Category: Shares

 while COVID-19 remains pervasive. With a return to sail underway, cruise operators are now utilzing updated health protocols to ensure the safety of cruising as paying customers return onboard. As virus mitigation tactics prove successful, we expect Royal to see modest pricing gains as it digests bookings paid for with future cruise credits, limiting near-term yield gains. On the cost side, stringent health protocols and cruise resumption costs should inflate spending, factors that will aggravate profitability through 2022.

Royal took quick action to reduce operating expenses and capital expenditures as a result of the coronavirus (we forecast capital expenditures of $2.2 billion in 2021, down from $3 billion in prepandemic 2019). Also, since the beginning of the pandemic, the firm accessed around $13 billion to enhance its liquidity cushion. Further, as of June 30, $2.4 billion in customer deposits were still available for use. Although we believe Royal’s cash burn should remain between $300 million-$350 million a month (as it restaff the fleet), it should be able to navigate a graduated return to sailing over the next six months. While Royal is set to return to positive profitability over the next year, the prior 20>25 by 2025 target (EPS to $20 by 2025) is virtually impossible to reach as a result of secular changes in demand due to COVID-19.

Financial Strength 

Royal has taken numerous steps to ensure it remains a going concern after COVID-19. In March 2020, Royal noted it was taking actions to reduce operating expenses and capital expenditures by the tune of $1.7 billion to improve liquidity. Additionally, since the beginning of the pandemic, the firm secured around $13 billion in liquidity through various debt and equity issuances (resulting in our estimate for $1.1 billion in debt service costs in 2021, up from around $400 million in 2019). 

Furthermore, as of June 30, $2.4 billion in customer deposits were still available for use, although industry commentary suggests about half of canceled bookings have been refunded in cash rather than future cruise credits during the pandemic. And in April 2020, Royal announced it was laying off or furloughing more than 25% of its 5,000 shoreside employees. The cash burn for Royal every month while restaffing and redeployng its ships should be between $300 million-$350 million.

Bulls Say’s 

• If COVID-19’s delta variant recedes quickly, yields could recover faster than we currently anticipate.
• Lower fuel prices could help benefit the cost structure to a greater degree than initially expected, thanks to Royal’s floating energy prices (with only about 50% of fuel costs historically hedged).
• The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators previously had capacity for nearly 4 million passengers at the beginning of 2020, which provides an opportunity for long-term growth with a new consumer when cruising fully resumes.

Company Profile 

Royal Caribbean is the world’s second-largest cruise company, operating 60 ships across five global and partner brands in the cruise vacation industry. Brands the company operates include Royal Caribbean International, Celebrity Cruises, and Silversea. The company also has a 50% investment in a joint venture that operates TUI Cruises and Hapag-Lloyd Cruises, allowing it to compete on the basis of innovation, quality of ships and service, variety of itineraries, choice of destinations, and price. The company is completed the divestiture of its Azamara brand in the first quarter of 2021.

(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.

 Monster continues to extract outsize growth and stella profitability from this market. Crucial to Monster’s positioning in the market is its partnership with Coca-Cola. Being able to rely on the widest moat in beverages for distribution, merchandising, and retailer negotiation reinforces and perpetuates the benefits of its resonant brand, in our view. With its entire U.S. footprint and most international territories fully incorporated into the Coke system, strategic and logistic planning should become more seamless, allowing products to be scaled more quickly, particularly in international markets (over 35% of sales). Despite the inevitable complexity of appealing to distinct local palates, we believe Monster’s continued geographic diversification should augment its positioning.

Given the importance of the Coke relationship, the launch of Coke Energy products following arbitration between the two parties was a significant development. Still, it has proved to be far from an existential threat, garnering trivial share in the markets where it launched (and recently discontinued in the U.S.). In addition to a seemingly more tenuous Coke relationship, Monster must contend with an intense competitive environment. While Red Bull remains the most formidable rival, Monster is also beleaguered by a number of both established and upstart firms looking to carve out niches in the energy space. Nevertheless, structural advantages and an experienced management team should allow the firm to navigate an evolving competitive landscape.

Financial Strength 

Moreover, the business churns out healthy free cash flow, with over $1.1 billion generated on average over the past three years (high-20s as a percentage of sales). The company’s free cash flow has historically supported persistent share repurchases, and the company’s ability to continue buying back shares amid market disruptions like the coronavirus pandemic is a poignant illustration of its financial health, in our view. As of June 2021, Monster had over $1.5 billion in cash and short-term investments on its balance sheet, with no long-term debt to speak of. 

Still, general liquidity is not a concern. In addition to its healthy cash balance and an untapped revolver, Monster has implemented certain nontraditional means of financing, such as a working capital line of credit that is similar to an interest-bearing liability but not treated as leverage for accounting purposes. 

Bulls Say’s

• Monster is a leading pure-play incumbent in a secularly advantaged beverage category that is growing in the high single digits, meaningfully above the broader industry average (low single digits).
• Monster’s strategic partnership with Coca-Cola aligns its fortunes with the widest moat in nonalcoholic beverages, affording it top-tier store positioning and merchandising.
• International expansion through Coke’s bottlingsystem offers material runway for growth.

Company Profile

Monster Beverage is a leader in the energy drink subsegment of the beverage industry. The Monster trademark anchors its portfolio, and notable offerings include Monster Energy and Monster Ultra. The firm has also started to incubate new trademarks for emerging enclaves of the energy space, like Reign in performance energy. It is primarily a brand owner, outsourcing most of its manufacturing processes to third-party copackers. It primarily uses the Coca-Cola bottling system for distribution after a strategic agreement in which Coke became Monster’s largest shareholder (roughly 19%) and that also included the exchange of certain businesses between the two firms. Most of Monster’s revenue is generated in the United States, though international geographies are increasing in the mix.

(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.

Fee revenue has fully recovered to beyond prepandemic levels, as the company reported second-quarter fee revenue of $1.6 billion, a 34% increase year over year and a 3% increase from the second quarter of 2019. Adjusted EBITDA also came in strong for the current quarter at $220 million, 26% higher than the second quarter of 2019. 

Adjusted EBITDA margin calculated on a fee-revenue basis was 13.5%, significantly higher than the 10.2% reported in 2020 and 11.1% in 2019. The adjusted EBITDA growth and margin expansion reflect the impact of strong brokerage activity and permanent cost reduction actions, which management believes amounted to around $30 million in the current quarter and will reach $125 million in annualized permanent cost savings.

The company announced that John Forrester, who is the current global president, will succeed Brett White as the new CEO of the company effective Jan. 1, 2022. White will remain executive chairman after the transition and continue to lead strategy, mergers and acquisitions, and succession planning, alongside Forrester. 

The brokerage segment of the company displayed excellent recovery in the current quarter compared with the second quarter of 2020, when the pandemic suppressed business around the world. Capital markets revenue more than doubled in the current quarter on a year-over-year basis and was 17% higher than the second quarter of 2019. Leasing revenue was 67% higher in the current quarter compared with last year, but it remains 9% below 2019 levels.

Management Anticipates Revenue Growth

The valuation and other segment remains a bright spot for the company as fee revenue came in 16% higher in the quarter on a year-over year basis. The property, facility, and project management segment, which has been resilient throughout the pandemic, reported a 7% year-over-year increase in fee revenue. Management anticipates revenue growth in midteens for the full year as brokerage revenue growth is expected to be up more than 30% and the nonbrokerage segment is expected to grow in midsingle digits. Management said it expects adjusted EBITDA margins for the full year to be well above 2020 levels and will approach 2019 levels, which equates to an adjusted EBITDA range of $660 million-$710 million for full-year 2021.

Company Profile 

Cushman & Wakefield is the third largest commercial real estate services firm in the world with a global headquarters in Chicago. The firm provides various real estate-related services to owners, occupiers and investors. These include brokerage services for leasing and capital markets sales, as well as advisory services such valuation, project management, and facilities management.

(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.

Looking across CNH’s end markets, we think agriculture demand will continue to be a major driver in the back half of the year. In our view, demand will be supported by strong crop exports to China. This dynamic has been a key reason why crop prices have been relatively high over the past year. Rising crop prices have propelled farmer incomes higher, allowing them to refresh their aging agriculture equipment–a benefit to CNH.

Overall, manufacturing sales reached $8.5 billion in the quarter, up 65% year on year. The strength in the company’s top line was attributable to increased volumes and favorable product mix. In agriculture, tractor sales worldwide were up 28%, compared with the prior-year period. Of that, high horsepower tractors (above 140 horsepower) saw strong volume growth in North America, surging 49% year on year. Combines also contributed to volume growth in the quarter, up 14% worldwide, with extraordinary growth in South America (up 38% year on year). CNH’s gross margins were also strong in the quarter, coming in at 19.3% as higher pricing more than offset cost inflation (due to supply chain constraints).

Company’s Future Outlook

Management reaffirmed its commitment to spinning off the on-highway business (commercial vehicles and power train businesses). Following the spin-off, CNH’s end market exposure will largely be focused on agriculture markets, with the balance in construction markets. We believe this is a good move for the company as the agriculture business has been fairly profitable for CNH. On average, its EBIT margins have been nearly twice the consolidated business’ EBIT margins. We estimate over 80% of EBIT will be coming from agriculture after the spin-off is completed, putting CNH on much better footing from a profitability standpoint.

Company Profile

CNH Industrial is a global manufacturer of heavy machinery, with a range of products including agricultural and construction equipment, commercial vehicles, and power train components. One of its most recognizable brands, Case IH, has served farmers for generations. Its products are available through a robust dealer network, which includes over 3,600 dealer and distribution locations globally. CNH Industrial’s finance arm provides retail financing for equipment and vehicles to its customers, in addition to wholesale financing for dealers; which increases the likelihood of product sales.

 (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.

Knights long-standing laser focus on network efficiency has served it well given the asset-intensive nature of trucking. Its legacy operating ratio (expenses/revenue, excluding fuel surcharges) averaged in the mid-80% range before the merger, versus an industry average that traditionally exceeds 90%. Within its legacy dry van truckload unit, Knight has long emphasized short- to medium-haul shipments (length of haul near 500 miles) and high-density lanes near its existing service centers. Regional freight is an attractive niche because shipments face less competition from intermodal and are seeing growth as shippers locate distribution centers closer to end customers.

In 2017, Knight Transportation and Swift Transportation merged. Following the transaction, Knight-Swift became the largest asset-based full-truckload carrier in the industry. Overall, we believe the merger structure was positive for previous shareholders because of meaningful cost and revenue synergy opportunities, which have proved to be within reach over the past few years.

Knight’s management has executed well in terms of applying its best-in-class operating acumen to Swift’s network. In fact, Swift’s adjusted truckload OR was roughly at parity with the Knight trucking division’s OR in first-quarter 2021. Pandemic lockdowns weighed on freight demand in early 2020, but retail shipments turned robust in the second half on strong inventory restocking, and industrial end markets are recovering off pandemic lows. Furthermore, truckload-market capacity has tightened materially and double-digit contract rate gains are likely this year.

Financial Strength

At the end of 2020, Knight-Swift held roughly $700 million of total debt on the balance sheet (including capital lease obligations, an accounts receivable securitization program, and a term loan), some of which stems from the former Swift operations. Recall truckload-industry giants Knight Transportation and Swift Transportation merged in September 2017. The firm held $157 million in cash on the balance sheet at year-end 2020, similar to 2019, with total available liquidity near $740 million. Management expects net capital expenditures of $450 million to $500 million in 2021, which we estimate will be around 10.4% of total revenue, compared with 9% in 2019.

Bull Says

• The 2017 Knight-Swift merger created meaningful opportunities for cost and revenue synergies that have thus far proved value accretive. The firm is also enjoying a demand surge from heavy retailer restocking that should last into the first half of 2021.

• The legacy Knight operations rank among the most efficient and profitable carriers in trucking, with an average operating ratio in the mid-80s prior to the merger.

• Knight has expanded its asset-light truck brokerage division at a healthy clip over the years, and these operations add incremental opportunities for long term growth.

Company Profile

Knight-Swift Transportation is by far the largest asset-based full-truckload carrier in the United States. About 80% of revenue derives from asset-based truckload shipping operations (including for-hire dry van, refrigerated, and dedicated contract). The remainder stems from truck brokerage and other asset-light logistics services (8%), as well as intermodal (8%), which uses the Class-I railroads for the underlying movement of the firm’s shipping containers and also offer drayage services.

 (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.

We are pleased with Facebook’s continuing enhancement of its platforms as it improves e-commerce functionality, increases video content, and introduces more audio content, which support the firm’s network effect moat source on the user and advertiser sides, increasing overall ad inventory. Facebook is also investing in innovation for the long-run, including Metaverse, which we view as the next stage of growth and development in virtual reality. While Metaverse is likely to require more interoperability between many platforms and may slowly erode Facebook’s walled garden, the firm’s current network effect moat source should maintain more users on the Facebook side of the Metaverse.

Management guided for significant deceleration in revenue growth during the second half of this year, which we had already modeled in. Total revenue of $29.1 billion was up 55.6% year over year due to higher ad prices and an increase in users. Facebook benefited from ongoing strong demand for direct response and the resurgence of brand advertising. Monthly active users increased 7% and 2% year over year and from last quarter, respectively, to nearly 2.9 billion. Engagement remained at around 66% as daily active users increased to 1.9 billion (also up 7% from last year and 2% sequentially).

Strong Revenue Growth

Strong revenue growth during the quarter created operating leverage for Facebook resulting in 42.5% operating margin, compared with 31.9% last year. Management expects yearover- year revenue growth during the second half to “decelerate significantly.” The firm provided a bit more color by stating that the slowdown will be modest when comparing the second quarter 2021 with the same period in 2019 (revenue up 72.2%). The firm still expects full-year operating expense between $70 billion and $73 billion and capital expenditures of $19 billion-$21 billion.

Metaverse to take hold and attract billions of users, the virtual world needs to be more interoperable, like the physical world where users can easily experience many different environments and interact with different individuals and groups. Allowing interoperability may represent a risk to the network effect of platforms like Facebook. However, in our view, given Facebook’s 2.9 billion users and strong network effect moat source, the firm’s Horizon will be a step ahead of competitors in attracting users and quickly building the virtual environments, which should attract more users, content creators, businesses, and advertisers.

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.

Our fair value increase reflects Colfax’s strong results, an improved near-term outlook, and time value of money, partially offset by the implementation of a probability-weighted change in the U.S. statutory tax rate in our model.

Colfax delivered stellar 59% year-over-year revenue growth, as sales rebounded strongly from last year’s depressed levels due to initial pressure from the coronavirus outbreak. Colfax’s revenue was also up 9% from prepandemic levels in the second quarter of 2019, with improvement in both segments. On an organic sales-per-day basis, second-quarter sales increased 44% year over year in fabrication technology and 54% year over year in the medical technology segment.

Colfax continues to grow its reconstructive business through M&A, aiming to grow the platform to $1 billion in revenue within the next five years. The company announced the acquisition of Mathys Bettlach for roughly $285 million. Mathys is a Swiss-based orthopedics company whose portfolio includes products for artificial joint replacement and synthetic bone replacement. Colfax expects the business to generate roughly $150 million in sales and $15- $20 million in EBITDA in 2022.

Company Profile
Colfax is a diversified technology firm that produces welding equipment and medical devices. Following the sale of its air and gas handling business in 2019, Colfax’s remaining portfolio is organized into two segments: fabrication technology and medical technology. Fabrication technology is a leading manufacturer of equipment and consumables used in welding, cutting, and joining applications, mostly marketed under the ESAB brand name. The medical technology segment makes medical devices, including orthopedic braces, reconstructive implants, and other products used for rehabilitation, physical therapy, and pain management. The company generated roughly $3.1 billion in revenue in 2020.

(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.