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Wyndham’s Brands Continue to See Industry Leading Travel Recovery in the U.S.

a brand intangible asset and switching cost advantage. This view is supported by the company’s roughly 40% share of all U.S. economy and midscale branded hotels and the industry’s fourth-largest loyalty program by which encourages third-party hotel owners to join the platform. 

With essentially all of its nearly 9,000-plus hotels managed or franchised, Wyndham has an attractive recurring-fee business model with healthy returns on invested capital, as these asset-light relationships have low fixed costs and capital requirements. This asset-light model creates switching costs, given 10- to 20-year contracts that have meaningful cancellation costs for owners.

The 2018 acquisition of La Quinta as a strategically strong fit that supports Wyndham’s intangible-asset-driven narrow moat while enhancing long-term growth Cyclicality, illnesses like COVID-19, and overbuilding are the main risks for shareholders.

Wyndham Continues to Lead the Global Travel Rebound; More Demand Recovery Expected in 2022

Wyndham’s leisure, continued to lead the global travel recovery in the third quarter, with total revenue per available room reaching 98% of 2019 levels. U.S. and international revPAR increased to 107% and 75% of 2019 levels, respectively, up from 95% and 56% in the three months prior. Wyndham expects demand to sustain in the fourth quarter and now sees its 2021 revPAR growth at 43% versus 40% prior and compared with our forecast of 41%. 

Looking to 2022, we expect strong U.S. leisure demand to continue, aided by remote work flexibility, while international markets should experience a strong revPAR recovery because vaccination rates now allow for reduced travel restrictions. This view is supported by Wyndham’s Canadian revPAR improving to 90% of 2019 levels in the quarter, up from around 60%, as the country reduced its pandemic-related restrictions.

Financial Strength

Wyndham’s financial health remains in good shape, despite COVID-19 challenges. Wyndham exited 2020 with debt/adjusted EBITDA of 7.9 times, up from 3.5 times in 2019, as its asset-light business model allows the company to operate with low fixed costs and stable unit growth . But Wyndham did not sit still during the depths of the pandemic; rather, it took action to increase its liquidity profile, tapping its $750 million credit facility (which was repaid in full by Nov. 2020), cutting discretionary expenses, suspending buybacks, and reducing its quarterly dividend from $0.32 to $0.08 (which was increased back to $0.32 per share in Oct. 2021).Further, Wyndham saw positive cash flow generation in 2020, despite COVID-19 significantly reducing global travel demand in that year. While Wyndham’s adjusted EBIT/interest expense was negative 0.4 times in 2020.The company has only $64 million in debt maturing over the next three years. 

Bull Says

  • The La Quinta brand offers long-term growth opportunity to 2,000 units from 937 at the end of 2020, as it is not in 30% of the regions monitored by Smith Travel Research, despite strong third-party hotel operator renewal rates and strong revPAR share in existing market.
  • Wyndham’s economy/midscale select service presence operates at low operating costs, allowing its U.S. hotels to break even at 30% occupancy levels. 
  • The vast majority of Wyndham Hotels’ EBITDA is generated by service-for-fee operations, which are less capital-intensive than owned assets, leading to healthy ROICs.

Company Profile

As of Sept. 30, 2021, Wyndham Hotels & Resorts operates 803,000 rooms across 22 brands in the economy (around 51% of total U.S. rooms) and midscale (45%) segments. Super 8 is the largest brand, representing around 30% of all hotels, with Days Inn (18%) and La Quinta (10%) the next two largest brands. During the past several years, the company has expanded its extended stay/lifestyle brands (2% of total properties), which appeal to travelers seeking to experience the local culture of a given location. The United States represents 61% of total rooms. The company closed its La Quinta acquisition in the second quarter of 2018, adding around 90,000 rooms at the time the deal closed.

(Source: Morningstar)

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

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Healius EBIT margin to expand to 13% by fiscal 2026 from 8% in pre-pandemic fiscal 2019

Healius is looking to new sources of strategic growth as well as dealing with prior under investment in infrastructure. There is much to fix in the business and we anticipate it to take a few years before significant margin improvements are made in the base pathology and imaging businesses. Healius selling its medical centers and Adora Fertility to focus on redirecting capital toward infrastructure upgrades and higher-margin Montserrat day hospitals is viewed as a positive strategic step.

Improvement in systems is key to improving efficiency. Pathology is an increasingly technologically driven service and the company intends to invest in a new laboratory information system, automation, and digitization through to fiscal 2024. In addition, the number of tests available is expanding. Increasing complexity of tests, such as veterinary and gene-based testing, is also resulting in average fee price increases. Pathology has a high fixed cost of operation and thus benefits from volume growth to drive lower cost-per-test outcomes.

Financial Strength

After divesting the medical centers and Adora Fertility businesses, Healius boasts significant balance sheet flexibility. While the sale proceeds were used predominantly to retire debt, Healius is also on track to return AUD 200 million to shareholders in the form of share buybacks in calendar 2021. At the end of fiscal 2021, Healius reported AUD 188 million in net debt, representing net debt/EBITDA of 0.7 times pre-AASB 16. Following Healius’ improvement program in the near term, it is expected to free cash flow prior to dividends to settle around 96% of net income at midcycle. The high cash conversion affords Healius to maintain dividend payout ratio of 60%, within Healius’ 50%-70% target range.

Bulls Say’s 

  • On top of the base level of COVID-19 testing that is likely to continue, Healius is well-positioned for underlying trends in preventive diagnostic treatments and outpatient care in its day hospitals. 
  • Simplifying the business via the sale of its medical centers and Adora Fertility is a positive indicator for the ultimate success of the company’s turnaround. 
  • Advances in technology and personalized medicine are increasing the number of complex and gene-based tests available to patients, which are typically higher margin.

Company Profile 

Healius is Australia’s second-largest pathology provider and third-largest diagnostic imaging provider. Pathology and imaging revenue is almost entirely earned via the public health Medicare system. Healius typically earns approximately 70% of revenue from pathology, 25% from diagnostic imaging and a small remainder from day hospitals.

(Source: Morningstar)

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

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Vivo Is Turning the Corner on Growth as Network Investments Bear Fruit

But the market faces several challenges, including stiff competition, a fragmented fixed-line industry, and general economic weakness that has also hurt the value of the Brazilian real. The plan to carve up Oi’s (Brazilian mobile network operator) wireless assets promises to significantly improve the industry’s structure, cutting the number of wireless players to three. Vivo also holds the largest, and fastest growing, fiber network footprint in Brazil, which should allow the firm to stabilize and ultimately grow broadband market share. While results will likely remain volatile, it is expected that Vivo will prosper as Brazilians continue to adopt wireless and fixed-line data services.

Vivo is the largest wireless carrier in Brazil by far, holding 34% of the wireless market, including 38% of the more lucrative postpaid business. The firm generated about 60% more wireless service revenue in 2020 than America Movil or TIM, its closest rivals. The three carriers have agreed to split up the wireless assets of Oi, the distant fourth-place operator that has been in bankruptcy protection. If successful, the transaction could remove a sub-scale player from the industry.

Financial Strength:

The fair value estimated is USD 11.00, which is mainly because revenue growth will average about 5% annually over the next five years.

Vivo’s financial health is excellent, as the firm has rarely taken on material debt. The net debt load increased to BRL 4.4 billion following the acquisition of GVT in 2015, but even this amounted to less than 0.5 times EBITDA. Cash flow has been used to allow leverage to drift lower since then. At the end of 2020, the firm held BRL 3.0 billion more in cash than it has debt outstanding, excluding capitalized operating leases. Even with the capitalized value of operating lease commitments, net debt stands at BRL 7.4, equal to 0.4 times EBITDA. Parent Telefonica has control of Vivo’s capital structure. While Telefonica’s balance sheet has improved markedly in recent years, the firm still carries a sizable debt load and faces growth challenges in its core European operations. The dividend is set to decline another 2% in 2021 based on 2020 earnings. These cuts have come despite ample free cash flow generation.

Bulls Say:

  • Vivo is the largest telecom carrier in Brazil and benefits from scale-based cost advantages in both the wireless and fixed-line markets. 
  • The firm is well-positioned to benefit as consumers demand increased wireless data capacity. Its network in Brazil is first-rate and its reputation for quality is second-to-none. 
  • Owning a high-quality fiber network enables Vivo to offer converged services throughout much of the country, while buttressing its wireless backhaul, improving network speeds and capacity.

Company Profile:

Telefonica Brasil, known as Vivo, is the largest wireless carrier in Brazil with nearly 80 million customers, equal to about 34% market share. The firm is strongest in the postpaid business, where it has 45 million customers, about 38% share of this market. It is the incumbent fixed-line telephone operator in Sao Paulo state and, following the acquisition of GVT, the owner of an extensive fiber network across the country. The firm provides Internet access to 6 million households on this network. Following its parent Telefonica’s footsteps, Vivo is cross-selling fixed-line and wireless services as a converged offering. The firm also sells pay-tv services to its fixed-line customers.

(Source: Morningstar)

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

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Global stocks Shares

Lockdowns Cause Transurban’s Traffic Volumes To Slump in Key Markets

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Concessions grant the right to operate the roads and collect tolls for predetermined amounts of time. The roads benefit from strong competitive advantages, and the assets generate attractive returns on initial investment, warranting a wide economic moat rating.

Operating cash flow should increase strongly during concession lives, as solid revenue growth, driven by rising tolls and traffic volumes, is leveraged over a mostly fixed cost base. Cash flow stops when concessions end. Concessions on the Australian roads are set to end between 2026 and 2065. Including the long-life U.S. assets, the weighted average is 30 years. To extend its existence, Transurban will look to build new roads or undertake road upgrades which may require new equity issues or increased financial leverage, given that the firm currently pays out all free cash flow as distributions to investors. 

Typically, cash flow is defensive and grows strongly, but returns are lower than they appear at first blush, given that the roads are handed over to the government for no consideration when concessions end.

Lockdowns Causes Transurban’s Traffic Volumes To Slump in Key Markets

Sydney and Melbourne–51% and 25% of fiscal 2021 revenue, respectively–have suffered through prolonged lockdowns to slow the spread of the delta variant while rolling out vaccinations. September quarter traffic volumes in Sydney and Melbourne were down 43% and 46% in the same quarter in 2019, prior to the COVID-19 outbreak. Lockdowns are ending and traffic volumes are now recovering, with Sydney leading the way.  A rapid recovery is expected consistent with the experience in other markets as they exit lockdowns. 

Financial Strength 

Transurban is in sound financial health after selling 50% of U.S. assets. As of June 2021, Transurban had a proportional gearing ratio (defined as debt/enterprise value) of 34.3%, a corporate senior debt interest cover ratio of 2.8 times and funds from operations/debt of 8.9%. While financial leverage is high compared with other infrastructure firms, it should quickly improve on strong earnings growth. There is also comfort from relatively defensive revenue and immaterial maintenance capital expenditure requirements. Almost all debt is hedged, and the average maturity (which is currently 7.7 years) has been lengthening. Typically, debt associated with each road is repaid progressively during the last 10 years of concession lives.

Bull Says

  • Core Australian roads generate defensive revenue that grows with traffic volumes and toll price increases, which are at a minimum pegged to inflation. Solid revenue growth and a high fixed-cost base translate to strong cash flow and distribution growth. 
  • Transurban owns high-quality infrastructure assets with limited regulatory risk. 
  • There are attractive organic growth opportunities, such as potential widening of roads.

Company Profile

Transurban Group is an owner/operator of toll roads in Melbourne, Sydney, and Brisbane. It also owns toll roads in Virginia, USA and Montreal, Canada. The weighted average concession life across the portfolio is close to 30 years. Australian assets contribute around 90% of proportional revenue

(Source: Morningstar)

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

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Secular Tailwinds Within Electronic Design Automation and IP Drive Cadence’s Strong Growth

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Over the years, there has been a demand for faster, smaller, and more-efficient chips to keep pace with the rapid evolution of modern technology. Many companies are also placing increasing importance on chip customization as a point of differentiation. These trends have provided a boon for Cadence, as the firm’s tools are essential for designers needing to keep pace with growing demands. Such developments in chip design will benefit narrow-moat Cadence and support healthy long-term growth.

There are additional secular tailwinds in the industry buoying Cadence and other EDA vendors. Technologies such as cloud computing, 5G, Internet of Things, AI, and autonomous vehicles will support demand for new, more advanced chip designs. This is reflected in the advent of systems companies such as Tesla designing more chips in-house, thus expanding Cadence’s customer base beyond traditional semiconductor designers. As a result, we expect higher demand for Cadence’s EDA and IP offerings.

Cadence has been a pioneer in the cloud EDA space and has made significant investments in developing its cloud offerings, ranging from hosted cloud to hybrid cloud. While the pace of cloud adoption in the EDA space has been slow, it offers customers a broad range of options with regard to tool deployment. This service also poses a point of differentiation for Cadence relative to chief competitor Synopsys.

Cadence’s moat is supported by strong user metrics. Per company insiders, Cadence has relationships with approximately 100% of chip design companies in the U.S. today, that is if a company is involved in the chip design process, it uses Cadence tools at some stage of its design process. Furthermore, churn is negligible, with customer retention consistently at approximately 100%, showcasing the stickiness of Cadence’s offerings.

Financial Strength 

Cadence is in a very healthy financial position. As of April 2021, Cadence had $743 million in cash and cash equivalents versus $347 million in long-term debt due in fiscal 2024.Approximately 85%-90% of the firm’s revenues are of a recurring nature, given that the firm primarily sells time-based licenses.Cadence is profitable on both a GAAP and non-GAAP basis and demonstrates strong cash flows; free cash flow margin has averaged 25% over the last five fiscal years. A healthy growth in free cash flow is expected as industry tailwinds lead to long-term growth for Cadence. On a non-GAAP basis, Cadence has exhibited an operating margin of approximately 30% over the last five fiscal years. Expected this to continue to expand and believe the company will hit 38% non-GAAP operating margins by the end of our explicit forecast period. In the long term, Cadence will be able to exhibit healthy free cash flows while continuing to support both organic and inorganic investments.

Bull Says

  • Cadence enjoys a leadership position in the EDA space that has helped the firm develop strong relationships with chip designers, enhancing switching costs. This is reflected in retention rates of approximately 100%. 
  • Secular tailwinds in chip design such as 5G, Internet of Things, AI/ML, and others should increase demand for EDA tools and support growth for Cadence. 
  • Cadence Cloud can support a growing total addressable market as systems companies and small/ medium enterprises may take advantage of more flexible and cost-effective chip design capabilities

Company Profile

Cadence Design Systems was founded in 1988 after the merger of ECAD and SDA Systems. Cadence is known as an electronic design automation, or EDA, firm that specializes in developing software, hardware, and intellectual property that automates the design and verification of integrated circuits or larger chip systems. Historically, semiconductor firms have relied on the firm’s tools, but there has been a shift toward other nontraditional “systems” users given the development of the Internet of Things, artificial intelligence, autonomous vehicles, and cloud computing. Cadence is headquartered in Silicon Valley, has approximately 8,100 employees worldwide, and was added to the S&P 500 in late 2017.

(Source: Morningstar)

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

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Raising Tesla FVE to $680 on Increased Vehicle Sales From Fleet Opportunity

In addition to luxury autos, the company competes in the midsize car and crossover SUV market with its platform that is used for Model 3 and Model Y vehicles. Tesla also plans to sell multiple new vehicles over the next several years. These include a platform that will be used to make an affordable sedan and SUV, a light truck, a semi truck, and a sports car. Tesla also sells solar panels and batteries used for energy storage to consumers and utilities. As the solar generation and battery storage market expands, Tesla is well positioned to grow.

Financial Strength

Rental Car company Hertz announced plans to purchase 100,000 Tesla Model 3 vehicles by the end of 2022. While rental car companies typically get a discount for purchasing vehicles, it is expected that Tesla offered no discount to Hertz, given the company’s growing vehicle backlog. Tesla raised fair value estimate to $680 per share from $650. Our narrow moat rating is unchanged. The market responded positively to the news, sending Tesla shares up 12% at the time of writing. At that point, for consumers who are interested in electric vehicles but hesitant to buy one, renting an EV is an opportunity for an extended test drive to alleviate road trip anxiety. This drives our above-consensus forecast for 30% EV adoption by 2030.

Tesla is in solid financial health as cash and cash equivalents exceeded total debt as of Sept. 30. Total debt was roughly $8.2 billion; however, total debt excluding vehicle and energy product financing (nonrecourse debt) was around $2.1 billion. Cash and cash equivalents stood at $16.1 billion as of Sept. 30.To fund its growth plans, Tesla has used credit lines, convertible debt financing, and equity offerings to raise capital. In 2020, the company raised $12.3 billion in three equity issuances. Management has stated a preference to pay down all debt over time and continues to make progress on this goal. Regardless, with positive free cash flow generation and a clean balance sheet, Tesla could maintain its current levels.

Bulls Say’s

  • Tesla has the potential to disrupt the automotive and power generation industries with its technology for EVs, AVs, batteries, and solar generation systems.
  • Tesla will see higher profit margins as it achieves its plan to reduce battery costs by 56% over the next several years.
  • Through the combination of its industry-leading technology and unique supercharger network, Tesla offers the best function of any EV on the market, which should result in its maintaining its market leader status as EV adoption increases.

Company Profile 

Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. The company sells solar panels and solar roofs for energy generation plus batteries for stationary storage for residential and commercial properties including utilities. Tesla has multiple vehicles in its fleet, which include luxury and midsize sedans and crossover SUVs. The company also plans to begin selling more affordable sedans and small SUVs, a light truck, a semi truck, and a sports car. Global deliveries in 2020 were roughly 500,000 units.

(Source: Morningstar)

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

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Strong unit economics and digital platforms position Chipotle well in restaurant space

or LTV, through its loyalty program, and serving sustainably sourced, healthier fare than quick service restaurant, or QSR, peers. The company has carved out an enduring niche in the U.S. restaurant landscape, with competitive menu prices, extreme convenience, and “food with integrity” allowing the firm to lure away customers from both upscale fast-casual and traditional fast-food competitors. 

The burrito chain’s unit development narrative remains compelling, with strong returns on investment driving our high-single-digit unit growth estimates. New format stores (Chipotlanes, digital-only concepts) offer attractive upside, yielding access to heretofore inaccessible or uneconomic trade areas like office buildings, college campuses, and freestanding suburban concepts, leaving us encouraged as Chipotle diligently links appropriate store footprints to various trade areas.

Financial Strength:

Chipotle’s financial strength is sound, with the firm maintaining $1 billion in cash, investments, and cash equivalents at the end of third-quarter 2021, access to a $500 million credit facility, and no long-term debt obligations. The company’s only meaningful fixed charges come in the form of operating leases. Given the company’s growth profile, management has indicated a preference for internally funding expansion (with the intention of maintaining financial flexibility) and has channelled some $1.5 billion into capital expenditure over the last five years, matching $1.5 billion in capital returns through share repurchases over the same time frame.

Bulls Say:

  • Accelerated digital adoption during the pandemic supercharged Chipotle’s loyalty program, which should drive increased order frequency and reduce customer churn. 
  • New format stores (Chipotlanes and digital-only pickup concepts) should position the brand to better compete with quick-service competitors, while opening up new trade areas. 
  • The success of recent menu innovations (quesadillas, queso blanco, cauliflower rice) validates Chipotle’s stage-gate innovation process and could drive daypart expansion.

Company Profile:

Chipotle Mexican Grill is the largest fast-casual chain restaurant in the United States, with systemwide sales of $7.2 billion over the last twelve months. The Mexican concept is entirely company-owned, with a footprint of nearly 2,900 stores at the end of the third quarter of 2021 heavily indexed to the United States, though the firm maintains a small presence in Canada, the U.K., France, and Germany. Chipotle sells burritos, burrito bowls, tacos, quesadillas, and beverages, with a selling proposition built around competitive prices, high-quality food sourcing, speed of service, and convenience. The company generates its revenue entirely from restaurant sales and delivery fees.

(Source: Morningstar)

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

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Supply Chain Disruptions Pressure Graco’s Margins

The company differentiates itself by manufacturing specialized products that handle difficult-to-move liquids, often used for niche applications where competition is limited. 

 Graco’s relentless cost control and commitment to lean manufacturing allow it to leverage shared components across different product lines to operate its plants efficiently and lower the overall cost of its products. The high-mix, low-volume nature of the business and the relatively small size of many niche end markets act as a barrier to entry, as rivals would struggle to establish the scale needed to challenge Graco’s competitive position.

While Graco is a high-quality business protected by a wide economic moat, the main challenge is generating growth, as the firm mostly competes in mature end markets growing at low-single-digit rates. Historically, Graco’s organic growth rate has outpaced GDP growth because of its commitment to research and development, which has allowed the company to generate additional sales by developing new products, penetrating adjacent markets, and capturing market share from competitors. 

We think that Graco can continue to increase sales 100-200 basis points faster than GDP growth thanks to its strategic initiatives, and we project mid-single-digit average organic sales growth over the next five years.

Demand Remains Strong but Supply Chain Issues Pressure Graco’s Third-Quarter Margins

Margins were adversely affected by supply chain interruptions and cost inflation, especially in the contractor segment. 

Graco’s third-quarter sales were up 9% year over year. While demand remains robust, supply chain constraints persist and continue to pressure margins for the remainder of the year. Graco’s third-quarter gross margins compressed 110 basis points year over year due to higher product costs, including material, labor, and freight. Graco implements price increases on an annual basis, so cost inflation will likely remain a headwind in the fourth quarter. However, Graco, affords the firm strong pricing power because of customer switching costs and intangible assets .

Financial Strength

Graco maintains a healthy balance sheet. The company ended 2020 with $150 million in long-term debt while holding approximately $379 million in cash and equivalents. Debt maturities are reasonably well laddered over the next few years, with no major payments due in 2021, and we believe the firm is adequately capitalized to meet its debt obligations and maintain its dividend. Management has indicated that it will prioritize organic growth, M&A opportunities, and increasing the dividend while allocating excess capital to opportunistic share repurchases. 

Bulls Say

  • Graco has a large installed base and leading market share across a wide range of niche products.
  • Graco has a healthy level of recurring revenue, generating roughly 40% of its sales from aftermarket parts and accessories, which reduces the volatility of its earnings from cyclical end markets. 
  • The company generates strong free cash flows, averaging around 17% of revenue over the last decade.

Company Profile

Graco manufactures equipment used for managing fluids, coatings, and adhesives, specializing in difficult-to-handle materials. Graco’s business is organized into three segments: industrial, process, and contractor. The Minnesota-based firm serves a wide range of end markets, including industrial, automotive, and construction, and its broad array of products include pumps, valves, meters, sprayers, and equipment used to apply coatings, sealants, and adhesives. The firm generated roughly $1.7 billion in sales and $410 million in operating income in 2020.

(Source: Morningstar)

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

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Snap-on Continues to Benefit From Strengthening Vehicle Repair Demand

a strong brand reputation among repair professionals. Customers value Snap-on’s high-quality and strong performing products, in addition to its high-touch mobile van network. 

The company’s strategy focuses on providing technicians, shop owners, and dealerships a full line of products, ranging from tools to diagnostic and software solutions. Increasing vehicle complexity will be a tailwind for diagnostic sales as auto manufacturers are already tapping the company to develop new tools to service new EV models. We think repair work will shift away from engines to batteries, sensors, wiring, and advanced driver assistance systems. 

Snap-on has exposure to end markets that have attractive tailwinds. In automotive, we think demand for vehicle repair work will be strong in the near term, largely due to vehicle owners taking in their cars for overdue servicing. Additionally, we believe the high average age of vehicles will support demand for repair work to keep them on the road. On the commercial and industrial side, end markets are starting to pick up in activity; which we think means an increase in repair work for heavy-duty vehicles, planes, and heavy machinery.

Financial Strength

Snap-on maintains a sound balance sheet. The industrial business does not hold any debt, but the debt balance of the finance arm stood at $1.7 billion in 2020, along with $2.1 billion in finance and contract receivables. In terms of liquidity, we believe the company’s solid cash balance of over $900 million can help it quickly react to a changing operating environment as well as meet any near-term debt obligations from its financial services business. In addition, we also find comfort in Snap-on’s ability to access $800 million in credit facilities. Snap-on’s solid balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth but also returns cash to shareholders via dividends and share repurchases.We believe Snap-on can generate solid free cash flow throughout the economic cycle. We expect the company to generate over $800 million in free cash flow in our midcycle year, supporting its ability to return its free cash flow to shareholders through dividends and share repurchases. 

Bulls Say

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

Company Profile

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

(Source: Morningstar)

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

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AT&T Delivers Solid Customer Growth During Q3 as Content and Network Investments Ramp Up

AT&T also benefits from its ownership of deep network infrastructure across much of the U.S. and its ability to provide a range of telecom services, particularly among enterprise customers. The plan to extend fiber to 3 million homes and businesses annually through at least 2025 builds on this position and should allow it to serve those locations directly and enhance wireless coverage in the surrounding areas. 

AT&T is also positioned to benefit as Dish builds out a wireless network as the firms recently signed a 10-year wholesale agreement that generates revenue for AT&T and gives it access to Dish spectrum. AT&T shareholders will own 71% of the new Warner Bros. Discovery. Warner remains a media powerhouse in its own right, with a deep content library and the ability to reach audiences across a wide variety of platforms. The firm’s direct-to-consumer plans around HBO Max are gaining momentum, which should nicely augment and eventually supplant traditional distribution channels like cable TV. Adding Discovery’s non-scripted prowess and international presence should give the new firm wider options to craft service offerings. 

Wireless customer additions were impressively strong

AT&T’s third quarter earnings displayed several of the same themes as the last few quarters: solid momentum in the wireless business, continued growth at HBO Max, and steady gains in consumer broadband, set amid financial complexity as management deconstructs the firm’s former strategy. AT&T added 928,000 net postpaid phone customers, by far its strongest quarter of the past decade, leaving its base nearly 5% bigger than a year ago. Prepaid net customer growth (351,000) was also the strongest since 2018. Average revenue per postpaid phone customer declined 0.6% year over year as the amortization of phone discounts hits this metric.

HBO Max added 1.9 million net new customers, a sharp slowdown versus past three quarters. With several European launches coming, Warner should easily hit its target of 70 million-73 million global Max customers by the end of the year. As a result, the WarnerMedia EBITDA margin was stable at 26%. On a cash basis, however, content investment has ramped up sharply during 2021, with cash spending year to date increasing more than $4 billion versus the first three quarters of 2020. Total revenue declined 5.7% year over year due to the spinoff of the DirecTV television business during the quarter. Adjusted EBITDA declined only 2.2%, however, reflecting strength across AT&T’s major operating segments. Free cash flow has totaled $18.0 billion thus far in 2021, down from $19.8 billion the year before.

Financial Strength

AT&T ended 2020 with net debt of $148 billion, down from $177 billion immediately after the Time Warner acquisition closed in mid-2018. The firm’s purchase of C-band spectrum for $23 billion, excluding around $4 billion of future clearing and relocation costs, pushed the net debt load back up to $168 billion, taking net leverage to 3.2 times EBITDA from 2.7 times. In addition, the firm has issued more than $5 billion of general preferred shares. The WarnerMedia spin-off will take $43 billion of debt with it, taking AT&T’s net debt to about $125 billion, which management expects will shake out in the range of 2.6 times EBITDA. The firm will use the Warner spin-off to adjust its dividend policy, targeting a payout of around 40% of free cash flow, down from more than 60% in 2020, leaving substantial excess cash to reduce leverage or take advantage of opportunities, including share repurchases. In total, management will target a payout of around $8 billion-$9 billion annually, down from nearly $15 billion in 2020.

Bulls Say’s

  • AT&T has pulled together assets no telecom company can match. The firm has direct contact with more than 170 million customers across various products, providing an opportunity to build deeper relationships.
  • Within the wireless business, AT&T holds the scale needed to remain a strong competitor over the long term. With Sprint and T-Mobile merging, industry pricing should be more rational going forward.
  • WarnerMedia holds a broad array of content rights and has a strong reputation with content creators. Shareholders will own 71% of this firm after it merges with Discovery.

Company Profile 

Wireless is AT&T’s largest business, contributing about 40% of revenue. The firm is the third-largest U.S. wireless carrier, connecting 66 million postpaid and 17 million prepaid phone customers. WarnerMedia contributes a bit less than 20% of revenue with media assets that include HBO, the Turner cable networks, and the Warner Brothers studios. AT&T plans to spin Warner off and merge it with Discovery to create a new stand-alone media firm. The firm recently sold a 30% stake in its traditional television business, which serves 15 million customers and generates about 17% of sales. This business will be removed from AT&T’s financials going forward. Fixed-line telecom services provided to businesses and consumers account for about 20% of revenue, serving about 15 million broadband customers.

(Source: Morningstar)

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