Category: Shares

Business Strategy and Outlook:

While COVID-19 is still materially impacting near-term travel demand in many regions of the world, we expect Marriott to expand room and revenue share in the hotel industry over the next decade, driven by a favorable next-generation traveler position supported by renovated and newer brands, as well as its industry-leading loyalty program. Additionally, we believe the acquisition of Starwood (closed in September 2016) has strengthened Marriott’s long-term brand advantage, as Starwood’s global luxury portfolio complemented Marriott’s dominant upper-scale position in North America.

Marriott’s intangible brand asset and switching cost advantages are set to strengthen. Marriott has added several new brands since 2007, renovated a meaningful percentage of core Marriott and Courtyard hotels in the past few years, and expanded technology integration and loyalty-member presence; these actions have led to share gains and a strong positioning with millennial travelers. Starwood’s loyalty member presence and iconic brands should further strengthen Marriott’s advantages. With 97% of the combined rooms managed or franchised, Marriott has an attractive recurring-fee business model with high returns on invested capital and significant switching costs for property owners. Managed and franchised hotels have low fixed costs and capital requirements, along with contracts lasting 20 years that have meaningful cancelation costs for owners.

Financial Strength:

Marriott’s financial health remains in good shape, despite COVID-19 challenges. Marriott entered 2020 with debt/adjusted EBITDA of 3.1 times, as its asset-light business model allows the company to operate with low fixed costs and stable unit growth, but reduced demand due to COVID-19 caused the ratio to end the year at 9.1 times. During 2020, Marriott did not sit still; rather, it took action to increase its liquidity profile, including suspending dividends and share repurchases, deferring discretionary capital expenditures, raising debt, and receiving credit card fees from partners up front. As travel demand recovered in 2021, so too did Marriott’s debt leverage, with debt/adjusted EBITDA ending the year at 4.5 times. If demand once again plummeted, we think Marriott has enough liquidity to operate at zero revenue into 2023.

Bulls Say:

• Marriott is positioned to benefit from the increasing presence of the next-generation traveler through emerging lifestyle brands Autograph, Tribute, Moxy, Aloft, and Element. 
• Marriott stands to benefit from worker flexibility driving higher long-term travel demand. Our constructive stance is formed by higher income occupations being the most likely industries to continue to work from remote locations. 
• Marriott has a high exposure to recurring managed and franchised fees (97% of total 2019 units), which have high switching costs and generate strong ROICs.

Company Profile:

Marriott operates nearly 1.5 million rooms across roughly 30 brands. Luxury represents 10% of total rooms, while full service, limited service, and time-shares are 43%, 46%, and 2% of all units, respectively. Marriott, Courtyard, and Sheraton are the largest brands, while Autograph, Tribute, Moxy, Aloft, and Element are newer lifestyle brands. Managed and franchised represent 97% of total rooms. North America makes up two thirds of total rooms. Managed, franchise, and incentive fees represent the vast majority of revenue and profitability for the company.

(Source: Morningstar)

General Advice Warning

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

Business Strategy and Outlook:

Several secular trends are affecting Tyson’s long-term growth prospects. While U.S. consumers (81% of fiscal 2021 sales) are limiting their consumption of red and processed meat (71% of Tyson’s sales), they are consuming more chicken (29%). International demand for meat has been strong, and although Tyson’s overseas sales mix is just 12%, it is likely to increase over time, as this is an area of acquisition focus. Also, in order to feed the world sustainably, alternative proteins should play a key role. Tyson is actively investing in lab-grown and plant-based meats and should participate in this growth (albeit to a small degree). The beef segment has been a bright spot in Tyson’s portfolio in recent years, as strong international demand, coupled with a drought-induced beef shortage in Australia, has increased the segment’s operating margins to 10% over the past five years from 2% prior to 2017. Conversely, the chicken segment has suffered from executional missteps that have resulted in structurally higher costs relative to competitors.

About 80% of Tyson’s products are undifferentiated (commoditized), so it is difficult for them to command price premiums and higher returns. Although Tyson is the largest U.S. producer of beef and chicken, we do not believe this affords it a scale-based cost advantage, as its segment margins tend to be in line with or even below those of its smaller peers. The absence of a competitive edge, in the form of either a brand intangible asset or a cost advantage, leads us to our no-moat rating.

Financial Strength:

Tyson’s financial health is viewed as solid and there aren’t any issues to suggest that it will be unable to meet its financial obligations. While Tyson generates healthy cash flow and is committed to retaining its investment-grade credit rating, the business is inherently cyclical, with many factors outside of its control. But management has made changes to improve the predictability of earnings. Chicken pricing contracts, which now link costs and prices, and a greater mix of prepared foods (from 10% in 2014 to the current 19%) both serve as stabilizers. In terms of leverage, net debt/adjusted EBITDA stood at a rather low 1.2 times at the end of fiscal 2021, below Tyson’s typical range of 2-3 times. At the end of December, Tyson held $3.0 billion cash and had full availability of its $2.25 billion revolving credit agreement. Together, this should be sufficient to meet the firm’s needs over the next year, namely about $2 billion in capital expenditures, nearly $700 million in dividends, and $1.1 billion in debt maturities.

Bulls Say:

• China’s significant protein shortage resulting from African swine fever should boost near-term protein demand, while the country’s continued moderate increase in per capita consumption of proteins should drive long-term growth. 
• While investor angst over chicken price-fixing litigation has weighed on shares, Tyson’s recently announced settlements materially reduce this overhang. 
• In the current inflationary environment, Tyson’s cost pass-through model limits potential profit margin pressure.

Company Profile:

Tyson Foods is the largest U.S. producer of processed chicken and beef. It’s also a large producer of processed pork and protein-based products under the brands Jimmy Dean, Hillshire Farm, Ball Park, Sara Lee, Aidells, State Fair, and Raised & Rooted, to name a few. Tyson sells 81% of its products through various U.S. channels, including retailers (47% in fiscal 2021), food service (32%), and other packaged food and industrial companies (10%). In addition, 11% of the company’s revenue comes from exports to Canada, Mexico, Brazil, Europe, China, and Japan.

(Source: Morningstar)

General Advice Warning

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

Investment Thesis:

• Leveraged to the structural growth story of electronics payments globally.
• Difficult to replicate technology platform which provides an element of high barrier to entry to new entrants.
• Largely defensive earnings and strong market position (second largest payments network globally). 
• Expansion into new markets / segments provides upside potential
• Value accretive acquisitions. Management aims for all acquisitions to be value-accretive by the third year of the transaction.
• Capital management initiatives 

Key Risks:

• Adverse currency movements and regulatory changes (data privacy / protection, governments’ intervention/protection policies). 
• Security and technology risks (including cyber-attacks). 
• Increased competition, potentially from new forms of payment systems. 
• Value destructive acquisition(s). 
• Macroeconomic conditions globally deteriorate, impacting consumer spending and business activity, especially given the coronavirus outbreak.
• Significant change at the senior management level.
• Company fails to meet market/investor expectations leading to analysts’ earnings downgrade – the stock is likely to come under selling pressure. 
• Outstanding litigation risk.

Key highlights:

• MA’s FY21 results came in above consensus estimates with revenue of $18.9bn (up +23%) vs estimate of $18.8bn and EPS of $8.76 (up +38%) vs estimate of $8.43 amid a spending rebound, with management forecasting YoY growth in FY22 as cross-border travel continues to improve. 
• MA’s fundamentals remain strong with highly defensible and recurring revenue streams, high incremental margins and superior Free Cash Flow (FCF) generation, and remains well positioned to capture management’s targeted $255 trillion in new payment flows. The impact of potential sanctions on Russia and broader valuation declines of tech stocks amid monetary policy tightening weigh on investor sentiment.
• Secular growth should remain strong from ongoing global shifts toward card-based and electronic payments with MA’s innovations and acquisitions to strengthen Buy Now Pay Later (BNPL), crypto currency and account-to-account payments providing further boost.
• Management sees significant opportunity by expanding in payments and has upgraded its total addressable market size estimate to $255 trillion, up +8.5% over prior estimate driven by driving growth in person to merchant payments through new wins across the globe, capturing new payment flows, including commercial, B2B accounts payable, bill pay and cross-border remittances, and leaning into payment innovation in areas like instalments, contactless acceptance and crypto currencies.

Company Description:

Mastercard Inc is a technology company in the global payments industry that connects consumers, financial institutions, merchants, governments, digital partners and businesses, enabling them to use electronic forms of payment instead of cash and cheques. The Company provides payment solutions and services through brands such as Mastercard, Maestro and Cirrus.

(Source: Banyantree)

General Advice Warning

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

Business Strategy and Outlook:

Las Vegas demand remains robust, with fourth-quarter sales reaching 134% of 2019 levels, up from 119% last quarter, driven by strong gaming, food and beverage, and room revenue. Wynn plans to sell and leaseback its Boston assets for $1.7 billion, which will be used to pay down debt and invest back into its existing properties and new opportunities, like the property in the United Arab Emirates (scheduled to open in 2026). Wynn will receive management fees for this property and we see this as a good allocation of capital, supporting our Standard capital allocation rating. Macao benefits from a large addressable market (China’s 1.4 billion population), which is captive (only gambling location in China) and underpenetrated (2% of Chinese visited Macao in 2019), with a propensity to gamble (average Macao visitor produced $925 in gaming sales versus $244 in Las Vegas in 2019). Also, supply is limited, with just 41 casinos versus around 1,000 in the United States, supporting operator regulatory advantages, the source of narrow moats in the industry.

Financial Strength:

Wynn’s 2021 sales and EBITDA (pre-corporate expense) of $3.8 billion and $837 million, respectively, surpassed our $3.4 billion and $808 million forecast, driven by better-than-expected Macao sales results. Wynn shares are viewed as undervalued, but prefer shares of narrow-moat Las Vegas Sands, which also trades at a discount to our $53 valuation, while offering stronger assets, along with a stout balance sheet. Macao (76% of 2019 EBITDA) 2021 revenue of $1.5 billion was ahead of our $1.3 billion estimate, while EBITDA of $96 million trailed our $129 forecast. Encouragingly, Wynn saw strong VIP direct play during the recent Chinese New Year, with turnover per day up 175% from 2021 and at 88% of 2019 levels.

Company Profile:

Wynn Resorts operates luxury casinos and resorts. The company was founded in 2002 by Steve Wynn, the former CEO. The company operates four megaresorts: Wynn Macau and Encore in Macao and Wynn Las Vegas and Encore in Las Vegas. Cotai Palace opened in August 2016 in Macao, Encore Boston Harbor in Massachusetts opened June 2019. Additionally, we expect the company to begin construction on a new building next to its existing Macao Palace resort in 2022, which we forecast to open in 2025. The company also operates Wynn Interactive, a digital sports betting and iGaming platform. The company received 76% and 24% of its 2019 prepandemic EBITDA from Macao and Las Vegas, respectively.

(Source: Morningstar)

General Advice Warning

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

Business Strategy and Outlook

Wesco operates in very fragmented markets, but its large scale, global footprint, expansive product portfolio and supplier base, and service offerings differentiate it from smaller local and regional competitors. Service offerings, such as vendor-managed inventory, efficiency assessments, product repairs, and training, generate a meaningful portion of Wesco’s sales and are key components of the firm’s value proposition to customers. Wesco’s size is also an important competitive advantage because the company has the scale to serve large, multinational clients anywhere in the world. Wesco doubled in size after it completed its acquisition of close peer Anixter in June 2020.

Financial Strength

Wesco’s $4.7 billion acquisition of close peer Anixter International in June 2020 caused the firm’s net debt/EBITDA ratio (excluding synergies) to swell to 5.7. However, Wesco’s elevated free cash flow generation in 2020 allowed the firm to reduce net debt by $389 million, finishing 2020 with a 5.3 net leverage ratio. Wesco’s leverage ratio continued to decline as 2021 progressed, and the firm finished the year with a 3.9 net debt/adjusted EBITDA ratio. At the end of 2021, Wesco had $4.7 billion of debt, but modeling about $4.2 billion of free cash flow over the next five years. Wesco has a proven ability to generate free cash flow throughout the cycle. Indeed, it has generated positive free cash flow (defined as operating cash flow less capital expenditures) every year since its 1999 initial public offering, and its free cash flow generation tends to spike during downturns due to reduced working capital requirements. 

Wesco delivered 16% organic revenue growth during the fourth quarter, and gross profit margin and adjusted EBITDA margin expanded 120 and 140 basis points to 20.8% and 6.6%, respectively. All three of Wesco’s segments delivered revenue growth and adjusted EBITDA margin expansion during the quarter, and the firm’s backlog has reached a record level, which bodes well for 2022 growth prospects. Management expects revenue to increase 5%-8% in 2022, adjusted EBITDA margin of 6.7% to 7.0% (20-50-basis point improvement), and adjusted EPS of $11.00-$12.00

Bulls Say’s

• Wesco’s transformative acquisition of Anixter should result in stronger growth and profitability, which should help the stock fetch a higher multiple. 
• Wesco’s global footprint and focus on value-added inventory management services help the firm take market share from smaller distributors and support pricing power. 
• Despite serving cyclical end markets, Wesco’s business model generates strong free cash flow throughout the cycle. The firm will likely continue to use its cash flow to fund organic growth initiatives, acquisitions, and share repurchases.

Company Profile 

Wesco International is a value-added industrial distributor that has three reportable segments, electrical and electronic solutions, communications and security solutions, and utility and broadband solutions. The company offers more than 1.5 million products to its 125,000 active customers through a distribution network of 800 branches, warehouses, and sales offices, including 42 distribution centers. Wesco generates 75% of its sales in the United States, but it has a global reach, with operations in 50 other countries.

(Source: Morningstar)

General Advice Warning

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

Business Strategy and Outlook

As the global leader in the cleaning and sanitation industry, Ecolab provides products that help its hospitality, food-service, and healthcare customers do laundry, wash dishes, and maintain regulatory compliance. With unmatched scale and a solid razor-and-blade business model, Ecolab’s competitive advantages are firmly in place. The company’s cleaning and sanitation scale dwarfs the competition. Ecolab generates over 3 times the revenue of its largest rival. Its industries are fragmented, with many markets made up of regional and local competitors. Ecolab controls roughly 8% of the $152 billion global market. 

With its unrivaled scale and breadth of product offerings, the company is an attractive partner to global hospitality and food-service firms. We think it will continue to grow from market share gains and expanding into new markets. The firm uses a razor-and-blade business model by providing cleaning equipment to customers that solely uses Ecolab’s proprietary consumables. This model creates a steady stream of consumables revenue. The installed base and consumables model also leads to high customer switching costs, as clients are generally reluctant to switch out equipment and retrain staff.

Financial Strength

Ecolab is in decent financial health. Net debt/adjusted EBITDA was 3.1 times as of Dec. 31, well above below the company’s long-term goal of 2.0 times. The company’s leverage ratios are currently elevated as it recently closed the $3.7 billion Purolite acquisition, which was mostly financed with debt. Ecolab’s leverage ratio will likely remain elevated throughout 2022. The institutional business continues to recover, with operating income up 73% in 2021 versus 2020, on 11% revenue growth. Segment operating margins expanded 500 basis points to 14% in 2021. While this is still well below pre-pandemic levels above 21%, it shows how volume recovery translates to an outsized profit rebound. This level of margin expansion likely is a result of management’s decision to maintain its workforce throughout the COVID-19 slowdown, despite the sharp decline in volumes.

Bulls Say’s

• Ecolab’s focus on delivering savings on labor, energy, and water for customers makes the firm’s products and services attractive even during economic slowdowns. 
• Ecolab’s customers are willing to pay a premium to protect their own brand reputations. For example, a restaurant knows what a food contamination incident can do to its standing with customers. 
• Rising fresh water costs will drive demand for industrial water management systems. Ecolab’s water management systems will be able to save its customers water and energy costs, which will increase water business profits.

Company Profile 

Ecolab produces and markets cleaning and sanitation products for the hospitality, healthcare, and industrial markets. The firm is the global market share leader in this category with a wide array of products and services, including dish and laundry washing systems, pest control, and infection control products. The company has a strong hold on the U.S. market and is looking to increase its profitability abroad. Additionally, Ecolab serves customers in water, manufacturing, and life sciences end markets, selling customized solutions. 

(Source: Morningstar)

General Advice Warning

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