Category: Shares

Categories
Global stocks Shares

SUN reported strong FY21 result with plans to deliver a growing business through strategic initiatives

Investment Thesis

  • Management believes it will be difficult to achieve a ROE target of 10% in FY21 due to factors affecting both the underlying ITR and cost to income targets, as well as the historically low interest rate environment, but it hopes to maintain an ordinary dividend payout ratio of 60-80 percent of cash earnings.
  • SUN has a 2-year forward PE-multiple of 15.0x and a fully franked yield of 5.3 percent, which is excellent.
  • A $250 million share repurchase programme should help the company’s stock price.
  • SUN’s Bank has been granted advanced accreditation by APRA, resulting in capital relief.
  •  Banking and general insurance margins outperformed expectations (GI).
  •  The Royal Commission’s recommendations have resulted in positive changes in the sector.
  •  Maintaining net interest margins while maintaining good credit quality in its Bank and Wealth sector.
  •  Management has the ability to continuously maintain an underlying insurance trading ratio of 12 percent and a sustainable ROE of at least 10% in the future.

Key Risk

  • Competition in insurance lines is greater than predicted, affecting pricing, unit growth, and risk management.
  • Continuing high-intensity natural disasters, like the NSW bushfires, which will deplete reinsurance and have an impact on SUN’s profitability.
  • Key milestones for FY21, such as the rollout of the Company’s technology and digital platforms, have not been met.
  • Investment returns are lower than projected.
  • Net interest margins are lower or provisions are larger than projected.
  • An increase in the number of claims.

Key highlights of FY21

  • SUN reported strong FY21 results reflecting cash earnings of $1,064m, up by 42.1% and Group NPAT, up by 13.1% to $1,033m.
  • By segments: Relative to the pcp: (1) Insurance (Australia): PAT of $547m, was up by 42.4%.(2) Banking & Wealth: PAT of $419m was up +69% on net interest margins of 2.07%, up 13bps. (3)NZ: PAT of $200m declined by 18.4% driven lower by General Insurance PAT of NZ$177m, declining 19.2% (mainly due to higher natural hazard costs and lower investment income).
  • SUN reported better top-line growth, with Gross Written Premium (GWP) growth of 5.5 percent in Australia and 9.2 percent in New Zealand, respectively (best insurance top-line performance in almost a decade).
  • Suncorp Bank  home lending grew by 0.8 percent in the second half of 2021, and has grown home loans for six months in a row as of July 31, 2021.
  • The Board declared a fully franked final ordinary dividend of 40cps which brings FY21 total fully franked ordinary dividends to 66cps (on a 79.3% payout ratio, and up from 36cps in FY20, on 60.7% payout ratio), a fully franked 8 cent special dividend, and an on-market share buyback of up to $250m (which should support its share price).

Guidance commentary: (1) FY23 Plan: “The plan intends to deliver a growing business with a sustainable return on equity above the cost of equity throughout the cycle.” The Group is investing in 12 major projects to achieve this, with the program’s advantages beginning to be realised in 2H22. (2) Natural hazard and reinsurance: SUN has increased its natural hazard allowance for FY22 to $980 million. (3) Releases of prior-year reserves: SUN continues to allow for prior-year reserve releases if inflation continues low, releases should be at least 1.5 percent of Group NEP. (4) Operating expenses: The Group’s operating expense base is estimated to be $2.8 billion, including project spending and restructuring charges in fiscal year 22. (6) Capital: SUN remains committed to a 60-80% dividend distribution ratio”.

Company Profile

Suncorp Group Ltd (SUN) provides general insurance, banking, life insurance, and superannuation products and related services to the retail, corporate, and commercial sectors in Australia and New Zealand. The company operates through Personal Insurance, Commercial Insurance, General Insurance New Zealand, and Banking segments.

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.

Categories
Global stocks Shares

Bapcor delivered record results driven by increased revenue and earnings across all business segments

Investment Thesis:

  • Trading below analysts’ valuation 
  • Fundamentals for the vehicle aftermarket continue to remain strong (with increase in second hand vehicle sales; travellers seeking social distancing and hence moving away from public transport; with Covid lockdown measures in forced, more people are spending their holidays domestically utilising their vehicles)
  • Significant opportunities within BAP to drive growth (expanding network; increase market share by leveraging BAP’s Victorian DC; enhance supply chain efficiencies; driven own brand growth). 
  • Strong earnings growth profile
  • Further opportunity to grow gross profit margins from better buying terms with tier one and two suppliers
  • Significant distribution network across Australia to leverage from
  • Ongoing bolt on acquisitions and associated synergies
  • Growing BAP’s own brand strategy, which should be positive for margins
  • BAP is on track to reach their 5-year targets to supplement market leading brands with BAP’s own brand products
  • Weak macro story of leveraged Australian consumer and lower growth environment persisting
  • Thailand represents a meaningful opportunity 

Key Risks:

  • Rising competitive pressures 
  • Value destructive acquisition
  • Rising cost pressures eroding margins (e.g. more brand or marketing investment required due to competitive pressures)
  • Given the high trading multiples the stock trades at, a disappointing earnings update could see the stock price significantly re-rate lower
  • Integration (and therefore synergies) of recent acquisitions underperform market expectations 
  • Execution risk around Thailand

Key highlights:

  • BAP delivered a record result with FY21 revenue up +20.4% over the pcp, driven by increased revenue and earnings across all business segments
  • Pro forma EBITDA and NPAT, were up +28.8%, and +46.5% respectively, over the pcp.
  • The revenue and EBITDA generated by segments are:
  1. Trade: Delivered record revenue of $649m, up by 15.5% and EBITDA of $115m, which is up by 19%
  2. New Zealand: Revenue of $170m, was up 8.8% and EBITDA of $33m, was up 21.2%
  3. Specialist Wholesale (‘SWG’): Revenue of $660m, and EBITDA of $90m was up +26.8% and +42.2% respectively
  4. Retail: Revenue of $369m increased +26.1% and EBITDA of $65m increased +20.1%
  5. Asia: On BAP’s 25% investment in Tye Soon and Thailand, management highlighted revenue up by 26% and profit after tax of $2.2m

Company Description: 

Bapcor Ltd (BAP) is Australasia’s leading provider of aftermarket parts, accessories and services. The core businesses of BAP are: (1) Trade – Burson Auto Parts is a trade focused parts professional supplying workshops with all their parts and accessories. (2) Retail – Autobarn is the premium retailer of auto accessories and Opposite Lock specializes in 4WD accessory specialists. (3) Independents – supporting the independent parts stores via the group’s extensive supply chain capabilities and through brand support. (4) Specialist Wholesaler – the number 1 or 2 industry category specialists in parts supply programs. (5) Services – experts at car servicing through Midas and ABS.

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.

Categories
Shares Technology Stocks

Facebook’s Network Effect Moat Source Remains Intact

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.

along with the valuable data that they generate, makes Facebook attractive to advertisers in the short and long term. The combination of these valuable assets and expected continuing growth in online advertising bodes well for Facebook, as the firm generates strong top-line growth and remains cash flow positive and profitable. Facebook has increased users and user engagement by providing additional features and apps to keep them engaged within the Facebook ecosystem. With more Facebook user interaction among friends and family members, sharing of videos and pictures, and the continuing expansion of the social graph, we believe the firm compiles more data, which Facebook and its advertising clients then use to launch online advertising campaigns targeting specific users. While utilization of the data is under scrutiny in different markets, we think Facebook’s large audience size will still attract the ad dollars. Growth in Facebook’s average ad revenue per user indicates advertisers’ willingness to pay more for Facebook-placed ads, as they expect high return on investment from the targeted ads.

We believe Facebook will continue to benefit from an increased allocation of marketing and advertising dollars toward online advertising, more specifically social network and video ads where Facebook is especially well positioned. The firm’s Facebook app, along with Instagram, Messenger, and WhatsApp, is among the world’s most widely used apps on both Android and iPhone smartphones. Facebook is taking steps to further monetize its various apps, such as providing interactive video ads. It is also applying artificial intelligence and virtual and augmented reality technologies to various products, which may increase Facebook user engagement even further, helping to further generate attractive revenue growth from advertisers in the future.

We assign Facebook a wide moat rating based on network effects around its massive user base and intangible assets consisting of a vast collection of data that users have shared on its various sites and apps. Given its ability to profitably monetize its network via advertising, we think Facebook will more likely than not generate excess returns on capital over the next 20 years.

Financial Strength

 In an industry where continuing investments are required to remain competitive and maintain market leadership, we believe Facebook is well positioned in terms of access to capital. The firm has a very strong balance sheet with $62 billion in cash, cash equivalents, and marketable securities and no debt.The firm generated $39 billion cash from operations in 2020, 7% higher than the prior year. We expect faster growth in cash flow during the next five years owing to operating leverage after 2022. Facebook’s strong operational and financial health is demonstrated by the 28% average free cash flow to equity/revenue during the past three years. We project average annual FCFE/sales to be in the 35%-40% range through 2025, as a result of strong top-line growth and slight operating margin expansion beginning in 2022. We do not expect Facebook to issue a dividend as it remains in a rapid-growth phase. The firm may use some portion of its cash, as it remains active on the merger and acquisition front.

Bull Says

  • With more users and usage time than any other social network, Facebook provides the largest audience and the most valuable data for social network online advertising. 
  • Facebook’s ad revenue per user is growing, demonstrating the value that advertisers see in working with the firm. 
  • The application of AI technology to Facebook’s various offerings, along with the launch of VR products, will increase user engagement, driving further growth in advertising revenue.

Company Profile

Facebook is the world’s largest online social network, with 2.5 billion monthly active users. Users engage with each other in different ways, exchanging messages and sharing news events, photos, and videos. On the video side, the firm is in the process of building a library of premium content and monetizing it via ads or subscription revenue. Facebook refers to this as Facebook Watch. The firm’s ecosystem consists mainly of the Facebook app, Instagram, Messenger, WhatsApp, and many features surrounding these products. Users can access Facebook on mobile devices and desktops. Advertising revenue represents more than 90% of the firm’s total revenue, with 50% coming from the U.S. and Canada and 25% from Europe. With gross margins above 80%, Facebook operates at a 30%-plus margin.

 (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.

Categories
Shares Small Cap

Baby Bunting FY21 results show group revenue surged by 15.6%

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.

Investment Thesis

  • Mandatory product safety standards for baby goods in Australia limit supply sources and provide barriers to entry to international competitors.
  • BBN has the largest presence in Australia amongst specialty baby goods retailers.
  • Low risk that online sales threaten high service business model of brick-and- mortar stores to showcase goods and in-store advice.
  • Solid growth story via new store openings (targeting 100+ stores network).
  • Strong market shares (currently sits at 30% in a highly fragmented market).

Key Risks

  • Retail environment and general economic conditions in addressable markets may deteriorate.
  • Competition may intensify especially from online retailers such as Amazon, specialty retailers, department stores, and discounted department stores.
  • Customer buying habits/trends may change. Rapid changes in customer buying habits and preferences may make it difficult for the Company to keep up with and respond to customer demands.
  • Higher operating and occupancy costs. Any increase in operating costs especially labour costs will affect the Company’s profitability.
  • Poor inventory control and product sourcing may be disrupted.
  • Management performance risks such as poor execution of store rollout especially into ex-metro areas.

FY21 Results Highlights 

  • Sales of $468.4m were up +15.6%, with same-store comparable sales up +11.3%. Online sales grew by +54.2% and now make up 19.4% of total sales (vs 14.5% in pcp).
  • Gross profit of $173.7m was up +18.3% on pcp, with GP margin up +83bps to 37.1%. Cost of doing business (CODB) as a percentage of sales improved 14bps to 27.8%, aided by store expense leverage and warehouse volume leverage (cost fractionalization).
  • Operating earnings (EBITDA) were up +29.2% to $43.5m (with EBITDA margin up +100bps to 9.3%) and NPAT was up +34.8% to $26.0m.
  • Operating cash flow was weaker versus previous corresponding period (pcp), driven by higher working capital – driven by an increase in inventories and also cycling particularly low levels in the pcp.
  • The Company declared a final dividend of 8.3cps, taking the full year dividend to 14.1cps (up +34.1% on pcp). The Board continues to target a payout ratio in the range of 70-100% pro forma NPAT.
  • Private label sales were up +31.1% vs pcp and now make up 41.4% of group sales (vs 36.5% in FY20). The Company remains on target to achieve 50% of sales from private sales.

Company Profile 

Baby Bunting Group Limited (BBN) is Australia’s largest nursery retailer and one-stop-baby shop with 42 stores across Australia. The company is aspecialist retailer catering to parents with children from newborn to 3 years of age. Products include Prams, Car Seats, Carriers, Furniture, Nursery, Safety, Babywear, Manchester, Changing, Toys, Feedingand others.

(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.

Categories
Shares Technology Stocks

Netflix faces increase in competition in the U.S and around the world

Netflix has morphed into a pioneer in subscription video on demand and the largest online video provider in the U.S. and likely the world. Our economic moat rating of narrow is based on intangibles resulting from the use of Big Data stemming from the firm’s massive worldwide subscriber base. Already the largest provider in the U.S., Netflix expanded rapidly into markets abroad as the service now has more subscribers outside of the U.S. than inside. 

The firm has used its scale to construct a massive data set that tracks every customer interaction. It then leverages this customer data to better purchase content as well as finance and produce original material such as “Stranger Things.” Media firms will continue to reap the benefits of both an additional window for existing content and another platform for new content. Larger firms like Disney+ and WarnerMedia have launched their own SVOD platforms to compete against Netflix. 

Financial Strength 

Netflix’s financial health is poor due to its weak free cash flow generation, large number of content investments that require outside funding (primarily debt), and content obligations. Debt has been taken on to fund additional content investments and international expansion. The net cash burn was over $2 billion in 2017, over $3 billion in 2018, and $3.5 billion in 2019. As of June 2021, Netflix has $14.9 billion in senior unsecured notes that do not have borrowing restrictions, but a relatively small amount due in the near term ($500 million due 2021, $700 million due 2022, $400 million due 2024, and $800 million due 2025), as the firm generally issues debt with a 10-year maturity. Netflix also has a material quantity of noncurrent content liabilities ($2.7 billion recognized on the balance sheet and over $15 billion not yet reflected on the balance sheet).

Bulls Say’s 

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

Company Profile 

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

(Source: Morningstar)

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.

Categories
Global stocks Shares

Incitec Pivot’s Fiscal Second Half Enjoys Surge in Fertiliser Price AUD 3.00 FVE Unchanged

Business Strategy and Outlook

Incitec Pivot aims to expand its business around its strong global market share in explosives. This provides an increasingly stable earnings stream relative to volatile earnings from its fertiliser business. Competitive advantages include a duopoly Australian explosives business and global explosives operations. Incitec Pivot is also a dominant player in the Australian domestic fertilizer market and enjoys a degree of domestic fertiliser pricing power from its dominant market share in eastern states, but it is too small to influence global prices.

Explosives earnings are leveraged to mining volumes as much as price and should benefit from long-term global growth in demand for minerals and metals. Additionally, mining strip ratios are expected to increase over time, with more explosives required to mine the same amount of ore. Incitec Pivot is consequently focused on ensuring all new projects meet strict financial criteria. There will likely be an oversupply of ammonium nitrate in Western Australia to 2020 and in Eastern Australia to 2021. 

Financial Strength

IncitecPivot raised AUD 645 million in new equity at AUD 2.00 per share in the second half of fiscal 2020. In conjunction with positive free cash flows, net debt fell to AUD 1.3 billion at end September, down 45% from AUD 1.9 billion at end March 2020. As at end March 2021, net debt worsened slightly to AUD 1.48 billion, for comparatively modest leverage ND/(ND+E) of 22%, but somewhat elevated net debt/EBITDA just over 2.0. It is pleasing therefore that management has expressed an investment bias to capital-light and faster cash returning projects aligned to the strategy.The equity capital raised in fiscal 2020 increased the company’s liquidity and supports a continued investment-grade credit rating.

Our fiscal 2021 EPS forecast is little changed at AUD 0.10 with full-year results to be released on Nov. 15. The global explosives provider deliberately brought down its Waggaman ammonia plant in late August 2021 in anticipation of Hurricane Ida, with an NPAT impact of USD 21 million. Post-hurricane inspections did not identify any material damage to the Waggaman plant. Incitec Pivot ended March 2021 with net debt of AUD 1.48 billion, for comparatively modest leverage ND/(ND+E) of 22%, but somewhat elevated net debt/EBITDA just over 2.0.

Bulls Say’s

  • Investors enjoy bumper dividends at peak cycle times.
  • Continued growth of the explosives business will reduce earnings volatility.
  • Over the longer term, explosives earnings are favourably leveraged to mining volumes rather than prices, and mine strip ratios are expected to increase over time.

Company Profile 

Incitec Pivot is a leading global explosives company with operations in Australia, Asia, and the Americas. We estimate its share of the global commercial explosives market at about 15%. Explosives contributes 80% of EBIT. Incitec Pivot is also a major Australian fertiliser producer and distributor and is the only Australian manufacturer of ammonium phosphates and urea. Ammonium phosphates are sold in the domestic market and exported.

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.

Categories
Global stocks Shares

Invocare solid 1H21 results reflect profits of $44m, a turnaround from -$18m loss

Investment Thesis 

We rate IVC as a Neutral for the following reasons:

  • Trades in-line with our blended valuation (DCF / PE-multiple). IVC is currently trading on a 12-mth blended forward PE-multiple of 36.4x and 1.7% dividend yield. 
  • IVC continues to be impacted by Covid-19 and associated lockdown/containment measures.
  • Potential for increased death rates.
  • Continued cost control from strategic review and operational efficiency.
  • IVC benefits from demographics and long-term population growth.
  • IVC holds leading market positions in its core markets.
  • IVC has strong cash flow conversion and generation.
  • High barrier to entry with quality assets and business model that is difficult to replicate.  
  • Increased competition from budget operators in Australia.

Key Risks

We see the following key risks to our investment thesis:

  • Continued reduction in death rate compared to expectations/forecasted trend.
  • Increased competition especially around pricing.
  • Protect and Grow 2020 does not yield incremental returns as anticipated.
  • Underperformance of funds under management.

1H21 Results Highlights 

Relative to the pcp: 

  • Statutory Revenue of $260.9m, up +13%. 
  • Operating Revenue of $257.3m, up +13%. 
  • Operating EBITDA of $63.6m, was up +31% with IVC returning to positive operating leverage. 
  • Operating EBIT of $39.4m, was up +46%. 
  • Reported Profit After Tax of $44m, compared to a Reported Loss After Tax of $18m in the pcp. Operating EPS of 14.4cps, was up +57%. 
  • IVC retained a strong balance sheet with cash of $131.2m and net debt of $124.7m. Capital management metrics improved with leverage ratio of 1.1x, strong cashflow conversion of 102% and ROCE of 10.4%, up 1.8 points on FY20.
  • The Board declared an interim fully franked dividend of 9.5cps, up 73% over the pcp and equates to a dividend payout ratio of 66%, within IVC’s preferred dividend payout range.

Company Description  

InvoCare Ltd (IVC) is the largest private funeral, cemetery and cremation operator in the Asia Pacific Region. It has leading market positions in countries like Australia, New Zealand, and Singapore.

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.

Categories
Global stocks Shares

After a 54 percent dividend increase, Ansell’s stock is in the spotlight.

Investment Thesis

  • Based on our valuation, ANN’s share price trades at a >10% discount to our DCF valuation.  
  • ANN is a quality business with global manufacturing capabilities.
  • We believe our 5-yr forward earnings estimates are on the conservative side and capture the moderating growth likely to be seen from the elevated levels experienced in FY21. 
  • FX translation should be positive for the Company.
  • Raw material cost pressures can be shared with customers and suppliers.
  • ANN has a strong balance sheet position with flexibility to return cash to shareholders or borrowing capacity for acquisitions

Key Risks

We see the following key risks to our investment thesis:

  • Product recall.
  • Trade wars escalate, leading to higher tariffs. 
  • Increase in competitive pressures.
  • Adverse movements in AUD/USD.
  • Emerging or developed market growth disappoints. 
  • Any worst or better prices for raw materials.

FY21 key trading metrics 

  • Sales of $2,027m, up +25.6% (+22.5% in CC) with Healthcare organic growth of +34.8% and Industrial organic growth of +7.1%. 
  • EBIT of $338m, up +56.0% (+51.4% in CC) with margin improving +330bps to 16.7%, driven by higher production volumes, pricing/mix benefit and SG&A operating leverage, partly offset by elevated labour and freight costs combined with increase in inventory provisions 
  • Profit Attributable to ANN shareholders of $246.7m, up +57.5% (+48.5% in CC) and EPS of 192.2cps (EPS would have been 193.9cps, without Cloud Computing accounting policy change), up +59.9% (+50.8% I CC). 
  • Operating Cash Flow of $49.2m (down -74.3% over pcp) representing cash conversion of 60.9%, negatively impacted due to greater investment in working capital to support top line growth along with pricing impact as well as higher capex to increase capacity in a number of higher demanded products. Capex increased +36.5% over pcp to $82.7m, however, remained below management’s $95-105m guidance due to temporary delays to shipments and installation as a result of COVID-19, with management expecting FY22 capex spend to be $80-100m. 
  • ROCE saw significant improvement (up +590bps to 19.8% pre-tax and up +550bps to 16.8% post tax), predominantly due to strong EBIT growth.

Company Description  

Ansell Ltd (ANN) operates two global business units: (1) Ansell’s Industrial segment manufactures and markets multi-use protection solutions specific for hand, foot, and body protection, for a wide-range of industries such as automotive, chemical, metal fabrication; (2) Ansell’s Healthcare segment (Medical + Single Use) offers a full range of surgical and examination gloves covering all applications, as well as healthcare safety devices and active infection protection products. The segment also manufactures and markets single use hand protection. Ansell recently sold its sold its Sexual Wellness Global Business Unit group.

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.

Categories
Global stocks Shares

Cisco’s Software and Subscription Push Providing Investors with Greater Insight and Predictability

its strategic focus of increasing recurring revenue via selling software and services to supplement its hardware products. Software and services were more than half of fiscal 2020 revenue, up from 43% in fiscal 2017. In our view, Cisco embracing software from hardware disaggregation, and even selling networking chips, can help keep demand for its solutions high although some customers rely on cloud-based resources or generic hardware.

The company is the dominant supplier of switches, routers, cybersecurity, and complementary networking products. Cisco’s products are mission critical for network performance, stability, and security. Cisco is proliferating software, analytics, wireless, and security offerings to satisfy nascent trends, and we see Cisco as the only one-stop-shop networking vendor. Despite Cisco’s commanding position in switches and routers, IT professionals are increasingly shifting computer workloads to the cloud, in turn buying less data center hardware. Alongside changing its product offerings, Cisco is moving product sales toward subscription-based offerings, which is the preferred method of consumption for cloud-based resources.

Financial Strength

Cisco a financially healthy Company. With a fiscal 2021 debt/capital ratio of 22%, abundant free cash flow generation, and expected on-time debt payments. The company could safely lever back up to fund development projects, acquisitions, and shareholder returns if needed. Cisco has continually exceeded its commitment to return at least 50% of free cash flow, calculated as cash from operating activities minus capital expenditures, to shareholders. Cisco initiated its share repurchase program in 2001, has increased the authorization over time, had about $8 billion remaining at the end of fiscal 2021, with no termination date. 

Cisco has recurrently raised its dividend year over year, and modest annual increases. Even after shareholder returns and debt repayments, the company remains financially flexible with plenty of cash to support acquisitions and its large marketing and R&D expenditures. Growing recurring revenue will provide a steadier income stream, and we expect strong operational and free cash flow generation to continue in the future. Our view is that Cisco will manage its growing war chest with future cash deployments into strategic developments and acquisitions.

Bulls Say’s

  • Cisco’s one-stop-shop ecosystem, from switches to data analytics, should remain valued as more networking customers migrate to hybrid clouds.
  • Despite the rise of public clouds, Cisco should continue to grow its customer base via hybrid cloud and software offerings.
  • The expected rapid proliferation of devices to hit networks should drive customer demand for Cisco products. We foresee Cisco’s hardware as needed for access points, routing, and switching while software is crucial for analytics, security, and intent-based networking.

Company Profile 

Cisco Systems, Inc. is the world’s largest hardware and software supplier within the networking solutions sector. The infrastructure platforms group includes hardware and software products for switching, routing, data center, and wireless applications. Its applications portfolio contains collaboration, analytics, and Internet of Things products. The security segment contains Cisco’s firewall and software-defined security products. Services are Cisco’s technical support and advanced services offerings. The company’s wide array of hardware is complemented with solutions for software-defined networking, analytics, and intent-based networking. In collaboration with Cisco’s initiative on growing software and services, its revenue model is focused on increasing subscriptions and recurring sales.

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.

Categories
Shares Technology Stocks

Oracle Begins Fiscal 2022 With a Mixed Quarter As Cloud Shines; Shares Overvalued

Revenue in the first quarter increased 4% year over year to $9.7 billion. Once again, cloud services and license support drove the top line upward, growing 6% year over year and accounting for 76% of the firm’s sales in the June quarter. Additionally, adjusted operating margins for the quarter remained flat year over year at 45%, and non-GAAP earnings per share was $1.03, compared with our estimate of $0.94.

The company’s cloud business continues to perform well and grow as a portion of Oracle’s overall sales. Since the cloud business typically offers better margins than the firm’s on-premises business, we view this mix shift positively as the increasing cloud mix will help the company grow its profitability. At the same time, however, we remain aware of the intense competition in the database management market and maintain our fair value estimate of $65 per share. With shares trading around $87, we recommend waiting for a pullback before committing capital to the narrow-moat name.

Within the cloud space, management highlighted a recent Gartner report that reviews Oracle’s strong execution within cloud infrastructure. At the same time, we find it important to highlight that while Gartner positions Oracle as the number three player in the cloud infrastructure space, Amazon and Microsoft (the current number one and two, respectively) have built their cloud infrastructure business over many years. As a result, it’ll be hard for Oracle to displace these two cloud giants off their perches, as doing so would require companies to make cloud infrastructure decisions primarily based on database functionality. 

Additionally, on the call, management stressed the outperformance of its MySQL offering, HeatWave, over Amazon’s and Snowflake’s MySQL offering. While we continue to think Snowflake boasts significant benefits over Amazon due to its customers’ ability to avoid vendor lock-in, we found it compelling that Oracle claimed it plans to make its MySQL product available on competing public clouds. 

Company Profile

Oracle provides database technology and enterprise resource planning, or ERP, software to enterprises around the world. Founded in 1977, Oracle pioneered the first commercial SQL-based relational database management system. Today, Oracle has 430,000 customers in 175 countries, supported by its base of 136,000 employees.

(Source: Morningstar)

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.