Category: Shares

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Shares Small Cap

Rocket Remains in Strong Competitive Position, but Higher Rates Will Lead to Lower Earnings in 2022

price of btc is going to breakout

Business Strategy & Outlook

While Rocket Companies offers a variety of products and services, the firm is best known for its Rocket Mortgage segment, which provides Rocket with most of its revenue. The mortgage industry is fractured and highly competitive, but Rocket has distinguished itself by operating as an entirely digitally lender, originating and servicing its mortgages through its mobile app and website. Rocket has made substantial investments in automating the mortgage process and has been an industry leader in increasing loan processing speed and removing pain points for consumers. These investments along with its control over the appraisal and titling process, through its ownership of Amrock, have allowed the firm to offer an industry-leading mortgage experience to borrowers while also enjoying a cost structure advantage over its competitors. As a digital lender Rocket is able to scale its capacity for mortgage volume up or down quickly since each loan requires less manual attention. This flexibility will be needed as rising mortgage rates push mortgage origination volume well below their 2020 and 2021 highs. Rocket is particularly exposed to this trend as it is strongest in refinance activity and price sensitive first-time homebuyers. As origination activity is curtailed by higher interest rates, the Rocket’s revenue and earnings to fall from 2021, particularly as pricing in the mortgage secondary market has cooled down.

That said, through the full cycle that Rocket will continue to gain market share from other lenders. Consumers have become more comfortable with conducting their finances digitally during the pandemic, and digital lenders, like Rocket, have benefited from this tailwind. Rocket has had strong success in expanding its partner network. New partnerships with firms like Mint and Morgan Stanley, in which these firms offer Rocket’s mortgages to their customers, will help drive growth. While Rocket’s revenue and earnings will likely remain volatile, a symptom of the cyclical nature of the mortgage industry, the company’s strong competitive position and trends in consumer behavior will provide it with long-term secular growth.

Financial Strengths

Rocket operates in a highly cyclical industry, as a result its revenue and earnings have the potential to drop sharply due to economic factors completely out of its control. While Rocket does resell the mortgages it makes within days of origination, the sheer volume of mortgages that Rocket creates means that the company has billions in mortgage debt on its balance sheet at any given point in time. At the end of December, Rocket had more than $19 billion in mortgages, which were financed by equity and less than $13 billion in funding facilities. The combination of volatile revenue and substantial funding needs means that Rocket’s financial strength is an important factor to watch, particularly during slower markets. Despite this, no one can have any significant concerns about Rocket’s financial health at this time. The company has a strong balance sheet and has been able to maintain constant profitability, even during slow periods for mortgage origination. Rocket had over $2.1 billion in cash at the end of December 2021 and only $6 billion in debt not directly tied to its mortgage holdings. With net debt of roughly 1.5 times that projected 2023 EBITDA, Rocket should have more than enough financial resources to see it through a slow mortgage market, should one develop.

Bulls Say

  • Rocket has been steadily gaining market share in both its direct-to-consumer and partner network mortgage origination channels. 
  • Rocket’s digital origination model gives it a cost advantage over its peers and allows it to respond rapidly to market developments. 
  • Rocket has been able to sign major partnerships to expand its partner network. Deals with Morgan Stanley and Intuit’s Mint represent major wins for the company.

Company Description

Rocket Companies is a financial services company that was originally founded as Rock Financial in 1985 and is currently based in Detroit. Rocket Companies offers a wide array of services and products but is best known for its Rocket Mortgage business. The company’s mortgage lending operations are split between its direct-to-consumer lending, which sees borrowers accessing the company’s lending arm directly through either its mobile app or website, and its partner network where mortgage brokers and other firms use Rocket’s origination process to offer loans to their customers. The company has rapidly gained market share in recent years and is now the largest mortgage originator in the U.S. as well as the servicer for more than 2 million loans. 

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

Nanosonics’ Third Quarter Largely Consistent With its Second; Shares appear Modestly Overvalued

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Business Strategy & Outlook:   

Nanosonics’ trophon solution for high-level disinfection, or HLD, of ultrasound probes has garnered substantial market share, as evidenced by penetration of over 75% in Australia and New Zealand and 40% in North America. The elevated growth over the next three years as Trophon continues to gain share in North America and launch in Japan, but high market penetration may be more challenging to achieve in developing economies, which may not be able to prioritise nuanced disinfection standards. Moreover, the device patent expires in 2025, leading to slower volume growth in the medium term. Nonetheless, Nanosonics has a razor-and-blade business model and the installed trophon base supports an ongoing revenue stream from high margin consumables. In 2021 consumables contributed 63% of group revenue. The consumables revenue stream as more secure as its protected from generic substitution until fiscal 2029, and forecast these sales climbing to over 70% of Trophon revenue over the next 10 years. 

Nanosonics primarily distributes via GE Healthcare, its partner across multiple geographies. Recently Nanosonics established a direct sales team in North America, adding to the operating cost base, however, it is expected to see expanding gross margins from this and increasing revenue contribution from consumables. The estimated consumables to roughly earn a gross margin of 85% and devices 65% by fiscal 2026. Outside of trophon, the company expects to launch a new product in flexible endoscope cleaning in 2023. Previously, management intimated the addressable market to be equivalent to trophon and there is greater awareness of the infection issue this product addresses. The broad assumptions of a similar roll-out pattern to trophon from fiscal 2024 onwards and equivalent margins. This supports the views that consolidated companys EBITDA margins will climb to 35% by fiscal 2031 versus 14% in fiscal 2021. The pipeline product contributes roughly 16% of the fair value.

Financial Strengths:  

Nanosonics is in a net cash position and free cash flow positive. The operating model does not require significant capital investment, with the key investments for growth stemming from ongoing R&D spending, building out a salesforce and working capital. Despite having 60-day terms from distribution partners, the current net investment in working capital runs at approximately 28% of revenue due to high inventory holding levels which average roughly 200 days in stock. The forecasted net investment in working capital to remain in line with historical figures, but note it is possible to elevate in the near term as inventory is built up prior to the new product launch and in the early roll-out phase. The company first posted a profit in fiscal 2016 and is yet to pay a dividend, nor it is expected in the future as it invests in underpenetrated markets and its pipeline product. However, the company has free cash flow positive and they forecast it to convert roughly 72% of net income into free cash flow in a typical year.

Bulls Say: 

  • Nanosonics is the market leader in automated HLD of ultrasound probes with significant further market penetration potential in most regions.
  • Establishing its direct distribution model should increase the gross margins achieved by Nanosonics once it reaches critical mass.
  • The company has reached a pivotal point where higher margin consumables dominate the revenue stream. This revenue stream is also protected by patents and the installed trophon device base.

Company Description:  

Nanosonics is a single-product company and its trophon device provides high-level disinfection, or HLD, of ultrasound probes used in semi-critical procedures. The patented technology uses low temperature sonically activated hydrogen peroxide mist that is suitable for probes sensitive to damage. Automated HLD is increasingly being adopted as the standard of care globally as it is superior in preventing cross-infection across patients. Nanosonics’ revenue is made up of capital sales of trophon units, ongoing consumables sales, and service revenue. At June 2021, there were 26,750 trophon units installed globally. Market penetration rates range from over 75% in Australia and New Zealand, roughly 40% in the United States to low-single-digit penetration in EMEA and elsewhere in Asia-Pacific.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

Kilroy Realty Corp: Vacancy rates in Los Angeles and San Francisco office markets were recorded at 20.8% and 21.9% respectively in Q1 2022

Business Strategy and Outlook

Kilroy Realty is a REIT that owns, develops, acquires, and manages premier office, life science, and mixed-use real estate properties in Los Angeles, San Diego, San Francisco Bay Area, Seattle, and Austin. It owns over 115 properties consisting of approximately 15 million square feet. The company has positioned itself to benefit from the burgeoning life sciences sector with material exposure in its current portfolio and future development pipeline. It is also greeted, management’s focus on ESG as it aligns its office portfolio to meet the sustainability requirements of its clients.

Kilroy’s management has been able to successfully time the boom in technological employment occurring in the largest metropolitan areas along the West Coast. The company’s strategy is to achieve long-term sustainable growth by developing and owning the highest quality real estate in technology and life science market clusters. The quality of their portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers. 

The economic uncertainty emanating from pandemic recovery and the remote work dynamic have together created a challenging environment for office owners. Employees are still hesitant at returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rates in Los Angeles and San Francisco office markets were recorded at 20.8% and 21.9% respectively in Q1 2022. The current vacancy rate in both these cities is substantially higher than the vacancy rates during the height of the global financial crisis. The net absorption rate in West Coast markets remains negative to marginally positive as of Q1 2022 and rental growth figures are disappointing especially given the inflationary environment. Having said this, it can be seen that an increasing number of companies requiring their employees to return to the office. In the long run, it is held that that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centrepiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strength

Kilroy Realty is in sound financial health. The company’s total debt was $4.1 billion as of the end of the first quarter in 2022, resulting in a debt/EBITDA ratio of 6.6 times. It can be pointed out that the debt/EBITDA ratio should trend lower over the next few years as fundamentals recover and EBITDA sees healthy growth. The weighted average interest rate on the company’s debt was 3.70% and the weighted average maturity period was 7.0 years. The maturity schedule of the company’s debt shows that there are no major debt maturities until the end of 2024 and the maturities are adequately spread. It can also be appreciated that the fact that in an increasing interest rate environment 100% of the company’s debt is fixed-rate debt. It is held that the leverage used by the company to fund its capital structure is appropriate given the high-quality office portfolio. The fixed-charge coverage ratio, which is a ratio of EBITDA divided by all fixed expenses (including interest expenses), was 3.5 times and the interest coverage ratio was 8.4 times as of the end of the first quarter of 2022. As a real estate investment trust, Kilroy Realty is required to pay out at least 90% of its income as dividends to shareholders. The FAD pay-out ratio which is a ratio of dividends to funds available for distribution was reported at 67.0% for the year 2021. This shows that the company is generating sufficient cash to cover its fixed expenses and pay-out dividends. The company is also in a comfortable position with respect to liquidity as it has a robust liquidity position of around $1.4 billion including the cash on the balance sheet and the revolving credit facility. This gives the firm enough flexibility to fund its operations, pay dividends, pursue inorganic growth, and invest in organic development opportunities.

Bulls Say’s

  • Kilroy’s focus on technology and life science market clusters should benefit the firm in the long run as wit is alleged that buoyant growth in these areas. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend. 
  • Kilroy’s management team has demonstrated that it is able to successfully recycle capital and pursue growth over the past business cycle. 
  • Regulatory barriers to construction in West Coast cities such as Los Angeles and San Francisco mean Kilroy will continue to benefit from muted supply.

Company Profile 

Kilroy Realty is a premier owner and landlord of approximately 15 million square feet of office space across Los Angeles, San Diego, the San Francisco Bay Area, and greater Seattle. The company operates as a real estate investment trust. 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Conagra’s Brands Are Performing Well Despite Inflation and Supply Chain Challenges

Business Strategy & Outlook

When CEO Sean Connolly was brought in to turn around a struggling Conagra in 2015, he implemented a new brand building strategy referred to as the Conagra Way. The process calls for using data to identify product attributes that are driving growth and designing products to reflect those traits. The strategy also increases the productivity of marketing investments by shifting spend to the more efficient digital channel and to higher potential brands. In addition, the firm has significantly reshaped its portfolio inorganically, shedding non-branded or noncore businesses and acquiring brands that enhance the firm’s growth and/or profit margins. As a result, in recent years, sales have inflected from declines to growth, and from market share losses to modest gains. The pandemic, which resulted in four and a half years of incremental new buyers and saved the firm hundreds of millions of dollars in customer acquisition costs, will accelerate the benefits Conagra is reaping from these efforts, as many new consumers have been exposed to its new fare. Once the food retail market normalizes post-pandemic, the Conagra can realize 2% annual organic sales growth. In addition, Conagra has identified over $700 million in supply chain efficiencies, which should result in operating margins that exceed 18% over the long term, up from fiscal 2021’s 17.5% metric.

Despite these efforts, an enduring competitive advantage via its brand assets or entrenched retail relationships remains elusive. Conagra maintains many market-leading brands, which makes it an important partner to retailers. However, Conagra’s commitment to maintaining below-average investments in marketing (about 2.4% of revenue on average over the past three years compared with the 4.6% peer average) and research and development (0.5% of revenue compared with the 0.8% peer average) weakens the conviction that Conagra can maintain its preferred status with retailers over the next 10 years, as required for a narrow moat designation.

Financial Strengths

Conagra’s net debt/adjusted EBITDA averaged 2.7 times in the three years before the $10.9 billion Pinnacle Foods acquisition in fiscal 2019. After the deal, leverage reached 5.8 times in fiscal 2019, and the expected share repurchases and additional acquisitions will remain limited until leverage reaches 2.3 times in 2025. Over the next five years, the expected average interest coverage (EBITDA/interest expense) of 8 times, in line with the peer average. One cannot have concerns about the firm’s inability to meet its debt obligations, as cash flows are relatively stable. The model share repurchases increasing meaningfully in 2025 (assuming the absence of acquisitions), with Conagra buying back about 1%-3% of outstanding shares annually, which as a prudent use of cash when the shares trade below the assessment of intrinsic value. The firm repurchased a significant amount of shares in fiscal 2017 and 2018, but as they were trading above the estimate of intrinsic value, one cannot view the transactions as judicious uses of capital. Although Conagra will likely make acquisitions once it reduces debt, one cannot have modeled future transactions, given the uncertain timing and magnitude. Instead, the model excess cash flows being used to repurchase shares. Conagra resumed dividend growth in fiscal 2021, after foregoing increases following the Pinnacle acquisition, to focus on debt reduction. Conagra announced a further 20% increase in the quarterly dividend during fiscal 2022 to $0.3125, and the high-single-digit annual increases thereafter. Over the next 10 years, the Conagra’s payout ratio to range from mid-40% to low-50%. Finally, the firm to spend 3%-4% of revenue on capital expenditures on average each year.

Bulls Say

  • Conagra is utilizing a unique data-driven innovation approach, which has allowed many of its brands to gain market share.
  • After significant portfolio reshaping, now 64% of Conagra’s sales stem from the high growth categories of frozen foods and snacks.
  • Over $700 million in supply chain efficiencies and positive mix should facilitate about 100 basis points of operating margin expansion in the next 10 years to over 18%.

Company Description

Conagra Brands is a packaged food company that operates predominantly in the United States (over 90% of revenue and profits). It has a significant presence in the freezer aisle, with brands such as Marie Callender’s, Healthy Choice, Banquet, and Birds Eye. Other popular brands include Duncan Hines, Hunt’s, Slim Jim, Vlasic, Orville Redenbacher’s, Reddi-Wip, Wish-Bone and Chef Boyardee. While the majority of revenue is sold into the U.S. retail channel, 7% of fiscal 2021 sales were to the food-service channel, down from 11% in fiscal 2019 due to the pandemic.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Aggregates producer Vulcan Materials is well positioned to benefit from the ongoing recovery of U.S

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Business Strategy and Outlook

Aggregates producer Vulcan Materials is well positioned to benefit from the ongoing recovery of U.S. construction spending. It is forecasted strengthening demand growth for the public sector and modest growth for the private sector. Accounting for roughly half of shipments, public-sector demand is generally more stable, and projects, primarily highway construction, are more aggregate-intensive per dollar of spending. At a national level, it is expected public infrastructure spending to grow by 6% per year on average, an acceleration from the last couple of decades. Federal funding power has weakened as better vehicle mileage and inflation have diminished the buying power of the $0.18 per gallon gasoline tax, unchanged since 1993. The FAST Act, passed in December 2015, provided stability and near-term funding certainty, but didn’t solve the still-weakening gas tax. However, long-term federal funding was passed in late 2021, totalling $1.2 trillion.

The outlook for road spending differs considerably from state to state. Differences in population growth, road conditions, funding mechanisms, and overall state fiscal health influence spending. Vulcan’s largest states by revenue–Texas, California, Virginia, Tennessee, and Georgia–have significant road spending needs and strong finances to support high growth. Private-sector demand consists of residential and nonresidential construction, including commercial and industrial properties. Nonresidential construction is the most important driver in the category, as spending is more material-intensive per dollar than residential construction. It is forecasted that the nonresidential spending growth to slow to 4% in the longer term, as many key sectors to make more efficient use of their construction spending. Additionally, it is expected residential starts to converge the long-term housing-start forecast of 1.5 million by 2030. Residential construction historically supports nonresidential construction growth.

Financial Strength

At the end of the fourth quarter of 2021, net leverage was roughly 2.5 times net debt/adjusted EBITDA, compared with the company’s target of roughly 2-2.5 times. Continued improvement in construction markets should help leverage to improve further, falling below 1 times net debt/adjusted EBITDA by the end of 2024, all else equal. The weighted average debt maturity is 11 years (as of year-end 2021), so maturities look quite manageable.

In June 2021, Vulcan announced the acquisition of U.S. Concrete. Given the healthy balance sheet before the close, the deal is unlikely to hamper Vulcan’s financial health. This case is bolstered by the relatively smaller size of U.S. Concrete. With the poorly timed and expensive acquisition of Florida Rock Industries in 2007, Vulcan’s debt surged from roughly $500 million to $3.7 billion. Combined with the recession that devastated construction activity, Vulcan’s leverage soared to more than 8 times debt/adjusted EBITDA. The company took difficult but important steps to protect its cash flow and improve its balance sheet in the aftermath. The company learned a lesson, given its current approach to M&A with more discipline. The acquisition of Aggregates USA in 2017 exemplifies Vulcan’s more disciplined, balance sheet-friendly approach

Bulls Say’s

  • Vulcan has a favourable geographic footprint in states that have a strong need for increased road work and the capability to fund it. 
  • Not-in-my-backyard tendencies make the permitting process incredibly difficult for new quarries, forming high barriers to entry and protecting Vulcan’s business from incoming entrants. 
  • Vulcan has made significant progress on its costcutting initiatives, demonstrated by its improving cost per ton despite relatively flattish demand.

Company Profile 

Vulcan Materials is the United States’ largest producer of construction aggregates (crushed stone, sand, and gravel). Its largest markets include Texas, California, Virginia, Tennessee, Georgia, Florida, North Carolina, and Alabama. In 2021, Vulcan sold 222.9 million tons of aggregates, 11.4 million tons of asphalt mix, and 5.6 million cubic yards of ready-mix. As of Dec. 31, 2021, the company had nearly 16 billion tons of aggregates reserves

(Source: Morning Star)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Global stocks Shares

Activewear Is a Growth Category, but Under Armour Lacks a Competitive Edge

Business Strategy & Outlook

The Under Armour as lacking an economic moat, given its failure to build a competitive advantage over other athletic apparel firms. Between 2008 and 2016, Under Armour’s North American sales (around 70% of its consolidated base) increased to $4 billion from $700 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). However, its North America sales have not grown over the past five years as it restructured and demand for performance gear, Under Armour’s primary category, has lagged that of athleisure. While sales of all activewear have been strong during the pandemic, the long-term benefits for Under Armour will be limited as compared with global brands wide-moat Nike and narrow-moat Adidas. A Under Armour has fallen behind on innovation and its product is not sufficiently differentiated.

Under Armour has recently had problems in both its direct-to-consumer and wholesale businesses. Although sales through its direct-to-consumer channels increased to $2.3 billion in 2021 from $1.5 billion in 2016 (calendar years), Nike and others have experienced much greater direct-to-consumer growth in this period. Under Armour has opened its own stores as wholesale distribution has slowed, but 90% of them in North America are off-price. Still, its direct-to-consumer revenue will rise to 61% of total revenue in fiscal 2032 from 42% in its last fiscal year. This should allow Under Armour to have better control over its brand, but one cannot see evidence that it allows for premium pricing and see it as a defensive move. The Under Armour’s international segment will produce growth over the long term, but the firm faces significant competition from global and native operators with established brands and distribution networks. According to Euromonitor, the combined sportswear markets in Asia-Pacific and Western Europe were about $160 billion in 2021, greater than North America’s roughly $140 billion. As Under Armour generates only about 30% of its revenue in Europe and Asia-Pacific, it has room for growth, but it lacks strong retail partnerships and brand recognition.

Financial Strengths

The Under Armour has enough liquidity to get through COVID-19 even as the effects have not fully passed. Prior to the crisis, the firm’s long-term debt consisted only of $593 million in 3.25% senior unsecured notes that mature in 2026. Then, in May 2020, Under Armour completed an offering of $500 million in 1.5% convertible senior notes that mature in 2024. However, as this additional funding has proven to be unnecessary, the firm has already paid down more than 80% of this convertible debt. Even after these debt repayments, at the end of March 2022, the firm had $1 billion in cash and $1.1 billion in borrowing capacity under its revolver. Thus, the Under Armour to operate in a net cash position for the foreseeable future. Under Armour’s free cash flow to equity has recovered from the pandemic impact, totaling about $850 million over the past two fiscal years. The forecast about $5.6 billion in free cash flow generation over the next decade. Although the firm does not pay dividends, it recently authorized its first share buyback program. The firm repurchased $300 million in shares in February 2022, and the forecast another $20 million in buybacks in fiscal 2023. Moreover, Under Armour’s restructuring has reduced base operating expenses by about $200 million, and the forecast its capital expenditures will remain low at about 2% of sales. The firm may use some of its free cash flow for acquisitions, but one cannot forecast acquisitions due to the uncertainty concerning timing and size. Although its growth has been largely organic, the firm acquired three fitness apps for a combined $710 million in past years as part of a strategy that has been mostly abandoned. It has also made some smaller investments, such as an investment of $39.2 million in its Japanese licensee, Dome, in 2018 to raise its ownership stake to 29.5%. Under Armour later had to write down this investment because of restructuring at Dome.

Bulls Say

  • Under Armour quickly became no-moat Kohl’s second biggest brand after its introduction in 2017. This partnership allows Under Armour to reach more female customers. Kohl’s is expanding shelf space for activewear. 
  • Under Armour’s restructuring has produced an average annual savings of $200 million. The firm can reinvest these savings into marketing and international expansion while improving its operating margins.
  • Under Armour could gain shelf space and distribution as Nike has reduced or eliminated shipments to some major sportswear retailers.

Company Description

Under Armour develops, markets, and distributes athletic apparel, footwear, and accessories in North America and other territories. Consumers of its apparel include professional and amateur athletes, sponsored college and professional teams, and people with active lifestyles. The company sells merchandise through wholesale and direct-to-consumer channels, including e-commerce and more than 400 total global factory house and brand house stores. Under Armour also operates a digital fitness app called MapMyFitness. The Baltimore-based company was founded in 1996.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Shares Small Cap

Waiting to Hear Seven’s Voice on Capital Management

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Business Strategy & Outlook: 

Seven, which generates the majority of its earnings through Seven Network’s free-to-air TV and broadcast video on demand units, offers exposure to the AUD 3.8 billion total Australian television advertising market. It is a media segment that has remained largely flat during the past 10 years, after consistently enjoying growth of about 6% in the preceding decade. The slowing growth has been caused by proliferating digital media alternatives, rapidly changing entertainment consumption habits, and increasing high-speed broadband adoption. Indeed, the structural headwinds have been such that the free-to-air television industry’s share of the Australian total advertising pie has slumped from more than 35% in the mid-2000s to just over 20% now, as advertisers follow eyeballs to digital media platforms. 

Within this mature industry, Seven Network commands the number-one or two position, with a 38%-40% rating and revenue share of the commercial metropolitan free-to-air television market. Its library of extensive sports and general entertainment programming has aided in the rise of these share metrics in recent years. Seven Network can maintain revenue shares at the 38.0% level on a long-term, midcycle basis. The key investment consideration comes down to Seven Network’s EBIT margin outlook. This is important in the face of increasing competition for viewers (from proliferating new digital entertainment options) and for content (from digital upstarts and incumbent television broadcasters). The group’s exposure to the even more structurally challenged print media industry is another key issue facing investors in Seven West Media. Earnings from the newspaper division have slumped from almost AUD 140 million in fiscal 2011 to AUD 28 million in fiscal 2021. However, combined profits from the print media business now account for less than 10% of the group’s total.

Financial Strengths:

The strong progress in balance sheet repair in recent years has vaporised the key concern regarding the group’s financial position. This is reflected in company’s net debt/EBITDA forecast of 0.8 by the end of fiscal 2022.

Bulls Say:  

  • Seven West Media commands a strong position in the Australian free-to-air television industry, with leading ratings and revenue shares.
  • The unique antisiphoning regime in Australia ensures that Seven Network will continue to have a stronghold on marquee live sports programming, such as the Australian Football League, cricket, and other sports events of national importance. 
  • Seven Network creates and produces about 70% of its television programming (excluding sports), far more than its peers, allowing the company to capture much of the content value chain in proliferating media channels.

Company Description: 

Seven West Media operates Seven Network, a free-to-air television network spread across five capital cities, as well as in regional Queensland. It also owns most of the newspapers circulating in Western Australia (including the monopoly Perth title called West Australian Newspapers), as well as the country’s second-largest magazine publishing group (Pacific Magazines). In the Australian online space, it operates broadcast on demand, or BVOD, service called 7plus.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Shares Small Cap

Stericycle’s self-help measures and significant exposure to the growing United States medical waste market

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Business Strategy and Outlook

Since its founding in 1989, Stericycle has been extremely acquisitive, having acquired over 500 companies. On the surface, this acquisitive strategy led to a lengthy period of impressive growth and the firm built unmatched scale. However, acquisitions began to stray from Stericycle’s core competencies and poor integration efforts caused inefficiencies to build. After decades of strong growth and profitability, Stericycle’s financial performance began to deteriorate in 2017. However, with a refreshed management team, led by CEO Cindy Miller, it is now seen Stericycle has turned the corner. With Miller at the helm, Stericycle has divested low-margin, noncore businesses, most notably, environmental solutions. The enterprise resource planning implementation project continues, and it is likely to be completed within the next couple of years. A common ERP system will streamline Stericycle’s operations and improve the firm’s financial planning and analysis. Finally, Miller has implemented much needed oversight and standardization, for example, customer contracts are now reviewed by a deal review committee. 

Management’s turnaround efforts are taking hold. Despite the global pandemic, Stericycle’s regulated waste and compliance services business reported 2% organic growth in 2020 (after flat organic growth in 2019 and a 2% organic decline in both 2018 and 2017), and consolidated gross margin improved 60 basis points year over year after six consecutive years of gross margin contraction. In 2021, RWCS registered nearly 6% organic revenue growth, and the secure information destruction services business reported 5% organic growth. 

Stericycle’s self-help measures and significant exposure to the growing United States medical waste market should result in solid top-line growth and margin expansion over the next five years. It is foreseen, Stericycle’s revenue to grow at about a 4% five-year compound annual rate and adjusted EBITDA margin to expand to around 23.5% by 2025-26 from (17.5% to 18.5% during 2019-21). Most importantly, it is alleged for return on new invested capital will rebound to the low double digits by 2024.

Financial Strength

Stericycle’s debt balance increased by over $1.5 billion in 2015 a result of the Shred-It acquisition. As the company’s financial performance deteriorated in subsequent years, the firm’s net debt/EBITDA ratio swelled to approximately 4.5. However, the current management team is committed to rightsizing the balance sheet, and the firm’s leverage ratios have already become more palatable (net debt/adjusted EBITDA was about 3.4 as of December 2021). Stericycle ended its first-quarter 2022 with $1.65 billion of net debt. The firm’s outstanding balance on its credit facility and term loan (approximately $540 million) is due in 2026, $600 million of 5.375% senior notes is due in 2024, and $500 million of 3.875% senior notes is due in 2029. Over the next five years, it is projected Stericycle will generate approximately $1.7 billion of free cash, so about the firm’s ability to service its outstanding debt is not a concern, and it is held, management’s goal of reducing its net debt/adjusted EBITDA ratio below 3 is achievable. Stericycle has plenty of liquidity with $60 million of cash on the balance sheet and over $790 million available on its $1.2 billion credit facility.

Bulls Say’s

  • Stericycle’s turnaround efforts will prove successful, materially improving the firm’s profitability and free cash flow. 
  • Medical waste volume should grow faster than U.S. GDP due to an aging population that requires more medical procedures. Stericycle’s leading position in an expanding market should improve the firm’s financial prospects. 
  • Stericycle is past the apex of pricing pressure related to private practice consolidation and a customer class action lawsuit. Going forward, the firm should realize annual price increases above inflation.

Company Profile 

Stericycle is the largest provider of medical waste disposal and data destruction (primarily paper shredding) services in the United States. Its next closest national competitor in the medical waste disposal space is Sharps Compliance, which generated $76 million of sales in fiscal 2021 (about 4% of Stericycle’s global regulated waste and compliance revenue). Stericycle’s data destruction business (Shred-It) is about twice the size of its closest competitor (Iron Mountain’s information destruction segment). Stericycle has a global presence, with about 20% of its revenue earned outside North America. 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Commerzbank’s latest strategy is the right one toward a better future, despite the herculean task ahead

Business Strategy and Outlook

Commerzbank generates about 70% of its operating income in the highly competitive German market, where banks without profit-maximizing motives (savings and cooperative banks) dominate the retail space and German as well as international competitors vie for the coveted German corporate market. In this competitive environment, Commerzbank has too long stuck to its large branch network strategy, failing to digitize processes sufficiently to compete in today’s changing banking landscape. Management is addressing these shortcomings with a highly ambitious plan. Until 2024, the bank aims to reduce its cost base by EUR 1.4 billion, or about 20% of its 2020 level. The largest cost savings will come from a reduction of about 10,000 in head count and 550 branch closures. After such a massive cut to its business, management believes it can achieve a return on tangible equity of 7%.

It is true that Commerzbank is addressing the obvious hurdles toward a more profitable future with its current plan. Yet given the competitive market in Germany, the reorganization may also provoke customer churn and bring revenue down with it. Commerzbank has been coveted as a takeover target by multiple European banks over the last couple of years. This was partially owed to its strong position in the German corporate market, but also the potential gains to be made via a heavy cost-cutting initiative. Commerzbank has now switched course, in experts view, and is taking matters into its own hands rather than hoping for a white knight. It is unexpected for European cross-border banking consolidation to commence anytime soon. As such, it is held, Commerzbank’s latest strategy is the right one toward a better future, despite the herculean task ahead.

Financial Strength

Commerzbank is in good financial health. The bank has cleaned up its balance sheet after its acquisition of Dresdner Bank in 2008 and derisked its exposure to bad loans in shipping, commercial real estate, and public finance. At the end of the first quarter of 2022, the bank posted a common equity Tier 1 ratio of 13.5% versus a requirement of 9.4%.

Bulls Say’s

  • Commerzbank is addressing its large cost base, setting the bank up for greater profitability in the future. 
  • The bank is in good financial health and has successfully run down its bad exposures in shipping, public finance, and commercial real estate. 
  • The efficiency program, cost-cutting efforts, and digitalization strategy will create a leaner and more agile Commerzbank.

Company Profile 

Commerzbank operates primarily in Europe. Germany contributes about 70% to total income. The bank operates two business segments: private and small-business customers as well as corporate clients. In its private and small-business segment, the group runs its branch business, a mobile bank with a focus on the Polish market, an online broker, and an asset manager for physical assets. Its corporate client business provides cash management and trade finance solutions to small and medium-size enterprises and large corporates. 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Global stocks Shares

Narrow-Moat Alcon Has Defensive Characteristics, Refractive Is Most Exposed To Recession Risks

Business Strategy and Outlook

As a global leader in eyecare, Alcon provides products and equipment for various vision conditions such as refractive errors, cataracts, and advanced vitreoretinal problems. The firm is the second-biggest player in contact lenses and has a robust portfolio in liquid eyecare solutions for allergies and dry eye. Despite a strong market position, Alcon remains in turnaround mode following years of underinvestment as a Novartis subsidiary. The company has committed significant capital to the turnaround program with greater sales and marketing spending, and capital expenditures that are expected to total over $1.5 billion over the next three years. Looking past expected lumpiness of near-term results, management’s turnaround efforts will largely pay off and there is a positive view of the outlook on the core business. 

Alcon’s strategy centers on growth in premium product lines, implementing cost-saving initiatives to drive margin expansion, and capitalizing on secular long-term growth in global eyecare. Specifically, the firm has identified three main areas of growth for the business: advanced intraocular lenses (PanOptix, Vivity), premium daily contact lenses (Total1, Precision1), and liquid eyecare (Systane, Pataday). Within each of these markets, Alcon has a premium product that should allow for near-term above-market growth. Alcon’s leading position in phacoemulsification for cataract surgery, with a 50% market share, helps pull in demand for standard intraocular lenses, or IOL, from bundling, and Alcon now holds a greater-than-50% share in IOLs, as well. The firm recently launched a value-priced phaco system that should generate share gains in emerging markets, which have been slower to adapt phaco because of higher up-front costs. Alcon’s standard IOL business is expected to grow about in line with market, and the introduction of PanOptix to the U.S. market should enable above-market growth for the advanced lens portfolio. PanOptix is the first trifocal in the U.S., and this lens has benefited from its first-mover advantage, with the product achieving 75% share of advanced IOL sales in the U.S. and Japan.

Financial Strength

Alcon’s financial strength is satisfactory. The firm took on $3.5 billion of debt in early 2019 related to the spin-off from Novartis, and the company ended 2021 with a moderate degree of leverage (debt/EBITDA ratio of 2.6). Interest coverage is a moderate concern to us in the near term given that interest expenses are projected to exceed operating income in 2021. This is partly due to the refinancing of $2 billion of debt in 2019, which resulted in higher interest expense. Still, this also lengthened the maturity of the debt, giving Alcon improved longer-term financial stability. Given current assumptions about operating income growth over the coming years, interest coverage is not anticipated to be a long-term concern, and the coverage ratio is expected to surpass 10 times by the back half of the 10-year forecast period. In early 2019, about a month before Alcon once again became a public firm, the company acquired fluid-based intraocular lens maker Powervision for $285 million. The firm is likely to make a few similarly sized tuck-in acquisitions over the next few years, in the range of $50 million to $500 million, such as the $475 million acquisition of Ivantis in November 2021. With Alcon’s total market cap at around $35 billion, this acquisition range is meaningful but not necessarily material to the overall business, and the company has enough free cash flow to pursue acquisitions of this size. Positive free cash flow to the firm is projected throughout the 10-year explicit forecast period, indicating the firm has ample financial flexibility.

Bulls Say’s

  • Alcon stands to benefit from several secular trends in eyecare: an increasing prevalence of myopia, demand for better eyecare from a growing middle-class in emerging markets, and growth driven by an aging population. 
  • As a stand-alone public firm, Alcon will have the necessary financial flexibility to make investments for the longer term, and patient investors could be well rewarded. 
  • Alcon’s product pipeline (fluid-based intraocular lenses, accommodating contact lenses, Systane line expansion) will help the firm maintain and expand its position as the global leader in eyecare.

Company Profile 

Alcon, headquartered in Fort Worth, Texas, is the global eyecare leader with a diverse portfolio in ophthalmology including contact lenses, eye drops, surgical equipment, and related surgical products. Novartis purchased Alcon from Nestle in 2010 and, following nine years as a Novartis subsidiary, the company was spun-off as a public company in April 2019. The company reports five distinct segments: implantables (16% of revenue), consumables (31%), equipment (9%), contact lenses (27%), and ocular health (17%). The company is geographically diversified, with only about 40% of revenue from the U.S. market, and the firm has a strong presence in the European Union and Japan.

(Source: MorningStar)

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