Category: Shares

Categories
Shares Technology Stocks

Airbus Build Rate Announcement Prompts Us to Slightly Bump Up Our GE Fair Value Estimate

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.

First, GE has materially reduced its debt burden by $30 billion during Culp’s tenure. While some portfolio decisions like the sale of biopharma were painful, they were well-priced and provide the firm with critical flexibility to shift from a persistent defensive to offensive posture. While GE industrial net debt/EBITDA remains high, we think that the eventual aerospace recovery and continuous improvement initiatives will help drive this figure below 2.5 times by 2023. The gradual sale of Baker Hughes furthers GE deleveraging goals, while allowing the firm to focus on its core portfolio.

Second, we believe narrow-body commercial revenue should recover at a more accelerated pace relative to wide-bodies given favorable domestic over international travel trends. We also expect highly profitable narrow-body aftermarket services will recover ahead of the rest of the commercial aerospace portfolio since this business is driven by departures as opposed to revenue passenger miles. Deferring shop visits can add 20%-30% to airlines’ costs, and passenger survey data persistently reveals a majority of passengers are willing to travel once vaccinated. From this standpoint, GE is well-positioned to capitalize on this trend, with more narrow-bodies that are 10 years or younger than the rest of the industry, and roughly 62% of its fleet seeing one shop visit or less. At a minimum, we believe GE has an opportunity to enjoy strong incremental margins on a recovery matching decremental margins during the recession.

Finally, healthcare is a global leader in precision health, with technology helping practitioners gain valuable insights and eliminating waste in the healthcare system. We expect 50-basis points of consistent margin improvement on lower mid-single-digit growth.

Fair Values and Profit Maximisers

After reviewing Airbus’ announcement that it’s increasing production rates for the A320 family to 64 per month by the second quarter of 2023, we raise our GE fair value estimate to $15.70 from $15.30. Airbus may ask suppliers to enable production rates to as high as 75 per month by 2025. However, we would like to see Airbus build a bigger backlog before increasing our forecast to these levels. Even so, we think this supports our view that the back half of 2021 should witness a rosier commercial aero outlook based on the domestic travel data we previously highlighted.

Even with an estimated $3.7 billion headwind from the end of most of GE’s factoring program, we’re expecting just over $4.6 billion of industrial free cash flow. We also model adjusted EPS of $0.28 for 2021, just over the top end of management’s guide. Nonetheless, we still value GE at over 20 times 2023 adjusted EPS, or about 17.5 times 2023 industrial free cash flow per share. In our view, the two most important contributors to GE’s earning power lie in GE Aviation and GE Healthcare. Aviation will have significant headwinds in the front half of 2021. Nonetheless passenger survey data and airline booking data suggest significant pent-up demand. Longer term, we think global middle income class growth will drive demand once more and help GE commercial aviation recover lost sales by 2024 to year-end 2019 levels. GE’s fleet is young and strongly positioned in narrow bodies, which should help GE as domestic travel recovers ahead of international travel. Further, a majority of its fleet is still yet to see over one shop visit. Airlines deferring maintenance, moreover, can add considerable costs to their bottom line.

As for GE Healthcare, we assume key market drivers include increased access for healthcare services from emerging economies and an aging U.S. population, coupled with digital initiatives that save practitioners’ time, while protecting them from risks. Rolling this up, we believe these factors will help drive lower mid-single-digit sales growth, coupled with a minimum 25 basis point improvement in year-over-year margins. For Power and Renewables, we see both segments benefiting from the energy transition, but with the lion’s share of the sales growth opportunity flowing through to renewables. That said, we expect minimal contributions to profitability over the next couple of years from either business, before ramping up to mid-single-digit plus margins by midcycle.

General Electric’s Company Profile

GE was formed through the combination of two companies in 1892, including one with historical ties to American inventor Thomas Edison. Today, GE is a global leader in air travel, precision health, and in the energy transition. The company is known for its differentiated technology and its massive industrial installed base of equipment sprawled throughout the world. That installed base most notably includes aerospace engines, gas and steam turbines, onshore and offshore wind turbines, as well as medical diagnostic and mobile equipment. GE earns most of its profits on the service revenue of that equipment, which is generally higher-margin. The company is led by former Danaher alum Larry Culp who is leading a multi-year turnaround of the storied conglomerate based on Lean principles.

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

Lowering Harmonic Drive’s FVE but Still See Upside Potential; Wide Moat Remains Intact

We note that our revised expectation of margin expansion is still higher than management’s plan and we currently see upside potential in the low- to mid-teens percent. Throughout calendar 2020, the company’s share price grew significantly as a result of high growth expectations for HDS’ strain wave reduction gears, which serve as vital components for high precision machinery like industrial robots and semiconductor equipment. However, since reaching its peak of around JPY 9,200 at the end of 2020, HDS’ share price has fallen year to date, as the market’s excessively high growth expectations have been corrected.

The medium-term plan, ending in fiscal 2023, implies that operating margin will return to normalized levels in fiscal 2023–at 21.4%, from 2.3% in 2020. We believe the plan is conservative, but we also take this into account for our downward revision to our projection. Further, we consider the potential impact of pricing, as management commented that a domestic industrial robot manufacturer (HDS’ customer) hopes to eventually adopt a “two company” supplier policy for small-size reduction gears. At the moment, compared with other manufacturers’ gears, there is a significant pricing premium on HDS’ strain wave reduction gears due to hurdles by other companies in replicating the quality of HDS’ high-end gears. We note that this impact would not be immediate and that despite the likelihood of reduced pricing over the medium/long term, HDS’ wide moat remains intact, as the high-end strain wave gear market is not a “winner take all” market and will likely continue to have high barriers to entry.

Over the medium term, we assume margins will increase from 22% to 25.5% between fiscal 2022 and 2025, compared to 25% to 28% in our previous projection during the same year. Further, we maintain our fiscal 2021 operating margin of 18%, which is also higher than management guidance of 12.7% margin for the same year. We think this is possible, based on higher sales assumptions compared to guidance and after considering its high contribution margin of about 50%. We note that our assumption still implies operating margin of 5 percentage points lower compared to fiscal 2017 levels despite similar companywide revenue levels. We attribute this margin gap between 2017 and our 2021 projection to: 1) higher production-related costs, including increased expenses related to the operations of its new factories in Japan and North America as well as record D&A levels as a result of peak capital investments in 2018 and 2019; 2) increased R&D spending as part of its medium-term plan; and 3) near term rise in costs related to packaging and shipping.

For the current fiscal year, we assume 47% top-line year-on-year growth, which is higher than both guidance and our previous projection (40% and 37% year-on-year growth, respectively), as we expect stronger top-line recovery in Japan/Asia and Europe segments. We attribute this to order improvement in the fourth quarter, which exceeded our previous expectations, and likelihood of further increases in orders/sales throughout the fiscal year from industrial robot and collaborative robot, or cobot, manufacturers in these regions, as factory automation investments in the automobile industry pick up. Fourth-quarter consolidated orders in the Japan/Asia segment more than doubled year on year, and order growth in the Europe segment also turned positive in the fourth quarter with 12% year-on-year growth, after two consecutive declines from same periods of the previous year. We expect these factors will also contribute to margin expansion going forward.

The company’s fiscal 2020 year-end results, ending in March, were in line with our expectations, as companywide revenue remained flat year on year, while operating margin remained low at 2.3%–though this is an improvement from minus 0.5% in 2019. Margins have been impacted by high fixed costs from its newly constructed factories in Japan and North America, where HDS spent in excess of JPY 30 billion or 30% of sales collectively in 2018 and 2019. While the parent entity’s standalone operating margin improved by about 8 percentage points to 10.6%, from strong sales to Japanese industrial robot makers, other key group companies in North America and Europe realized declining operating income from lower sales for mainly non-industrial robot applications (such as for medical, amusement, and service robot industries).

Harmonic Drive Systems Inc Company Profile

Harmonic Drive Systems Inc., or HDS, manufactures and sells precision control equipment and components worldwide. It offers high-precision reduction gears (speed reducers) under the Harmonic Drive brand as well as other mechatronics products such as rotary actuators, linear actuators, and AC servo motors. The company also provides planetary-gear speed reducers under the Accu Drive and Harmonic Planetary brands. Its products are used in industrial robots, semiconductor manufacturing equipment, and other high precision equipment. HDS was founded in 1970 and is headquartered in Tokyo, Japan.

Source: Morningstar

General Advice Warning

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

Categories
Dividend Stocks Shares Technical Picks

“Can Lives Here” Is No Marketing Gimmick for Commonwealth Bank

Amber markets itself as a provider of cheap electricity, which Commonwealth Bank will promote to its mobile banking customers. Little Birdie will help the bank provide rewards and exclusive offers for Commonwealth Bank customers, probably a way of winning back share from the likes of Afterpay. The initiatives will not appeal to everyone, with these product enhancements likely appealing more to younger demographics who in the future become more profitable home loan customers. Generating annual profit north of AUD 8 billion, the bank has the luxury to: 1) invest in new and even unproven products; and 2) respond to consumer preferences.

It’s hard to say if recent investments will lead to material revenue windfalls, but we think the bank’s relatively small investments make sense as it attempts to build more engaged and satisfied customers. Our buy now, pay later analyst expects the market to grow materially over the next 10 years, but the incumbents will lose share, partly due to the major banks rolling out their own offerings. Commonwealth Bank shares are up over 50% in the last 12 months, and while we agree confidence in the earnings and dividend outlook is warranted, shares trade at a 30% premium to our fair value estimate. The fully franked dividend of AUD 4 per share, or 4% yield is likely attracting retail investors, but we caution against chasing shares for income. It is not hard to imagine the share price falling more than AUD 4 in a tough year, or even a month for that matter. Hopefully the earnings share price volatility of 2020 has not already been forgotten.

Commonwealth Bank’s consumer lending business, less than 2.5% of loans but we estimate around 8.5% of operating income, includes credit cards which are being impacted by growth in the buy now, pay later, or BNPL, sector. It’s not a surprise the bank is fighting back. It owns 5% of Klarna (50% of Klarna Australia), has the CBA BNPL offering, and a no-interest card called Neo.

Company Profile

Commonwealth Bank is Australia’s largest bank with operations spanning Australia, New Zealand, and Asia. Its core business is the provision of retail, business, and institutional banking services. An exit from wealth management is ongoing, with the bank still holding a 45% stake in Colonial First State. The bank has placed a greater emphasis on banking in recent years.

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

Digital Giants Finally Click Like Button on Nine’s News Content

Management projects the deals to propel an AUD 30 to 40 million EBITDA uplift in fiscal 2022 for the publishing unit. Some of this increase will likely be driven by continuing cost cuts and efficiency improvements. However, we believe the bulk of it is from the new content supply deals—juicy high margin arrangements which finally shift the image of the much-maligned and structurally-challenged division to one that can now much better monetise its (albeit still dwindling) journalistic resources.

Our fiscal 2021 earnings forecasts for Nine are largely intact. But we have increased our EBITDA estimates from fiscal 2022 by 6% on average, giving effect to the uplift from the new content supply agreements (up to three years with Facebook, five years with Google), as well as lifting the expected benefits from management’s relentless focus on costs in the publishing business. More specifically, from our fiscal 2021 publishing EBITDA forecast base of AUD 124 million, we now expect fiscal 2022 EBITDA to be AUD 158 million, up from AUD 120 million. Investors and, more importantly, the journalist community will be keenly watching how these digital platform deals change management’s resource and capital allocation to the publishing division in the future. Judging by the 26% premium that no-moat-rated Nine shares are trading at relative to our intrinsic assessment, it appears investors are betting the publishing unit will become an even bigger cash cow that Nine will milk, in order to fund its growth ambitions for the digital-centric units such as 9Now and Stan. On the other hand, competition is intensifying in the digital space, and we prefer to remain on the conservative side.

Company Profile

Nine Entertainment operates Nine Network, a free-to-air television network spread across five capital cities, as well as in regional Northern New South Wales and Darwin. It also owns Australia’s third-largest portfolio of online digital properties, one that reaches more than 60% of the country’s active online audience. The merger with Fairfax combines Nine’s top-ranked TV

network and the second-largest newspaper group, topped with a collection of quality digital assets in Nine Digital, subscription video on demand operator Stan, and Fairfax’s 59%-owned Domain. It ensures the merged entity remains relevant in the eyes of audiences and advertisers.

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

Ramsay Health Care Ltd

Ramsay’s offer of GBP 2.40 per Spire share represents an enterprise value of GBP 2 billion or EV/EBITDA multiple of 10.9 on pre coronavirus fiscal 2019 earnings. Post-acquisition, our EPS for fiscal years 2023 to 2025 increases by an average of 11%, slightly ahead of the high-single-digit EPS accretion management guided for fiscal 2024. However, we still view the transaction price as fair, with shares still screening as overvalued.

We expect Spire’s revenue to grow at a low-single-digit percent and operating margin to largely be maintained at 10%. In addition, we factor in GBP 26 million in annualised cost synergies from fiscal 2024 through procurement benefits, capacity utilisation and a reduction in administrative costs. The scheme is first subject to a Spire shareholder vote expected in July 2021, followed by a likely 12-month review process by the U.K. Competition Market Authority, or CMA. Ramsay’s 8% market share combined with Spire’s 17% would create the largest independent hospital operator in the U.K., but at most we anticipate CMA may require Ramsay to divest certain hospitals or clinics. Accordingly, we forecast full integration and control in fiscal 2023 and full realization of synergies in fiscal 2024.

We view the acquisition as strategically sound, in addition to extending Ramsay’s geographic reach. Spire provides more exposure to private revenue streams and higher acuity inpatient admissions. This complements and balances Ramsay’s U.K. case mix, which is dominated by day patients and revenue sourced from the National Health Service. We anticipate Ramsay to fund the deal through existing debt facilities and still afford a 50% dividend payout ratio. However, Ramsay indicated potential capital management initiatives or asset sales to deleverage its balance sheet if needed.

Profile.

Ramsay Health Care is the fifth-largest global private hospital operator with approximately 480 locations in 11 countries. The key markets in which it operates are Australia, France, the U.K., Sweden and Norway. It is the largest private hospital group in each of these markets other than Norway where it is number two and the U.K. where it ranks fourth. Ramsay Health Care has a history of acquisitive growth, with the most recent acquisition being that of Stockholm-listed Capio AB in November 2018. 51%-owned Ramsay General de Sante is listed on Euro next Paris. Ramsay Health Care undertakes both private and publicly funded healthcare.

Source:Morningstar

Disclaimer

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

Scentre Group – Shares Still Look Undervalued

However, the group faces challenges from consumers closing their wallets in 2020 due to the coronavirus, and from e-commerce taking a greater share of spending over time. The business has been allocating more space to food, entertainment and services in response to online competition undermining the rent it receives from discretionary retailers. We expect tenants will resist agreeing to traditional annual increases above CPI without corresponding revenue growth. As such, we forecast lower income growth in the long run, weighing on property values.

Key Investment Consideration

Under pressure specialty tenants pay higher rent per square metre than anchor tenants, and therefore drive Scentre Group’s profitability.

Scentre Group has high leverage, and has so far resisted raising equity in 2020, unlike other retail REITs. It can persevere, but we think it needs an improved operating environment in calendar 2021 to avoid an equity raise. OThe quality of Scentre’s assets will ensure they remain pre-eminent shopping destinations in Australia, but we expect e commerce will undermine its pricing power.

Our base case is Scentre either avoids an equity raise, or takes advantage of a rally in sentiment towards REITs to issue equity at less dilutive prices. But we include a dilutive equity raise in our bear case. A realistic possibility is something in between, perhaps a smaller rights issue at a less dilutive price, when markets are optimistic about recovery.

It’s possible our very high uncertainty rating could reduce if operational performance improves once distancing requirements fade, and Scentre reduces debt. With income underpinned by contractual leases under nearly all circumstances, Scentre’s revenue is much more predictable than many other companies. However, the pandemic is one of those rare circumstances, and until that subsides uncertainty remains.

Australian shopping centres are in better shape than their counterparts in the United States, due to lower retail space per person, and a larger share of anchor tenants such as supermarkets.

Population growth in Australia was among the fastest in the developed world until coronavirus. If immigration recovers it would provide infill demand at Scentre’s assets.

Despite retail spending switching online, retailers still need a physical presence to maintain their brand. Premium retailers have little choice but to locate shops in the malls of Scentre and a handful of other groups, given the quality of locations and centres.

While Scentre has one of the highest-quality shopping centre portfolios in Australia, rents are higher than for convenience focused centres, and high end consumer goods are most at risk from online competition.

In response to online competition, Scentre Group has remixed its tenant profile towards food, entertainment and services. However, these categories are more sensitive to social distancing preferences, and typically require higher tenant incentives and maintenance capital expenditure.

Retail space per person is higher in Australia than it is in Europe, and the amount of floorspace devoted to under pressure department stores is high. High end malls in the U.S. may benefit from the closure of marginal malls, but outright closures of rival malls is likely to be less frequent in Australia.

 (Source: Morningstar)

Disclaimer

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

Federated Hermes MDT Small Cap Growth

Modern financier with papers sitting in front of computer monitor with chart and graph of sales rate

He is responsible for the model and research and draws on seven managers/analysts. Frederick Konopka also became a manager in 2008 and handles portfolio construction and trading for the team. MDT looks to group companies into different baskets producing various streams of alpha potential using valuation, growth, momentum, and quality indicators.

By using classification and regression tree analysis, the team can test thousands of potential combinations of factors based on 30-plus years of U.S. stock data to find the best mixtures of alpha using a three-month investment horizon. Still, such a short investment horizon can be difficult to implement. It leads to annual portfolio turnover that can be lofty and varies greatly. Over the past five years, turnover ranged from 188% to 227%, well above the 59%-66% range for the typical small-growth. The portfolio’s holdings have varied from 150 to 250, suggesting some opportunities may be too illiquid and costly to pursue unless they’re spread out across more holdings.

Since Mahr became lead manager in August 2008, the Institutional shares’ 11.9% annualized return through April 2021 lagged the small growth category’s 12.2% gain and the Russell 2000 Growth Index’s 12.2% rise. The fund has performed better since the team’s 2013 process switch to multiple decision trees, but the fund’s high volatility has kept its risk-adjusted results in line with the index.

Quantitative approach with short focus

MDT groups companies into different baskets of alpha potential. The team forecasts three month returns using valuation factors based on structural earnings, tangible book value, and forward earnings estimates; growth factors like analyst conviction and long-term earnings growth; quality factors measuring free cash flow, leverage, and reliance on external capital; and momentum factors like relative stock price trend. The team uses classification and regression tree analysis to test thousands of potential combinations based on 30-plus years of U.S. stock data.

Prior to 2013, the team used one large decision tree to forecast alpha, but that approach was subject to overfitting issues. Switching to regression analysis using multiple decision trees resulted in combinations of subsets of the factors with the best alpha potential. This leads to the fund holding stocks with different avenues to produce alpha, potentially leading to more opportunities to outperform. The MDT team continues to refine its model, usually updating the model twice a year. These revisions are typically on the margin, though. In 2020, for example, they adjusted their structural earnings indicator by using an industry relative basis.

Diversified, but high turnover

The strategy’s short-term approach has led to higher turnover than most smallgrowth peers. Its annual portfolio turnover range of 118%-227% the past five years is much higher than the median range of 59%-66%. The fund might struggle to maintain its fast-trading ways if assets hit the team’s $8 billion-$10 billion estimate of its small-cap capacity, which includes this strategy, Federated MDT Small Cap Core QISCX, and Federated MDT Small Cap Value. So far, the team is not near that limit, with around $2 billion across its small-cap charges. However, the portfolio’s number of holdings has varied from 150 to 250, suggesting some opportunities may be too illiquid and costly to pursue unless their potential alpha is spread out across more holdings. This could become more pronounced as the asset base grows

Performance – Volatile

The fund’s absolute and risk-adjusted returns lag the Russell 2000 Growth Index during lead manager Dan Mahr’s tenure. Since Mahr took over in August 2008, the Institutional shares’ 11.9% annualized return through April 2021 trailed the small-growth category’s 12.2% gain and the Russell 2000 Growth Index’s 12.2% rise. It has done so with more volatility than the benchmark, resulting in subpar riskadjusted performance measures, like the Sharpe ratio. Most of the fund’s underperformance has come during market turbulence. Mahr’s Aug. 31, 2008,start date means he took over amid the credit crisis, and the fund barely edged the benchmark through that period’s March 9, 2009, bottom. The fund lagged the bogy’s ensuing trough-to-peak (April 23, 2010) performance by 26.6 percentage points, annualized.

(Source: Morning star)

Disclaimer

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

Xiaomi Produces Record Smartphone Sales and Gross Margins; FVE Raised to HKD 20.70

The smartphone gross margin of 12.9% was up 480 basis points on the previous corresponding period. Up until third-quarter 2020 Xiaomi’s smartphone gross margins averaged 7.5% and never rose above 9% in any quarter. Fourth quarter last year these margins increased to 10.5% and then jumped to 12.9% in the first quarter. The smartphone performance drove consolidated operating profit (less investment gains) up 161% with an 8% consolidated operating margin, much better than its previous best quarterly operating margin of 6.1% in second-quarter 2019. Huawei’s retreat seems to have lifted margins across the industry with Samsung’s smartphone business and Apple’s consolidated business also reporting their best operating profit margins since 2016. We lift our fair value estimate to HKD 20.70 from HKD 16.30 previously due mainly to increased gross margin forecasts in the smartphone business as well as increased smartphone revenue growth forecasts in 2021, with the lift in the value of Xiaomi’s investment portfolio over the quarter and a slightly stronger CNY also helping. Our no-moat rating is retained as we believe Xiaomi is predominantly an electronics hardware supplier with limited switching costs with its internet services business not yet well enough developed to assign a moat to. On our estimates Xiaomi currently trades on a 2021 price/earnings ratio of 31 times. Despite Xiaomi’s growing Internet of Things and lifestyle services business revenue giving it some differentiation from other consumer electronics peers, we believe this multiple is still above what could be reasonably justified.

Xiaomi’s smartphone segment had another strong quarter with Xiaomi’s total number of smartphones sold globally rising by 69% and smartphone revenue increasing by 70% from the previous year. Smartphone gross profit was up 170% with gross profit margin increasing to 12.9% from 8.1% in first-quarter 2020. Until the third quarter of 2020, the average smartphone gross margin for the previous 15 quarters had been 7.5% with a range of 3.3% to 9%. The margin then jumped to 10.5% in fourth-quarter 2020 and 12.9% in first-quarter 2021. Given Xiaomi generates around two thirds of its revenue from smartphone, its valuation is very sensitive to the smartphone gross margin assumption. If we double the smartphone gross margin assumption from 7.5% to (say) 15%, holding all other assumptions equal, Xiaomi’s valuation nearly doubles. Xiaomi pointed toward the shift in product mix toward higher end smartphones and reduced marketing and promotion spend given tightness in the semiconductor supply chain as the key drivers for the margin increase.

We estimate that reduced competitive intensity from Huawei has probably also helped smartphone industry margins and there may also be some premium attached to 5G phones. In the first-quarter 2021, key competitor, Samsung, reported its highest quarterly smartphone operating margin since the second quarter of 2016. The first quarter also saw Apple reporting its highest quarterly company operating margin since first quarter of 2016.

Xiaomi admitted that gross margin expansion had not been its main focus nor does it expect it to be in the near future as it is quite rightly focused on increasing market share, particularly in the mid-high end phone segment. It expects future growth to come from increased penetration into the offline segment in China as it is currently expanding its store footprint with a target of around 10,000 stores by the end of 2021. We forecast Xiaomi to grow its smartphone revenue by 44% in 2021 and at an average of 18% per year thereafter out to 2025 and assume its smartphone gross profit margin increases from 11.0% in 2021 to 11.4% in 2025 having lifted these assumptions by around 200 basis points following this result.

Revenue from the Internet of Things and lifestyle products segment increased by 41% year over year in the first quarter after growing by 8.6% in 2020. We note that the prior period was negatively impacted by COVID-19. Gross margin increased to 14.5%, which was also a quarterly record. Management had previously indicated that it had proactively reduced the number of stocks keeping units in this division to focus more on those products that interworked with the smartphone ecosystem. The company indicated that global shipments of its smart TVs were down 4% to 2.6 million for the first quarter. Larger television competitor, TCL, reported global TV sales volumes up 33% for the first quarter with TV sales in China up 8.3% and non-China sales up 43%. We forecast that Xiaomi can grow its Internet of Things and lifestyle products revenue by an average of 15.1% per year out to 2025 with gross margins averaging 12.0%.

Revenue from internet services was below expectations, increasing by 11.4% year over year in the first quarter after growing at 20% in 2020. Monthly active users, or MAUs, of its Mi User Interface increased to 425 million at the end of March from 396 million at the end of December 2020 and were up 29% year on year. However, average revenue per user was down 13% to CNY 5.3 per month. Advertising revenue was strong growing by 20% to CNY 3.6 billion and making up 58% of total internet services revenue. This is mainly driven by smartphone sales with the improved mix of higher end smartphones helping Xiaomi to grow the preinstalled app revenue. The high percentage of advertising revenue and improved margins from the fintech business drove internet services gross margin to 68.4% for the quarter. We believe the dominance of advertising in this revenue stream speaks to the difficulties Xiaomi has faced in building non-hardware-related internet revenue streams. We forecast internet services revenue growth of 20% per year to 2025 noting that growth in first-quarter 2021, internet services revenue was slower because of the very high gaming revenue in first-quarter 2020 due to the pandemic.

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

Best Buy Co Inc

Revenue was $11.6 billion, up from $8.6 billion in 2021’s first quarter and ahead of our $10.4 billion forecast. Comparable sales were up 37.2%, bolstered by the domestic appliance segment (comps up 67%), which the firm attributed to economic stimulus and sustained spending on the home. Best Buy’s 6.6% operating margin was ahead of the 2.7% result in fiscal 2021 and our 3% projection and reflected an improvement over 2020’s first-quarter result of 3.7%. Fiscal 2022 first-quarter EPS came in at $2.32, well above our $0.90 estimate. For comparison, first-quarter 2020 EPS was $0.98.

While these results were impressive, we are skeptical about their sustainability as economic stimulus payments are set to end and other disposable income options are increasing. Management’s second-quarter guidance indicates a deceleration of comps (17%) and a flat gross margin compared with 2021 (22.9%). For the full year, we expect comps around 5% (in line with updated guidance of 3%-6%), flat year-over-year gross margins, and a slight increase in selling, general, and administrative expense. We don’t plan a material change to our $101 fair value estimate and view the shares as overvalued, given the headwinds Best Buy faces.

One notable takeaway in Best Buy’s favor was the efficacy of its e-commerce and omni channel strategy despite the reopening of physical stores. Sixty percent of online orders were fulfilled from a Best Buy store via shipping, delivery, or pickup in store. Additionally, online orders made up 33% of domestic sales, compared with 15% in 2020. The firm is planning to capitalize on this with its new Best Buy Beta loyalty program, which offers perks including same-day delivery and special member pricing. For Best Buy to remain competitive after COVID-19, an evolving e-commerce plan is imperative.

Profile

Best Buy is one of the largest consumer electronics retailers in the U.S., with product and service sales representing more than 9% of the $450 billion-plus in personal consumer electronics and appliances expenditures in 2019 (based on estimates from the U.S. Bureau of Economic Analysis). The company is focused on accelerating online sales growth, improving its multichannel customer experience, developing new in-store and in-home service offerings, optimizing its U.S., Canada, and Mexico retail store square footage, lowering cost of goods sold expenses through supply-chain efficiencies, and reducing selling, general, and administrative costs.

Source:Morningstar

Disclaimer

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

Change Healthcare Inc

UnitedHealth still plans to purchase Change for $25.75 per share, which is our fair value estimate. However, in March, U.S. antitrust regulators announced an extension of that merger’s review period, and if the deal doesn’t close because of regulatory concerns, we would reduce the value of Change to our stand-alone fair value estimate of $16.50.

In the quarter, Change beat consensus on both the top and bottom lines. Revenue grew 1% to $855 million, above FactSet consensus of $846 million. With cost controls likely due to rightsizing before the pending acquisition, Change turned that slight revenue beat into a bigger profit beat. The company turned in adjusted EBITDA of $272 million (above consensus of $254 million) and adjusted EPS of $0.42 (above consensus of $0.36).

On the pending merger with UnitedHealth, both the acquirer and the target look committed to the deal, but regulators have thrown a wrench into the process. Based on recent commentary from UnitedHealth, there appears to be no major financing concerns or red flags from the perspective of the potential acquirer, and Change shareholders voted to approve the merger in April, as well. However, the Department of Justice announced an extended antitrust review on the combination in March after receiving a letter from the American Hospital Association about the combination, citing concerns about sensitive healthcare data shifting hands from Change (a neutral third party) to UnitedHealth’s Optum segment (a subsidiary of the largest U.S. health insurer and a large caregiver, too). The AHA suggested that the shift could give UnitedHealth an unfair advantage in its legacy businesses by seeing competitive claims processed in Change’s clearinghouse business. Concerns like that add uncertainty about whether the deal will close.

Profile

Change Healthcare is a spin-off of various healthcare processing and consulting services acquired by McKesson over numerous years. Recently, these processing assets were contributed to a joint venture and in June 2019 public shares were issued with McKesson retaining the majority interest. As of the end of the March 2020 quarter, McKesson distributed all its interest in the public processor. Core services consist of insurance (healthcare) claim clearinghouse for healthcare payers in addition to administrative and consulting services to assist healthcare providers improve reimbursement coding, billing, and collections.

Source:Morningstar

Disclaimer

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.