Category: Shares

While the competitive nature of these markets makes incremental share gain somewhat difficult, we see opportunity for organic growth and share gains in product inspection, industrial, and food retail. Mettler places an intense focus on sales and marketing and has leveraged its Spinnaker and Stern Drive programs to operate with high efficiency and maintain strong customer retention.

Despite relatively slow market growth in weighing instrumentation, Mettler has achieved steady above-market share gains and has established a niche in high-end laboratory balances. Impressively, the firm has posted consistent pricing and margin gains over the past decade, even during the great financial crisis, 2015-16 industrial downturn and COVID-19 pandemic. Tepid industry growth holds potential competitors at bay, given that new entrants would find it difficult to take meaningful share, and the reward for doing so would be relatively small.

Higher inflation could limit earnings growth because Mettler may find it difficult to pass on pricing increases to clients that are more than the customary 2 percent to 3 percent range. Nonetheless, because the company works in established, stable markets, the long-term picture for the company appears positive.

Despite shareholder pressure on financial allocation, Mettler has taken a methodical approach to acquisitions.

Financial Strength

Mettler-Toledo has good financial strength and has consistently maintained solid levels of free cash flow and reasonable debt, which stood at 1.5 times EBITDA in December 2020. Mettler has generated increasing levels of free cash flow in each of the past four years, with $240 million of cash flow in 2016 increasing to nearly $650 million in 2020. Mettler has typically used much of this cash flow on share buybacks, which have totaled nearly $2.8 billion over the last five years. Apart from repurchases, Mettler has occasionally made moderately sized acquisitions, such as the $105 million purchase of pipette consumable vendor Biotix in 2017, and the $96 million acquisition of lab equipment company Henry Troemner in 2016.

Bulls Say

• Despite the slow market growth of balances, Mettler has consistently exceeded analyst expectations, and the company has unmatched operating efficiency.
• Mettler has shown impressive cost discipline during the COVID-19 pandemic. With a flexible cost structure and healthy balance sheet, Mettler is poised to benefit from a post-crisis economic rebound.
• Though details of the programs remain somewhat opaque, the Spinnaker and Stern Drive initiatives appear to be significant contributors to the firm’s consistent market-beating results, and these programs are set to continue.

Company Profile

Mettler-Toledo supplies weighing and precision instruments to customers in the life sciences (54% of 2020 sales), industrial (40%), and food retail industries (6%). Its products include laboratory and retail scales, pipettes, pH meters, thermal analysis equipment, titrators, metal detectors, and X-ray analyzers. Mettler leads the market for weighing instrumentation and controls more than 50% of the market for lab balances. The business is geographically diversified, with sales distribution roughly as follows: the United States around 30% of sales, Europe around 30%, China around 20%, and the rest of the world around 20%.

(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.

Tesla also invests around 6% of its sales into R&D, focusing on improving its market-leading technology and reducing its manufacturing costs. The company will also move upstream into battery production, with a goal to reduce costs by over 50%. Tesla also sells solar panels and batteries used for energy storage to consumers and utilities.

After taking a fresh look at Tesla, we are raising our fair value estimate to $550 per share from $354. The increased fair value estimate comes from our outlook for higher long-term profitability in the automotive segment. We maintain our narrow moat rating but downgrade our moat trend rating to stable from positive. At current prices, shares as slightly overvalued, with the stock trading above our fair value estimate but within 25% of our fair value estimate, which is the upper end of the range for 3-star territory based on our uncertainty rating. A little over 5.1 million vehicles sold in 2030, up from 4.3 million, due to a greater number of affordable vehicles, which Tesla nicknamed the $25,000 car.

Management’s cost reduction initiatives driving long-term gross margin expansion. In its September Battery Day event, Tesla unveiled plans to reduce battery costs by 56%. Tesla will be able to achieve these cost reductions, without reducing prices, which will reduce vehicle unit costs and increase gross profit per vehicle. In addition to cost reductions, the mix shift to the Model Y will also increase automotive gross profit margins. The Model Y is built on the Model 3 platform, and management says the cost of production for a Model Y is not that much more than the Model 3. Given that the Model Y’s entry level price is $12,500, or roughly 30%, more expensive than the Model 3, we see gross profit margins expanding as a greater proportion of Model Y vehicles are sold.

Tesla’s EV prices will remain at or above the price of a comparable internal combustion engine or hybrid vehicle. This should lead to Tesla’s cost reduction efforts driving profit margin expansion. Tesla’s second largest vehicle platform over the next decade, with the two platforms generating nearly 90% of total volumes. Similar to Tesla starting with the Model 3 and then transitioning to sell more Model Ys, we expect Tesla will start with a $25,000 car and then transition to produce a greater proportion of SUVs from the platform.

Financial Strength

Tesla is in solid financial health as cash and cash equivalents exceeded total debt as of March 31, 2021. Total debt was roughly $10.9 billion, with about $5.1 billion of that amount nonrecourse debt mostly backed by asset-backed security issuances for the auto and energy businesses, China debt, and a warehouse line secured by cash flows from vehicle leasing contracts. To fund its growth plans, Tesla has used convertible debt financing as well as equity offerings and credit lines to raise capital. As of March 31, 2021, the company has $2.15 billion in unused committed amounts under credit lines and financing funds. In 2020, the company raised $12.3 billion in three equity issuances.

 Tesla‘s Unique Supercharger Network

• 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 the company 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 will result in the company 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 mid-size sedans and crossover SUVs. The company also plans to begin selling more affordable sedans and small SUVs, a light-truck, semi-truck, and a sports car. Global deliveries in 2020 were roughly 500,000 units.

(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.

). Although the present environment poses unique challenges, the off-price sector has performed well in such situations historically (Ross and TJX saw low- to mid-single-digit percentage comparable growth in 2008-09), and we expect Burlington to exit the crisis in better shape than full-price retailers.

Burlington’s strong inventory management operations hold inventory turnover above that of full-price stores, driving traffic with a fast-changing assortment. We believe off-price chains are valuable to manufacturers looking to sell excess product, as they offer flexibility, prompt payment, and discretion by avoiding advertising the brands they carry (important to producers looking to protect conventional channel pricing power). Product availability should stay high, as vendors’ production forecasting is complicated by factors such as mercurial customer preferences, channel diffusion, and unpredictable weather.

We believe off-price retailers such as Burlington are better positioned than other physical sellers to fend off digital rivals. The treasure hunt experience and low-frills environment enable steep discounts relative to the full-price channel (up to 60% for Burlington), limiting price gaps. Shipping and return costs (in addition to vendors’ restrictions) also limit the discounts digital sellers can offer.

Financial Strength

Burlington had reduced leverage meaningfully since its 2013 initial public offering (fiscal 2013 net debt was around 3.3 times EBITDA, versus a 0.7 mark in fiscal 2019, before the pandemic), and we expect growth and ample cash flows to keep the balance sheet strong despite ambitious expansion plans. We expect Burlington will take more than a decade to reach its 2,000-unit footprint target, in addition to relocations of existing stores. Considering Burlington’s store network is mostly leased and its payback period averages less than three years, we expect the firm to dedicate around 4% of sales to capital expenditures over the next decade (roughly $500 million on average annually). We expect the firm will continue to return excess capital to shareholders via buybacks after a pandemic-related pause; however, we expect this to eventually be augmented by a dividend approaching 40% of earnings (which we forecast the firm to initiate in fiscal 2023). We assume roughly 45% of long-term annual operating cash flow is returned to shareholders via repurchases. Burlington could pursue acquisitions of regional chains or other concepts (including operations outside the United States) to accelerate its growth, though we do not incorporate any such purchases into our forecasts because of the uncertain timing and nature of any deal.

Bulls Say

-With low prices spurred by efficiency, relatively high inventory turnover, and a differentiated value proposition to customers, Burlington should be relatively well protected from digital rivals.

– As Burlington’s assortment shifts toward more advantaged categories for the off-price channel (such as ladies’ apparel and home), performance should continue to improve.

– Burlington should be able to downsize its locations’ average square footage as it adds new, smaller stores and relocates existing inefficient units, boosting margins and the customer experience.

Company profile

The third-largest American off-price apparel and home fashion retail firm, with 761 stores as of the end of fiscal 2020, Burlington Stores offers an assortment of products from over 5,000 brands through an everyday low price approach that undercuts conventional retailers’ regular prices by up to 60%. The company focuses on providing a treasure hunt experience, with a quickly changing array of merchandise in a relatively low-frills shopping environment. In fiscal 2020, 21% of sales came from women’s ready-to-wear apparel, 21% from accessories and footwear, 19% from menswear, 19% from home décor, 15% from youth apparel and baby, and 5% from coats. All sales come from the United States.

(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.