Category: Global stocks

Global Stock refer to share that are traded on multiple exchanges with different currencies. For example, if a publicly-traded company issues shares in dollars on the New York Stock Exchange and in pounds on the London Stock Exchange, it is issuing global registered shares. Global stock to a portfolio offers diversification and may provide higher returns. Global stock markets may experience higher levels of volatility than other domestic markets with bigger swings to both the upside and downside.

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Global stocks

DiaSorin to maintain a competitive advantage in immunodiagnostics

Business concept, tablet with information chart

Business Strategy and Outlook 

DiaSorin is a niche player in the fragmented in vitro diagnostic market with diagnostic specialization in infectious diseases. Its systems are able to perform tests for diseases such as hepatitis, tuberculosis, mumps, and measles. Despite operating in a competitive industry with high research and investment requirements, DiaSorin has consistently been able to expand its installed base and deliver strong returns for shareholders over time. DiaSorin’s research strategy has three pillars: expand the market with new testing, advance market share in existing testing areas with improved features, and maintain current market positioning, while also expanding margin growth from better efficiency and pricing. Though a combination of these objectives is necessary for long-term success, market expansion from new testing products, such as recently launched tuberculosis and Lyme tests, and the partnership with MeMed, are especially important for DiaSorin to maintain a competitive advantage in immunodiagnostics.

Building a stronger presence in this hospital setting is another area of focus for DiaSorin. The hospital market is somewhat less exposed to clinical point-of-care decentralization risks, given the consolidated nature of hospital testing and higher throughput requirements, and the opportunity for DiaSorin to drive further growth in this market, which has historically been less of a strength for the company than the clinical lab setting. In the near term, DiaSorin is prioritizing the integration of Luminex and rebalancing test capacity initiatives as demand for COVID-19 tests wane. Overall, the pandemic can be seen as a net benefit to DiaSorin as the exclusivity of tests on the Liaison XL analyser (used for COVID-19 testing) are likely to provide a permanent boost to the equipment installed base, and some of this additional placed equipment is likely to remain in use beyond the pandemic.

Financial Strength

DiaSorin’s financial strength is solid. The company ended 2021 with EUR 985 million of debt, taken on to fund the $1.8 billion acquisition of diagnostic and biotechnology firm Luminex. The firm’s current degree of leverage does not concern us, and it is expected DiaSorin to quickly pay down debt with free cash flow generated from the combined business. In the first quarter of 2022, DiaSorin reduced the debt load down to EUR 860 million, and further debt reduction over the course of the year is likely. One should not be surprised to see DiaSorin pay off all or most of the new debt within the next two to three years. On balance, the firm’s financial position remains strong, even with the additional leverage being added by the Luminex purchase, which was the largest acquisition in company history. Apart from 2016, when the acquisition of Quest’s Focus Diagnostics immunodiagnostic and molecular business created a negative cash flow year, DiaSorin has consistently thrown off positive free cash flow to the firm, averaging EUR 145 million annually over the last five years. There are no issues with cash flow going forward and forecast free cash flow averaging EUR 330 million annually through the five-year explicit forecast period. Additionally, DiaSorin has maintained a strong balance sheet and ended 2021 with a cash balance of EUR 340 million. DiaSorin has also maintained a small dividend over the past decade. Notwithstanding a special dividend paid in 2013, the dividend payout ratio has typically hovered around 30% of earnings. There are no difficulties seen with maintaining a dividend payout ratio of about 30%, given the healthy cash position of the firm.

Bulls Say’s

  • DiaSorin has seen significant benefits from the ongoing COVID-19 pandemic, with diagnostic testing providing short-term cash flows and the higher installed base could support excess returns over the longer term. 
  • The equipment lease model used by DiaSorin reduces short-term revenue variability from temporary demand disruptions, and securing minimum reagent sales should allow the company to take share in less differentiated testing. 
  • DiaSorin has a history of niche expertise in infectious diseases, and it operates in an attractive competitive position as a growing diagnostics player.

Company Profile 

DiaSorin, headquartered in Italy, is a global provider of in vitro diagnostics–testing done on samples taken from the human body, such as blood and issue. DiaSorin produces and markets testing reagent kits for immunodiagnostics (55% of sales) and molecular diagnostics (35%) and has a total installed base of over 9,000 diagnostic systems. Licensed technologies contribute the remaining 10% of total sales, DiaSorin has a strong presence in Europe, the Middle East, and Africa; the region accounts for the largest portion of company revenue (44%), followed by North America (41%), Asia-Pacific (11%), and Latin America (4%).

 (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

Albemarle to generate healthy bromine profits due to its low-cost position in the Dead Sea

Business Strategy and Outlook 

Albemarle is the world’s largest producer of lithium, which generates roughly half of total profits. It produces lithium through its own salt brine assets in Chile and the United States and two joint venture interests in Australian mines, Talison and Wodgina. The Chilean operation is among the world’s lowest-cost sources of lithium. Talison is one of the best spodumene resources in the world, which allows Albemarle to be one of the lowest-cost lithium hydroxide producers as spodumene can be converted directly into hydroxide. As electric vehicle adoption increases, a high-double-digit annual growth in global lithium demand can be seen. In response, Albemarle plans to expand its lithium production from 88,000 metric tons in 2021 to over 450,000 metric tons over the next decade. This includes the company’s 60% interest in the Wodgina spodumene operation from Mineral Resources. Mineral Resources retains the other 40% interest and the two operate a joint venture, though this will likely become a 50-50 JV as the two are in discussions to expand the partnership. The joint venture will begin producing spodumene (lithium hard rock concentrate) and one 50,000-metric-ton lithium hydroxide plant in Australia. Albemarle will continue to increase its lithium capacity largely through brownfield expansions at existing operations, including the expansion of recently acquired spodumene conversion assets in China.

Albemarle is the world’s second-largest producer of bromine, a chemical used primarily in flame retardants for electronics. Bromine prices have begun to rise as increased demand for use in servers and automobile electronics is offset by a decline in demand from TVs, desktops, and laptops as well as lower demand for bromine used in oilfield completion fluids. Over the long term, Albemarle is to generate healthy bromine profits due to its low-cost position in the Dead Sea. Albemarle is also a top producer of catalysts used in oil refining and petrochemical production. These chemicals are highly tailored to specific refineries. However, the company is conducting a strategic review and may ultimately divest the business.

Financial Strength

Albemarle is in good financial health. As of March 31, 2022, the company’s net debt/adjusted EBITDA ratio was 1.9 times, within management’s target for a long-term ratio of 2-2.5 times. Albemarle should be able to meet all of its financial obligations, including dividends. Albemarle is completing the construction of two new lithium projects that were initially funded with a combination of debt and excess cash flow from its bromine and catalysts businesses. However, Albemarle raised equity in early 2021 as a way to deleverage its balance sheet and provide financial flexibility. This move made sense, given that the stock price was above the fair value estimate at the time. After 2022, Albemarle plans to expand its lithium capacity largely through the build-out of brownfield capacity and new greenfield spodumene conversion plants in China. While these expansions will likely be capital-intensive, they should be cheaper than building new greenfield lithium production assets in higher cost regions such as Australia. This should allow Albemarle to maintain the financial flexibility to expand its lithium capacity without considerably straining its balance sheet. Additionally, high lithium prices should allow the company to generate more cash flow from its existing businesses as a way to partially fund future capacity expansions. Further, Albemarle is undergoing a strategic review of the catalysts business and could divest it to pay for a considerable amount of the lithium capital expenditures over the next several years. Additionally, Albemarle could opt to raise capital through additional equity issuances if needed.

Bulls Say’s

  • Albemarle has top-tier lithium assets through its brine operations in Chile and spodumene hard-rock operations in Western Australia, which are among the lowest-cost sources of lithium production globally. 
  • Lithium prices will remain well above the marginal cost of production through at least the remainder of the decade, leading to excess profits and return on invested capital for Albemarle. 
  • Albemarle has low-cost bromine production through its highly concentrated brines in the Dead Sea and Arkansas

Company Profile 

Albemarle is the world’s largest lithium producer. The robust lithium demand is predicated upon increased demand for electric vehicle batteries. Albemarle produces lithium from its salt brine deposits in Chile and the U.S. and its hard rock joint venture mines in Australia. Albemarle is also a global leader in the production of bromine, used in flame retardants. The company is also a major producer of oil refining catalysts.

(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

Sonic announced its intention to compete with CarMax in used vehicles with EchoPark used-vehicle stores.

Business Strategy & Outlook

Sonic Automotive is undergoing many changes. Rollout of its omnichannel Digital One Stop process and the CarCash app allows consumers to shop digitally or in-store and helps Sonic procure more used-vehicle inventory. Management has also worked to make the car-buying process nearly paperless, place the customer with only one person for the entire transaction, and enable the customer to take delivery of a vehicle in an hour or less after deciding which one to buy.

In October 2013, Sonic announced its intention to compete with CarMax in used vehicles with EchoPark used-vehicle stores. The U.S. used-vehicle market is highly fragmented at about 40 million units a year, with late-model used vehicles as old as six years often making up at least 15 million units, so there is certainly room for both firms to pursue their strategies. Openings started in late 2014 in the Denver area and as of March 2022, the EchoPark segment has 47 stores with plans to add 25 a year between 2021 and 2025. It will take time for EchoPark to reach the scale to compete with CarMax’s over 220 stores. The stores will not have a big-box retail format and are not capital-intensive due to most eventually being delivery and buy centers that only cost $1 million-$2 million each. These centers will be served by larger hub stores in a region that each cost between $7 million and $25 million. EchoPark will not do home delivery. Sonic does not plan a captive finance arm like CarMax enjoys. In July 2020, management announced a $14 billion 2025 revenue target for EchoPark, up from $2.3 billion in 2021, with 140 nationwide points. This is not impossible in because EchoPark intentionally undercuts competitors on price, then recovers a small loss on the vehicle by arranging loans with third-party lenders and selling extended warranties, targeting over $2,000 gross profit per unit. In 2021, Sonic said it is reviewing alternatives for EchoPark. Sonic will have scale relative to a small dealer and can get better terms from vendors for supplies, computer systems, and health insurance compared with a small dealer. It also captures lucrative service work over repair shops through its warranty business. 

Financial Strengths

Sonic’s largest debt maturity at year-end 2021 through 2026 is $118.2 million in 2024, mostly from about $90 million of mortgage line borrowing coming due in November. The credit facility matures in April 2025 and is undrawn at the end of 2021 with $281.4 million available for borrowing. Total liquidity at the end of 2021 is $702.8 million including $299.4 million of cash. Management has told us that the used floorplan line is like a revolver. Net Debt/adjusted EBITDA was about 1.80 times at year-end 2021. Leverage in 2019 declined from about the 3.7 times level thanks to the early redemption of the firm’s $289.3 million 5% notes due in May 2023. Sonic also has $346.2 million of mortgage notes with 62% of the balance at fixed rates ranging between 2.05% to 7% and maturities at various dates through 2033. The company owns about half its real estate, but has not disclosed how much unencumbered real estate it has. In October 2021, Sonic issued $1.15 billion of 2029 ($650 million at 4.625%) and 2031 notes ($500 million at 4.875%) to help fund the $950 million purchase of RFJ Auto Partners in December 2021, but no one can concern about balance sheet health. The firm’s debt profile is not going to be a challenge for management to maintain.

Bulls Say

  • Auto dealerships are well-diversified businesses that have lucrative parts and servicing operations, which help them be profitable in almost any environment. 
  • EchoPark could prove to be a very lucrative business this decade if it can scale up. 
  • Sonic has the potential to generate significant economies of scale as vehicle demand rebounds and if EchoPark grows.

Company Description

Sonic Automotive is one of the largest auto dealership groups in the United States. The company has 110 franchised stores in 17 states, primarily in metropolitan areas in California, Texas, and the Southeast, plus 47 EchoPark and Northwest Motorsport brand used-vehicle stores. In addition to newand used-vehicle sales, the company derives revenue from parts and collision repair, finance, insurance, and wholesale auctions. Luxury and import dealerships make up about 88% of new-vehicle revenue, while Honda, BMW, Mercedes, and Toyota constitute about 60% of new-vehicle revenue. BMW is the largest brand at over 26%. 2021’s revenue was $12.4 billion, with EchoPark’s portion totaling $2.3 billion. Sonic bought RFJ Auto in December 2021, which added $3.2 billion in sales.

(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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Global stocks

ITT is well positioned to continue to win in its marque brake pad business

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Business Strategy & Outlook

The ITT is well positioned to continue to win in its marque brake pad business (nearly 30% global market share), while a focus on continuous improvement will push both its industrial process and connect and control technologies’ segments into greater than 20% adjusted segment operating margins. The market is overly focused in the near term on raw material inflation and the semiconductor shortage. That said, the semiconductor shortage should begin to ameliorate in 2023. More importantly, ITT regularly outperforms light vehicle production by greater than 800 basis points. While the somewhat less outperformance in a flat market through-the-cycle, we still believe this is a growth business that produces strong returns on capital (mid-30s). The ITT will continue to win based on a combination of material science expertise, technological innovations like the smart pad, and its consistent record of on-time delivery (greater than 99%).

Furthermore, the CEO Savi and CFO Caprais will implement the same successful playbook they used in motion technologies, or MT, in ITT’s other businesses. Successful tactics from this playbook include lean and automation to drive shop floor productivity gains, improved supply chain low-cost sourcing, and better price management. While MT is extensively automated, that’s not necessarily the case for all ITT’s facilities, such as with Seneca Falls. Furthermore, recent acquisitions offer attractive synergy opportunities. For instance, Habonim’s simplified and standardized design process is a core competency, and The ITT can implement best practices to save on both manufacturing and engineering expenses. Finally, the investors underappreciate the windfall from the commercial aerospace recovery. While revenue passenger kilometers have been decoupled from economic output, these headwinds will subside as COVID-19-related restrictions dissipate over time. Passen Therefore, connect and control technologies will be ITT’s strongest growth segment

Financial Strengths

The ITT is on solid financial footing and we give the firm a moderate credit risk rating. We note that following a transaction on June 30, 2021, ITT no longer has any obligation with respect to pending and future asbestos claims. We think ringfencing this liability was an excellent move on the part of management, since it removed both uncertainty and headline risk. Using a punitive methodology (incorporating all interest-bearing obligations and calls on capital), ITT consistently runs a net cash positive position. Therefore, we are not overly concerned about whether ITT can service its current obligations.

Bulls Say

  • Solutions like copper-free and smart brake pads will help ITT win content on additional and existing platforms, and its material science expertise should help with wins in the electrical vehicle original equipment segment. 
  • CEO Luca Savi will bring the same focus and drive operational efficiency to both IP and CCT as he did in MT; long-term, both IP and CCT can deliver 20% segment operating margins. 
  • An unleveraged balance sheet gives the company room to make value-accretive acquisitions.

Company Description

ITT is a diversified industrial conglomerate with nearly $3 billion in sales. After the spinoffs of Xylem and Exelis in 2011, the company’s products primarily include brake pads, shock absorbers, pumps, valves, connectors, and switches. Its customers include original-equipment and Tier 1 manufacturers as well as aftermarket customers. ITT uses a network of approximately 700 independent distributors, which accounts for about one third of overall revenue. Nearly three fourths of the company’s sales are made in North America and Europe. ITT’s primary end markets include automotive, rail, oil and gas, aerospace and defense, chemical, mining, and general industrial.

(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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Global stocks Shares

Ross’ results are enabled by its strong merchandising and inventory management, allowing a fast-changing assortment of opportunistically sourced items

Business Strategy and Outlook 

With a fast-turning inventory of high-value branded merchandise, Ross’ store experience and value proposition should continue to resonate as the pandemic ebbs. Ross weathered a number of challenges in 2021, with a difficult environment for experience-oriented physical retail, inflation, supply chain disruptions, and volatile case counts eased by economic stimulus, continued strength in home décor categories, and the start of Americans’ post-pandemic wardrobe rebuild. The current situation is unprecedented, but off-price retailers have not been derailed by past recessions; Ross’ comparable sales grew by 2% and 6% in fiscal 2008 and 2009, respectively. Ross’ results are enabled by its strong merchandising and inventory management, allowing a fast-changing assortment of opportunistically sourced items. It aims to be a partner of choice for vendors looking to sell excess items, accepting incomplete assortments without return privileges, paying promptly, and stocking brands discreetly (allowing them to avoid creating pricing pressure in the full-price channel that can ensue if their labels are viewed as a constant discount option). This flexibility is a product of the treasure-hunt shopping experience and Ross’ distribution and merchandising agility.

Ross has long enjoyed ample availability of attractively priced products, which is expected to persist. Mutable tastes, the proliferation of alternative distribution channels, and inherent demand variability due to unpredictable external factors (exacerbated by full-price store closures during the pandemic), should leave room for off-price retailers to source products attractively, capitalizing on their vendor relationships and ability to offer favourable terms. While competition is fierce and digital rivals are building a presence in Ross’ core categories, its low-frills shopping experience and significant discounts (around 20%-70%) result in competitive prices and superior economics after considering shipping and return costs. The pandemic should increase e-commerce adoption long term, but the full-price sellers will have to bear most of the shift.

Financial Strength

With nearly $5 billion in cash at the end of fiscal 2021 against less than $2.5 billion in debt, Ross’s clean balance sheet affords considerable flexibility. It is expected that annual adjusted EBITDA will cover interest expense at least 40 times in any given year over the next decade. Combined with free cash flow to the firm averaging around 8% of sales over the long term, Ross will fund its continued expansion goals internally once conditions normalize. Ross is expected to grow toward its 3,600-unit footprint target over the next 10 years (from 1,923 at the end of fiscal 2021). While expansion should remain its capital priority, it should continue to favour leasing stores. Capital expenditures should average around 3%-4% of sales long term, near fiscal 2019’s pre-pandemic 3.5%. The firm will continue to look to return excess capital to shareholders via share buybacks and dividends. Ross’ dividend rises over time as cash generation increases, at a long-term payout ratio of around 30%, slightly higher than fiscal 2021’s 23% mark. It is expected Ross to use 60% of its annual operating cash flow to repurchase shares by the end of the explicit forecast. Alternatively, the firm could pursue acquisitions of regional chains or other concepts (including operations outside the United States) to accelerate its growth.

Bulls Say’s

  • Ross should be relatively well-insulated against digital rivals, considering its differentiated store experience and operational efficiency (which fuels its competitive prices). 
  • Its treasure-hunt shopping experience, agile supply chain and distribution network, and merchandising strength maximize Ross’ flexibility while holding inventory levels in check, minimizing risk while freeing capital. 
  • Other physical retailers’ downsizing should lead to an ample supply of attractively located, well-priced storefronts that should fuel Ross’ expansion

Company Profile 

Ross Stores is a leading American off-price apparel and home fashion retailer, operating over 1,920 stores (at the end of fiscal 2021) across the Ross Dress for Less and dd’s Discounts banners. Ross offers a variety of name-brand products and targets undercutting conventional retailers’ regular prices by 20%-70%. The company uses an opportunistic, flexible merchandising approach; together with a relatively low-frills shopping environment centred on a treasure-hunt experience, Ross maximizes inventory turnover and traffic, enabling its low-price approach. In fiscal 2021, 26% of sales came from home accents (including bed and bath), 25% from the ladies’ department, 14% from each of men’s and accessories, 12% from shoes and 9% from children. All sales were made in the United States.

(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

Lululemon will need to introduce new fabrics and technology to hold its popularity

Business Strategy and Outlook 

With a narrow-moat Lululemon has a solid plan to expand its product assortment and geographic reach while building its core business. While there are many firms looking to compete in its core categories, the firm benefits from the athleisure fashion trend and will continue to achieve premium pricing due to the brand’s popularity and the styling and quality of its products. The narrow-moat rating is based on Lululemon’s intangible brand asset. The “Power of Three x2” five-year plan laid out at Lululemon’s April 2022 investor event as sound. The firm’s three priorities are product innovation, e-commerce, and international expansion. The product innovation is critical as many competitors, including no-moat Gap’s Athleta, sell women’s leggings of similar quality. Thus, Lululemon will need to introduce new fabrics and technology to hold its popularity in this critical category. The firm also plans to add to its assortment in men’s (24.6% of 2021 sales) and expand its nascent athletic footwear line. These categories fit the Lululemon brand, they also bring it in direct competition with athletic apparel firms like wide-moat Nike.

Boosted by the pandemic, Lululemon’s e-commerce will become increasingly important. There should be a 21% growth for the channel in 2022 and expect e-commerce sales will permanently exceed store revenue by 2024. Lululemon’s e-commerce should benefit from investments in digital capabilities (such as buy online, pick up in store), new product, and an expanding loyalty program. Its e-commerce operating margins at 44% in the long term, rising digital sales should lift its overall profitability. There is an opportunity for Lululemon to expand outside of North America. Sales outside the region accounted for just 15% of total in 2021 but have been growing more than 30% per year. Lululemon is building its brand overseas and has a large opportunity for new stores and larger online sales in China, the second-largest activewear market. The 2031 sales outside of North America will approach $4.2 billion (up from $957 million in 2021) and account for 23% of total sales.

Financial Strength

Lululemon is in exceptional financial shape. Lululemon is the rare apparel firm that developed a multibillion-dollar brand without long-term debt. The firm closed April 2022 with $649 million in cash and an undrawn $400 million revolving credit facility. Lululemon will generate significant free cash flow for stock buybacks. The firm’s free cash flow to equity has grown rapidly over the past six years (to $1 billion in 2021 from $154 million in 2015), allowing it to repurchase about $1.8 billion in shares in that period. It will generate about $6.9 billion in free cash flow to equity over the next five years and use most of it for buybacks. However, Lululemon may reduce shareholder value by repurchasing shares above the fair value estimate. The firm could easily afford to issue dividends but has not done so and will not do it in the future too. Lululemon’s capital expenditures are at an annual average of 6.2% of sales over the next decade. Its capital expenditures as a percentage of sales are relatively high for a firm in its industry as it operates its own stores. Most of its capital expenditures are for remodelling and relocation of stores and opening new stores. Lululemon will open about 370 stores over the next decade. The firm is also investing heavily in its digital capabilities.

Bulls Say’s

  • Lululemon’s online sales increased to $2.8 billion in 2021 from less than $100 million in 2010. It is estimated its e-commerce operating margin at roughly 44%, about 20 percentage points better than its store margin. 
  • Lululemon has a big opportunity in greater China, where the firm operates fewer than 100 stores. China is the second-largest athletic apparel market in the world and has high growth. 
  • Lululemon is often credited with the development of “athleisure”, which is a major change in how people dress and continues to thrive.

Company Profile 

Lululemon Athletica Inc. designs, distributes, and markets athletic apparel, footwear, and accessories for women, men, and girls. Lululemon offers pants, shorts, tops, and jackets for both leisure and athletic activities such as yoga and running. The company also sells fitness accessories, such as bags, yoga mats, and equipment. Lululemon sells its products through more than 570 company-owned stores in 17 countries, e-commerce, outlets, and wholesale accounts. The company was founded in 1998 and is based in Vancouver, Canada.

(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

The company’s position as the top dialysis service provider and equipment maker in the world remains symbiotic and unique

Stock market information

Business Strategy & Outlook

Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. After pandemic conditions recede, the company to benefit from solid demand in developed markets, such as the U.S., and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low to mid-single digits in the long run, the top-line growth for Fresenius to be toward the top of that range after a very weak 2021 and even higher earnings growth compounded annually during the next five years, as the firm wrings out more efficiencies and repurchases shares.

The company’s position as the top dialysis service provider and equipment maker in the world remains symbiotic and unique. Fresenius’ experience operating over 4,100 dialysis clinics around the globe (about 1,000 more than the next-largest player, DaVita) gives it insights into caregiver and patient needs to inform service offerings and product innovation. Fresenius uses clinical observations to develop and then manufacture even better technology to treat ESRD patients. It outfits all its clinics with its own brand of equipment and consumables, which has margin implications related to system costs and operating efficiency for staff. However, other dialysis clinics appreciate Fresenius’ technology as well, and Fresenius claims about 35% market share in dialysis equipment/consumables while serving only 9% of ESRD patients through its global clinics. Especially telling, main rival DaVita remains one of Fresenius’ top product customers. With growing clinical and payer support for at-home treatments, Fresenius is taking aim at those ESRD therapies with significant investments, too. It recently purchased NxStage Medical for home hemodialysis, which appears differentiated in the industry for its ease of use and physical size. The company also aims to improve on its peritoneal dialysis offering where Baxter has traditionally excelled.

Financial Strengths

Fresenius maintains a manageable balance sheet, despite its high lease-related obligations and capital-allocation strategy that includes acquisitions and significant returns to stakeholders. The company receives investment-grade ratings from the three major U.S. rating agencies, which should help it access the debt markets for any necessary refinancing. As of September 2021, Fresenius owed EUR 9 billion in debt and had lease obligations around EUR 5 billion. On a net debt/EBITDA basis, leverage stood at roughly 3 times, which appears manageable and in line with the firm’s previous long-term goal of 2.5-3.0 times, which excluded lease obligations. After generating over EUR 3 billion of free cash flow in 2020 including government aid, free cash flow looks likely to decline to about EUR 1.5 billion before rising to about EUR 2.0 billion by 2026. No one can believe the firm will face any significant refinancing risks during the next five years even as it continues to push cash out to stakeholders and pursue acquisitions. While acquisitions remain difficult to predict, the company pays a dividend to shareholders (EUR 0.4 billion in 2020) and makes distributions to noncontrolling interests (EUR 0.4 billion in 2020). It also repurchased EUR 0.4 billion in shares in 2020, and the more repurchases going forward. With those expected outflows to stakeholders and significant debt maturities coming due in the foreseeable future, Fresenius may be an active debt issuer going forward.

Bulls Say

  • Diversified by geography and business mix, Fresenius should be able to benefit from ongoing growth in treating ESRD patients worldwide once the pandemic recedes. 
  • Increasing at-home treatment rates could raise demand for the company’s at-home systems and boost how long patients can continue to work and stay on commercial insurance plans, which can positively affect the company’s profitability. 
  • Through its venture capital arm, Fresenius is investing in new ways to treat ESRD patients, aside from more traditional dialysis tools, which should help keep it at the forefront of this market.

Company Description

Fresenius Medical Care is the largest dialysis company in the world, treating about 345,000 patients from over 4,100 clinics across the globe as of September 2021. In addition to providing dialysis services, the firm is a leading supplier of dialysis products, including machines, dialyzers, and concentrates. Fresenius accounts for about 35% of the global dialysis products market and benefits from being the world’s only fully integrated dialysis business. Services account for roughly 80% of firmwide revenue, including care coordination and ancillary operations, while products account for the other roughly 20%. Products typically enjoy a higher margin, making them a strong contributor to the bottom line.

(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

ResMed’s minority stake hedges some risk from emerging competition

Business Strategy and Outlook

ResMed is taking a “smart devices” and Big Data approach to further entrench itself as one of the two leading players in the global obstructive sleep apnea, or OSA, market. With cloud-connected devices, physicians can monitor patient compliance and encourage continued use. Higher adherence supports both reimbursement rates from payers and the resupply of masks and accessories. ResMed also plays a key role in producing clinical data that demonstrates treatment can minimise related risks such as hypertension, stroke, heart attack and Alzheimer’s disease. Through its own testing devices and education, ResMed seeks more widespread diagnosis and treatment of OSA. The global OSA homecare device market, is a two-player duopoly with over 80% estimated market share split between ResMed and Philips, with ResMed the market leader in the majority of the 140 countries it competes in. The market offers a large global growth opportunity as penetration within developed markets is estimated at one fifth of the roughly 15% prevalence, and emerging markets are essentially untapped. In the U.S. It is estimated that roughly half of the 22 million people diagnosed with OSA are treated with continuous positive airway pressure, or CPAP, with another 34 million remaining undiagnosed. ResMed operates in over 140 countries with over 900 million people estimated to have sleep apnea globally, indicating the long runway for growth.

ResMed has made acquisitions of home healthcare software platforms as it seeks to leverage the trends of digital health and providing care in a lower-cost setting. Brightree, acquired in 2016, and MatrixCare, acquired in 2019, offer business management software for a range of home health providers. ResMed is currently directing significant capital to this area, and although high returns have largely been unproven, the move has been strategically sound given the structural industry tailwinds. ResMed has a minority stake in Nyxoah who are developing a neurostimulation implant to treat OSA. Although a little near-term risk from this therapy will be due to the higher cost and invasive surgery needed, ResMed’s minority stake hedges some risk from emerging competition.

Financial Strength

ResMed is in a strong financial position. Free cash flow conversion of earnings prior to acquisition spending has averaged 106% over the last five years and has allowed ResMed to quickly repay the debt funding its acquisitions. At the end of fiscal 2021, ResMed reported USD 360 million in net debt representing net debt/EBITDA of only 0.3 times. The free cash flow is to grow to USD 1,469 million by fiscal 2026 from USD 556 million in fiscal 2021, and in the absence of major acquisitions, the company should be in a net cash position over the five-year forecast period. ResMed commenced paying a dividend in fiscal 2013 and doesn’t have a fixed payout ratio policy. The 28% payout ratio is lower than the trailing three-year average of 34% of underlying net income mainly due to ResMed’s significant uplift in earnings. Dividends are to grow at a five-year 15% CAGR versus a trailing five-year CAGR of 6%, and ResMed is likely to seek optionality for further acquisitions in the software-as-a-service segment.

Bulls Say’s

  • The long-term growth opportunity for respiratory homecare devices is sizable as both developed and emerging markets are still significantly underpenetrated.
  • The focus on cloud-connected devices has led to increased adherence, supporting both reimbursement rates and the resupply of masks and accessories.
  • ResMed stands to benefit from Philips’ significant product recall and the launch of its new flagship product, AirSense 11.

Company Profile

ResMed is one of the largest respiratory care device companies globally, primarily developing and supplying flow generators, masks and accessories for the treatment of sleep apnea. Increasing diagnosis of sleep apnea combined with ageing populations and increasing prevalence of obesity is resulting in a structurally growing market. The company earns roughly two thirds of its revenue in the Americas and the balance across other regions dominated by Europe, Japan and Australia. Recent developments and acquisitions have focused on digital health as ResMed is aiming to differentiate itself through the provision of clinical data for use by the patient, medical care advisor and payer in the out-of-hospital setting.

 (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

Dick’s investments in new full-line and specialty stores have failed to attract enough new customers.

Business Strategy & Outlook

The no-moat Dick’s Sporting Goods lacks an edge as sporting goods are sold through an increasing number of channels. Although its sales have soared during the pandemic, the impact is temporary, as growth in sporting goods retail has generally been minimal due to external competition. According to IBISWorld, sporting goods retail sales experienced average annual growth of just 1.3% in the five years before the pandemic. Dick’s competitors include e-commerce operators (such as wide-moat Amazon), mass retailers (such as wide-moat Walmart), specialty stores (narrow-moat Lululemon, Foot Locker, Bass Pro Shops/Cabela’s), and branded stores and owned e-commerce from major vendors. As an example of the latter, narrow-moat Adidas’ direct-to-consumer business constituted 39% of its 2021 sales, up from 25% in 2015. Further, the COVID-19 crisis has accelerated manufacturers’ direct-to-consumer efforts, as evidenced by Foot Locker’s acknowledgement that wide-moat Nike will reduce shipments to the firm. One cannot believe Dick’s market position is strong enough to prevent vendors from offering their merchandise in alternate channels. Its compound average yearly sales growth of 3% over the next decade, at the lower end of projected U.S. activewear growth of 3%-5%.

Dick’s recent profitability has greatly improved, but one cannot not think the gains can hold. The firm recorded a 16.5% operating margin in 2021, but this as anomalous. In 2013, Dick’s forecast its operating margin would increase to 10.5% by 2017 from 9.0% in 2012, but its actual operating margins were only in the midsingle digits in the years before the pandemic. The 2021 operating margin was the peak level and expect its operating margins will trend downward over time due to a lack of pricing power. Ultimately, one cannot think the firm needs such a large store base (about 860 stores) especially as its e-commerce has risen during the pandemic (21% of sales in 2021, up from 16% in 2019). The Dick’s investments in new full-line and specialty stores have failed to attract enough new customers.

Financial Strengths

The Dick’s is in excellent financial shape. To conserve cash while stores were temporarily closed during the pandemic, Dick’s furloughed employees, cut its planned capital expenditures, reduced salaries, and suspended its share repurchases. In April 2020, it shored up its liquidity further by completing a $575 million convertible bond offering at an interest rate of 3.25% (matures in 2025). Then, in early 2022, the firm issued $1.5 billion in bonds, with half carrying a 3.15% interest rate and maturing in 2032 and the other half carrying a 4.1% interest rate and maturing in 2052. After this offering, Dick’s ended April 2022 with $2.25 billion in cash and equivalents, long-term debt of $1.9 billion, and about $1.6 billion in available borrowing capacity under its revolver. The firm may retire the convertible debt when it becomes callable in 2023. The Dick’s will produce significant free cash flow, which it will return to shareholders as dividends and share repurchases after the crisis has passed. Dick’s will generate $8 billion in free cash flow to equity over the next decade and will use this cash to repurchase about $5.5 billion in stock and issue about $2.6 billion in dividends. Dick’s suspended repurchases during the pandemic, but then spent nearly $1.2 billion on repurchases in 2021, its largest amount in any year by far. Unfortunately, the average price paid was $109 per share, which was possibly inefficient at well above the fair value estimates and historical price levels. For comparison, due to the large share price increase, Dick’s consumed about $400 million in cash in buybacks in 2019 but repurchased more shares than it did in 2021. The annual capital expenditures will average about $450 million (3.5% of sales) over the next five years as Dick’s opens a few stores per year, invests in e-commerce, and renovates existing locations.

Bulls Say

  • Dick’s is the largest pure sporting goods chain in the U.S. Its has a large loyalty program that is integrated with that of Nike. Dick’s has a strong business in high school and youth sports. 
  • Dick’s is replacing hunting with women’s activewear and other apparel in some stores. Popular activewear probably has better margin and growth prospects than hunting. 
  • Dick’s has adapted well to a market that has changed during the pandemic. Its digital sales skyrocketed to about $2.6 billion in sales in 2021 (21% of total), up from about $1.4 billion in 2019 (16% of total).

Company Description

Dick’s Sporting Goods retails athletic apparel, footwear, and equipment for sports. Dick’s operates digital platforms, about 730 stores under its namesake brand (including outlet stores), and about 130 specialty stores under the Golf Galaxy, Public Lands, and Field & Stream names. Dick’s carries private-label merchandise and national brands such as Nike, The North Face, Under Armour, Callaway Golf, and TaylorMade. Based in the Pittsburgh area, Dick’s was founded in 1948 by the father of current executive chairman and controlling shareholder Edward Stack.

(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

Chewy has been well-positioned to benefit from explosive e-commerce growth in the category–en route to high-40% online market share in 2021.

Business Strategy & Outlook

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in a $119 billion U.S. market (per Packaged Facts). While a slew of players jockey for upstream (manufacturing) and downstream (retail) market share, Chewy’s service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

Chewy was founded with the intention of outcompeting wide-moat Amazon for online pre-eminence in a category that was rife with inefficiencies and saw only low-single-digit online penetration at the time. By emphasizing the labor-intensive aspects of the business model that its largest competitor intentionally eschewed (building out an army of dedicated customer service representatives whose principal qualification was their love of pets), the firm amassed a loyal customer base, with robust autoship penetration and strengthening monetization over time, generating net revenue retention of over 100% for each annual cohort. The firm’s 72% autoship penetration, a subscription-based model that pet consumables lend themselves to particularly nicely, defrays fulfillment cost pressures relative to large peers, given that a high degree of order predictability renders inventory management markedly easier, reducing split shipments. With a digital native platform, expansion into adjacent sales layers in pet healthcare (filling prescriptions, offering telehealth services, partnering with veterinarians through “Practice Hub,” and offering pet wellness and insurance plans in conjunction with TransUnion), Chewy has been well-positioned to benefit from explosive e-commerce growth in the category–en route to high-40% online market share in 2021 . With the expansion of higher-margin private label product, pet healthcare, and increasingly valuable maturing cohorts, Chewy looks poised to continue its leadership well into the future, in a category with 30% online penetration and no apparent glass ceiling for e-commerce saturation.

Financial Strengths

The Dick’s is in excellent financial shape. To conserve cash while stores were temporarily closed during the pandemic, Dick’s furloughed employees, cut its planned capital expenditures, reduced salaries, and suspended its share repurchases. In April 2020, it shored up its liquidity further by completing a $575 million convertible bond offering at an interest rate of 3.25% (matures in 2025). Then, in early 2022, the firm issued $1.5 billion in bonds, with half carrying a 3.15% interest rate and maturing in 2032 and the other half carrying a 4.1% interest rate and maturing in 2052. After this offering, Dick’s ended April 2022 with $2.25 billion in cash and equivalents, long-term debt of $1.9 billion, and about $1.6 billion in available borrowing capacity under its revolver. The firm may retire the convertible debt when it becomes callable in 2023. The Dick’s will produce significant free cash flow, which it will return to shareholders as dividends and share repurchases after the crisis has passed. Dick’s will generate $8 billion in free cash flow to equity over the next decade and will use this cash to repurchase about $5.5 billion in stock and issue about $2.6 billion in dividends. Dick’s suspended repurchases during the pandemic, but then spent nearly $1.2 billion on repurchases in 2021, its largest amount in any year by far. Unfortunately, the average price paid was $109 per share, which was possibly inefficient at well above the fair value estimates and historical price levels. For comparison, due to the large share price increase, Dick’s consumed about $400 million in cash in buybacks in 2019 but repurchased more shares than it did in 2021. The annual capital expenditures will average about $450 million (3.5% of sales) over the next five years as Dick’s opens a few stores per year, invests in e-commerce, and renovates existing locations.

Bulls Say

  • E-commerce penetration should continue to increase in the category, favoring digital native players like Chewy. 
  • Chewy’s subscription-based model (72% autoship penetration) should help it retain the bulk of the customers it has added since the onset of COVID-19. 
  • With two thirds of Chewy’s customer base also boasting Amazon Prime memberships, we suspect that pressure from the e-commerce behemoth could prove less onerous than many expect.

Company Description

Chewy is the largest e-commerce pet care retailer in the U.S., generating $8.9 billion in 2021 sales across pet food, treats, hard goods, and pharmacy categories. The firm was founded in 2011, acquired by PetSmart in 2017, and tapped public markets as a standalone company in 2019, after spending a couple of years developing under the aegis of the pet superstore chain. The firm generates sales from pet food, treats, over-the-counter medications, medical prescription fulfillment, and hard goods, like crates, leashes, and bowls.

(Source: Morningstar)

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