Bulls Say:  

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

Company Description: 

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

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.