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 Shares

Wide-Moat Nike Faces Challenges, but Its Powerful Brand and Digital Strategy Position It Well

Business Strategy & Outlook:   

Company views Nike as the leader of the athletic apparel market and believes it will overcome the challenge of COVID-19 despite near-term supply issues. The wide moat rating on the company is based on its intangible brand asset, it will maintain premium pricing and generate economic profits for at least 20 years. Nike, the largest athletic footwear brand in all major categories and in all major markets, dominates categories like running and basketball with popular shoe styles. While it does face significant competition, the company believes it has proven over a long period that it can maintain share and pricing. Company thinks Nike’s strategies allow it to maintain its leadership position. Over the last few years, Nike has invested in its direct-to-consumer network while cutting wholesale accounts like Belk and Dillard’s. In North America and elsewhere, the firm has reduced its exposure to undifferentiated retailers while increasing its connections with a small number of retailers that bring the Nike brand closer to consumers, carry a full range of products, and allow it to control the brand message. Nike’s consumer plan is led by its Triple Double strategy to double innovation, speed, and direct connections to consumers. Triple Double includes cutting product creation times in half, increasing membership in Nike’s mobile apps, and improving the selection of key franchises while reducing its styles by 25%. It is considered that these strategies will allow Nike to hold shares and pricing.

 Although its recent results in China have been inconsistent due to supply issues and a political controversy, I still believe Nike has a great opportunity for growth there and in other emerging markets. The firm experienced double-digit annual sales growth in six of the past eight years in greater China and, fueled by high government investment in athletics, it will do so again after the current difficulties have passed. Moreover, with worldwide distribution and huge e-commerce that exceeded $10 billion in fiscal 2022, Nike should benefit as more people in China, Latin America, and other developing regions move into the middle class and gain broadband access.

Financial Strengths:  

Company believes Nike is in excellent financial shape to weather the COVID-19 crisis. At the end of fiscal 2021, Nike had $9.4 billion in debt but $13 billion in cash and short-term investments. Its debt/adjusted EBITDA and debt/equity were 1.3 and 0.6, respectively. Nike does not have any long-term debt maturities until May 1, 2023, when its $500 million in 2.25% senior unsecured debt matures, but it does have significant endorsement commitments of more than $1 billion per year. Nike has an unused credit facility of $1 billion and a separate $3 billion commercial paper facility for short-term borrowing, so it has significant unused borrowing capacity. The firm, with its investment-grade credit ratings, could easily increase debt for stock repurchases or other uses. Nike may also make acquisitions, although these are likely to be technology-focused and fiscally immaterial. It is anticipated Nike will continue to return significant cash to shareholders. The firm produced $20.6 billion in free cash flow to equity over the past five years, and estimates it will generate more than $40 billion in free cash flow to equity over the next five. It completed a $12 billion stock-repurchase program authorized in 2015 and has begun to repurchase stock under a four-year, $15 billion stock-repurchase program authorized in 2018. Moreover, Nike issued $1.8 billion in dividends in fiscal 2022, and forecast an average annual dividend payout ratio of 28% over the next decade. Over the next five fiscal years, the company forecasts that Nike will repurchase about $24 billion in stock and issue $11 billion in dividends.

Bulls Say: 

  • Nike has a great opportunity in fast-growing markets like China. More than 70% of Nike’s growth over the next five years may come from outside North America. 
  • Nike’s Triple Double strategy of increased innovation, direct-to-consumer sales, and speed may improve margins and share. Membership growth in its digital channel has exceeded expectations.  
  • Nike’s gross margins may expand by a couple dozen basis points per year through automation, ecommerce, and higher prices. Nike is actively shifting sales to differentiated retail in North America to increase full-priced sales.

Company Description:  

Nike is the largest athletic footwear and apparel brand in the world. It designs, develops, and markets athletic apparel, footwear, equipment, and accessories in six major categories: running, basketball, football (soccer), training, sportswear, and Jordan. Footwear generates about two thirds of its sales. Nike’s brands include Nike, Jordan, and Converse (casual footwear). Nike sells products worldwide and outsources its production to more than 300 factories in more than 30 countries. Nike was founded in 1964 and is based in Beaverton, Oregon. 

(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

UCB transformed from a hybrid pharma firm into a pure-play biopharmaceutical company

Business Strategy & Outlook

UCB emerged as a major biopharmaceutical player in the 1990s with the development of blockbuster drugs Zyrtec and Keppra. Throughout the 1990s and early 2000s, UCB transformed from a hybrid pharma/chemical firm into a pure-play biopharmaceutical company by shedding its packaging, film, and chemical businesses. Acquisitions of Celltech (2004) and Schwarz Pharma (2006) strengthened the biopharmaceutical pipeline, bringing in late-stage assets that would eventually be approved as Cimzia (immunology), Vimpat (epilepsy), and Neupro (Parkinson’s disease). These key products helped offset the impact of Zyrtec and Keppra patent losses, and the company has continued to shape its expertise in immunology and central nervous system disorders. 

UCB’s current portfolio faces key patent losses over the next 10 years, but successful pipeline development could help the firm fill the gaps. Among UCB’s central nervous system therapies, the epilepsy drugs Vimpat and Briviact to be strong contributors until key patent expirations in 2022 and 2026, respectively. In immunology, the steady growth for Cimzia until its 2024 patent loss. Through UCB’s acquisition of Zogenix, it gained Fintepla, an oral solution for patients suffering from Dravet Syndrome and Lennox-Gastaut Syndrome, two severe forms of epilepsy. UCB received approval in the EU and Great Britain in August 2021 for Bimzelx, a drug targeting IL-17A and IL-17F for the treatment of moderate to severe plaque psoriasis. It has subsequently received approval in Japan, Canada, and Australia. It could reach the U.S. market by 2024. The immunology landscape is fairly crowded, but Bimzelx could carve out a slice of the market. The potential for label expansions into psoriatic arthritis and other immunology indications. Additionally, UCB has two other later-stage candidates in complement-mediated disorders, with rozanolixizumab and zilucoplan (through the Ra Pharma acquisition announced in 2019). The complement-mediated disorders landscape is also somewhat crowded, with many competitors vying to displace Alexion’s (since acquired by AstraZeneca) dominant position.

Financial Strengths

The UCB is in good financial health, with solid earnings and cash flow generation. UCB has deleveraged over the years, and it ended 2021 with about EUR 860 million in net debt on its balance sheet. Year-end cash and equivalents totaled nearly EUR 1.3 billion. The firm has historically relied on acquisitions to fill gaps left by patent losses and in late 2019 agreed to acquire Ra Pharmaceuticals for about EUR 2 billion, net of cash acquired. The large purchase was mostly financed with new debt, but one cannot have any concerns about the company meeting its financial obligations. In early 2022, UCB acquired Zogenix for EUR 1.7 billion. This acquisition is financed through a combination of cash and a new term loan. The acquisition of Zogenix brought Fintepla into UCB’s portfolio. Fintepla is an FDA-approved oral solution for patients suffering from Dravet Syndrome and Lennox-Gastaut Syndrome, two severe forms of epilepsy. This acquisition will be earnings accretive from 2023 onwards.

Bulls Say

  • The immunology market presents a massive market opportunity for Cimzia and newer drug Bimzelx. 
  • UCB has taken steps to build out the pipeline in attractive therapeutic areas, such as complement mediated disorders. 
  • UCB should be able to leverage its commercial expertise to sell pipeline candidate bimekizumab, approved as Bimzelx outside the U.S. and on track for U.S. approval in 2024.

Company Description

UCB is a Belgium-based biopharma firm focused on the development of novel therapies for the treatment of central nervous system and immunologic diseases. Historically, revenue was derived from allergy medicine Zyrtec and epilepsy drug Keppra, which have both lost patent protection. The firm’s key products are Cimzia (immunology), Vimpat (epilepsy), Neupro (Parkinson’s disease and restless leg syndrome), Briviact (epilepsy), Bimzelx (psoriasis), Evenity (osteoporosis), Nayzilam (cluster seizures), and Fintepla (Dravet Syndrome and Lennox-Gastaut Syndrome).

(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

Raymond James’ bank will also receive a boost from rising interest rates

Global network and financial technology concept.

Business Strategy & Outlook

Raymond James’ revenue and earnings will hold up better over the near to medium term compared with more pure-play investment banks, thanks to a combination of acquisitions, interest rates, and a relatively large wealth-management business. Over 80% of Raymond James’ net revenue comes from relatively more stable wealth management, asset management, and traditional banking, with usually less than 20% coming from capital markets. 2021 capital markets revenue was abnormally high and will likely continue to reset lower over the next year or so. Given Raymond James’ relatively lower proportion of capital markets revenue, its company wide revenue should hold up better than many other firms’. Raymond James’ bank will also receive a boost from rising interest rates. The company as a whole will benefit from multiple acquisitions, such as Charles Stanley, TriState Capital, and SumRidge Partners. The company’s banking segment experienced quite a bit of pressure over the previous two years, but the future looks bright. Net interest margins compressed by more than 100 basis points to less than 2% in 2021, as benchmark interest rates fell and much of the bank’s assets were variable rate. Additionally, the allowance for loan losses has increased to about 1.2% of loans in early 2022 from 1% in 2019. The company’s banking operations in recent years contributed around 40% of operating income, but that has fallen to less than 20% in some recent quarters.

Expectations are that the U.S. Federal Reserve will increase the federal-funds rate to over 3% by the end of 2022, which will boost the yield on Raymond James’ variable-rate loans. Additionally, the acquisition of TriState Capital has increased the company’s banking operations by about 30%. Loan-loss charge-offs may tick up over the next year or two, but the company’s existing allowance for loan losses should be sufficient, so Raymond James’ banking segment will regain its place as a material driver of earnings.

Financial Strengths

Raymond James is in fine financial health. At the end of its fiscal 2021, the company had $2 billion of senior notes payable compared with $8.3 billion of equity. It doesn’t have any senior notes coming due until 2024. The company has total leverage of about 7.5 times, representing a combination of the bank, which is leveraged 14 times, and the brokerage operation. These leverage ratios are reasonable, given the profile of the company. Raymond James also has quite a bit of cash on its balance sheet. Typically around $500 million is housed at the parent company with upward of another $1 billion of parent company cash that is housed in Raymond James’ own bank or lent to its other businesses.

Bulls Say

  • Additional acquisitions can provide some lift to earnings if the macro environment falters. 
  • The company may have a greater opportunity to recruit advisors as it fills holes in its geographic footprint and offers both employee and independent advisor affiliation options. Recent advisor headcount growth and the Alex. Brown brand may portend superior advisor recruitment. 
  • Net interest income and earnings will meaningfully rise with interest rates.

Company Description

Raymond James Financial is a financial holding company whose major operations include wealth management, investment banking, asset management, and commercial banking. The company has more than 14,000 employees and supports more than 5,000 independent contractor financial advisors across the United States, Canada, and the United Kingdom. Approximately 90% of the company’s revenue is from the U.S. and 70% is from the company’s wealth-management segment.

(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

The strategic rationale for Ipsen’s divestment is to have a greater focus on its faster growing specialty care segment

Business Strategy & Outlook

Ipsen is a global biotechnology company headquartered in France that develops and commercializes medicines across three therapeutic areas: oncology, neuroscience, and rare diseases. Ipsen was founded in 1929 as a consumer healthcare company focused on prescription-based products for digestive disorders and neurological disorders. Ipsen has a global footprint and sells more than 25 drugs in 115 countries, with a direct commercial presence in 34 countries. Over the past nearly 100 years, the company has shifted its focus to its specialty care segment, which comprised 92% of its 2021 revenue. In early 2022, Ipsen announced the divestment of its consumer healthcare segment, which accounted for 8% of 2021 revenue. The strategic rationale for Ipsen’s divestment is to have a greater focus on its faster growing specialty care segment.

Approaching declines in economic profits due to Ipsen’s leading product, Somatuline, facing generic competition in Europe and the United States contributes to the negative moat trend rating. Somatuline accounted for 42% of total sales in 2021, and it will decline to 25% of sales in 2025 due to generic competition impacting sales. Growth from Ipsen’s other marketed products, which have patents that extend until the early to mid-2030s, will somewhat offset the negative impact from generic entry. However, patent expirations for Somatuline and generics gaining market share will likely nevertheless dampen returns by the end of the ten-year explicit forecast period. Thanks to Ipsen’s strong balance sheet, the company is well-positioned to continue funding its internal research and development efforts in addition to external innovation opportunities over the next decade in order to diversify its portfolio. Although the company’s advanced drug candidates are either in the filing stage or Phase 3 with relatively high probabilities of approval due to promising trial data, there is still a degree of uncertainty associated with Ipsen’s clinical and commercial success with these drugs.

Financial Strengths

Ipsen is in decent financial health, and the business continues to continue providing a steady stream of cash. Ipsen made a strategic decision to divest its consumer healthcare segment for EUR 350 million to Mayoly Spindler. This was a strong financial decision since the consumer healthcare segment only accounted for 8% of total revenue in 2021. The management will use the proceeds from the divestment to further expand and diversify its faster-growing specialty care segment. The management team has a history of returning cash to shareholders in the form of dividends. Over the past several years, management has paid a dividend between EUR 0.85 and EUR 1.00 to shareholders. Ipsen announced its 2022 dividend increased by 20% to EUR 1.20. The Ipsen’s shareholder distributions, as mixed as many other biotechnology companies under the coverage, do not pay dividends. The Ipsen’s revenue growth will be constrained by generic competition, so it may better serve long-term investors to reinvest in the company’s pipeline candidates instead of distributing dividends.

Bulls Say

  • Ipsen has a sound financial structure and strong cash generation, which allows it to further develop and expand its pipeline. 
  • Ipsen has a strong and diversified portfolio spanning three key therapeutic areas: oncology, neuroscience, and rare diseases. 
  • The divestment of the consumer healthcare segment allows Ipsen to have an even greater focus on its faster-growing specialty care segment.

Company Description

Ipsen is a global biotechnology company headquartered in France that develops and commercializes medicines across three therapeutic areas: oncology, neuroscience, and rare diseases. Ipsen was founded in 1929 as a consumer healthcare company focused on prescription-based products for digestive disorders and neurological disorders. Over the past nearly 100 years, Ipsen has shifted its focus to specialty care, which comprises the vast majority of its total revenue. In February 2022, Ipsen announced the divestment of its consumer healthcare business, which accounted for 8% of 2021 revenue. Ipsen has a large global footprint and sells more than 25 drugs in 115 countries.

(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

HCA’s strategies have generally yielded positive results over the long run

Business Strategy and Outlook 

HCA operates the largest network of hospitals in the United States, focusing on attractive geographic locations where it has the potential for leading and increasing market share. While it has locations in nearly 20 states and headquarters in Nashville, its facilities are particularly concentrated in Texas and Florida, which represent over half of its bed count. In those states, urban areas of focus include Dallas, Austin, Tampa, and Miami, and those geographic areas provide a good sense of the positive demographic factors that the firm aims to benefit from across the country.

Within its target markets, HCA aims to expand market share through a variety of strategies to attract patients, physicians, and third-party payers. The company provides wide networks of facilities within its chosen geographic markets with key hospital anchors supported by ambulatory surgical centers, urgent care centers, and physician clinics at convenient access points. HCA aims to be the facility of choice for physicians who are typically free agents with practicing rights to other hospitals in the area. For example, HCA has spent the past decade or so investing in its surgical suites to improve efficiency, nursing, and technology offerings to appeal to surgeons scheduling those procedures and positively influence patient satisfaction, which builds on the reputation of HCA’s facilities. From a payer standpoint, HCA continues to contract with health insurers in three-year cycles, which is typically manageable but is causing some concerns due to spiking labor costs. Overall though, HCA’s strategies have generally yielded positive results over the long run. For example, the company continues to grind out market share gains in its local markets with market share standing at roughly 27% at the end of 2020, up from 23% in 2011, according to HCA management. Once HCA works through current labor challenges, the firm is to grow its top line in the mid single digits and its adjusted earnings per share to grow in the low double digits.

Financial Strength

At the end of 2021, the company owed about $35 billion in debt, or gross leverage of less than 3 times, or below its new leverage target of 3.0 to 4.0 times, which is down from 3.5 and 4.5 times previously. At the end of 2021, HCA held just under $2 billion in cash after returning the government aid that it was originally granted during the COVID-19 health crisis of 2020. With those liquid resources at its disposal and free cash flows expected to range between roughly $5 billion and $7 billion annually during the next five years, HCA should be able to manage its debt maturities during the next five years through internal means. Those maturities include $0.2 billion due in 2022, $2.9 billion due in 2023, $2.4 billion due in 2024, $4.6 billion due in 2025, and $5.3 billion in 2026. However, the company plans to return significant cash to stakeholders going forward. As of February 2022, the company was authorized to repurchase about $9 billion in shares, which the firm expects to use in the next couple of years. Also, HCA just reinstated its dividend ($0.6 billion annual run rate), which was temporarily suspended during the pandemic. The company also distributed about $0.7 billion in cash to noncontrolling interests in 2021, and those outflows might grow mildly going forward. Overall, HCA’s planned distributions to stakeholders may lead to more debt issuance to refinance maturities or even to finance some of these outflows to stakeholders, going forward.


Bulls Say’s

  • Beyond administrative function efficiency, HCA’s large scale gives it an opportunity to test and expand best practices throughout its network of facilities to improve service quality and efficiency. 
  • HCA’s focus on attractive geographic locations gives it a volume tailwind that should positively affect its top line. 
  • The company’s financial leverage should be easily manageable, giving HCA flexibility for U.S. healthcare policy changes or other shocks to the system that could constrain demand for the more elective, and highly profitable, parts of its business.

Company Profile 

HCA Healthcare is a Nashville-based healthcare provider organization operating the largest collection of acute-care hospitals in the U.S. As of December 2021, the firm owned and operated 182 hospitals, 125 freestanding outpatient surgery centers, and a broad network of physician offices, urgent care clinics, and freestanding emergency rooms across nearly 20 states and a small foothold in England.

(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

Swatch-owned brands account for around 35% of Swiss watch exports

Business Strategy & Outlook

The Swatch Group is the biggest vertically integrated Swiss watch manufacturer with 18 brands covering all price ranges, from entry to ultra luxury. Swatch-owned brands account for around 35% of Swiss watch exports, and the company supplies competitors with watch movements. Swatch Group’s luxury brands boast 100- to 200-year histories, iconic collections, and deep cultural heritage. Most of Swatch’s brands (at price points below $10,000) benefit from a cost advantage through scale and a higher degree of production automation.

Swatch’s diversification in terms of brands and price points helps it to avoid the pitfalls that come with extending brands into categories where they don’t strategically belong, and to potentially capture positive mix as consumers trade up. However, a lack of control over distribution (around 70% of sales are wholesale) as a weak spot for the company. Distributors are more likely to engage in discounting to maintain cash flows when demand sours, which can be damaging for brands with long shelf-life products. The recent strong supply response from Swatch and its competitors to Chinese demand points to a lack of supply discipline. The supply discipline is one of the important moat-supporting factors for luxury brands, as it helps to preserve the brand exclusivity perception and ensure high returns on capital. The Swatch Group’s sales to grow at a 4.3% pace over the long term (versus low -single-digit growth over the prior decade) with mid-single-digit growth for its higher-priced watch brands such as Omega, Longines, Breguet and Blancpain, high-single-digit growth for jewelry brand Harry Winston and flat revenue for low-end watches (Tissot, Swatch, Mido, Hamilton and so on).

Financial Strengths

Swatch is in a strong financial position with CHF 2.5 billion in net cash at the end of 2020, with minimal financial debt and around CHF 2.6 billion in cash and marketable securities on the balance sheet. Further, over one third of inventories of Swatch Group, or over CHF 2.1 billion by value, are in precious metals and stones, recorded both in raw materials and as part of finished and semi finished goods. It is well-positioned to weather the COVID-19 crisis. Given the industry’s cyclicality, the financial prudence is appropriate. Cash flow improvement in future through operating leverage on fixed costs, cost discipline in the company—and especially within underperforming brands—and lower investment levels as productive and retail capacity has been built out in the past upcycle years. The free cash flow margin at around 10%, approximately in line with 2020-21 levels, as the investment cycle rolls over. The Swatch to remain mostly equity financed with low financial leverage.

Bulls Say

  • Around three quarters of Swatch’s revenue and higher share of profits are from higher-end watch and jewelry brands, not directly affected by smartwatch competition.
  • Harry Winston, among the few global brands in luxury jewelry, a niche with especially high entry barriers, offers growth and margin expansion potential. 
  • Swatch is increasingly taking action to tackle costs in low-end brands and limit gray market channels for high-end brands.

Company Description

Swatch Group’s biggest brands are Omega (number-two Swiss watch brand by sales after Rolex), Longines (the largest premium watch brand and number four by sales globally), Breguet, Tissot (the leader in mid range Swiss watches), and Swatch. Swatch group employs over 31,000 people, half of them in Switzerland. The Swatch Group makes about 28% of its sales from Omega, 18% from ultra luxury brands, 20% from Longines, 12% from Tissot, and 4% from Swatch. The Omega and Longines to be the group’s most profitable brands.

(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

After Jumping Over COVID-19 Hurdles, Labor Challenges Are Pressuring HCA Shares

Business Strategy & Outlook:   

HCA operates the largest network of hospitals in the United States, focusing on attractive geographic locations where it has the potential for leading and increasing market share. While it has locations in nearly 20 states and headquarters in Nashville, its facilities are particularly concentrated in Texas and Florida, which represent over half of its bed count. In those states, urban areas of focus include Dallas, Austin, Tampa, and Miami, and those geographic areas provide a good sense of the positive demographic factors that the firm aims to benefit from across the country.

 Within its target markets, HCA aims to expand market share through a variety of strategies to attract patients, physicians, and third-party payers. The company provides wide networks of facilities within its chosen geographic markets with key hospital anchors supported by ambulatory surgical centers, urgent care centers, and physician clinics at convenient access points. HCA aims to be the facility of choice for physicians who are typically free agents with practicing rights to other hospitals in the area. For example, HCA has spent the past decade or so investing in its surgical suites to improve efficiency, nursing, and technology offerings to appeal to surgeons scheduling those procedures and positively influence patient satisfaction, which builds on the reputation of HCA’s facilities. From a payer standpoint, HCA continues to contract with health insurers in three-year cycles, which is typically manageable but is causing some concerns due to spiking labor costs. Overall though, HCA’s strategies have generally yielded positive results over the long run. For example, the company continues to grind out market share gains in its local markets with market share standing at roughly 27% at the end of 2020, up from 23% in 2011, according to HCA management. Once HCA works through current labor challenges, we expect the firm to grow its top line in the midsingle digits and its adjusted earnings per share to grow in the low double digits.

Financial Strengths:  

At the end of 2021, the company owed about $35 billion in debt, or gross leverage of less than 3 times, or below its new leverage target of 3.0 to 4.0 times, which is down from 3.5 and 4.5 times previously. At the end of 2021, HCA held just under $2 billion in cash after returning the government aid that it was originally granted during the COVID-19 health crisis of 2020. With those liquid resources at its disposal and free cash flows expected to range between roughly $5 billion and $7 billion annually during the next five years, HCA should be able to manage its debt maturities during the next five years through internal means. Those maturities include $0.2 billion due in 2022, $2.9 billion due in 2023, $2.4 billion due in 2024, $4.6 billion due in 2025, and $5.3 billion in 2026. However, the company plans to return significant cash to stakeholders going forward. As of February 2022, the company was authorized to repurchase about $9 billion in shares, which the firm expects to use in the next couple of years. Also, HCA just reinstated its dividend ($0.6 billion annual run rate), which was temporarily suspended during the the pandemic. The company also distributed about $0.7 billion in cash to noncontrolling interests in 2021, and we would expect those outflows to grow mildly going forward. Overall, we expect HCA’s planned distributions to stakeholders may lead to more debt issuance to refinance maturities or even to finance some of these outflows to stakeholders, going forward.

Bulls Say: 

  • Beyond administrative function efficiency, HCA’s large scale gives it an opportunity to test and expand best practices throughout its network of facilities to improve service quality and efficiency. 
  • HCA’s focus on attractive geographic locations gives it a volume tailwind that should positively affect its top line. 
  • The company’s financial leverage should be easily manageable, giving HCA flexibility for U.S. healthcare policy changes or other shocks to the system that could constrain demand for the more elective, and highly profitable, parts of its business.

Company Description:  

HCA Healthcare is a Nashville-based healthcare provider organization operating the largest collection of acute-care hospitals in the U.S. As of December 2021, the firm owned and operated 182 hospitals, 125 freestanding outpatient surgery centers, and a broad network of physician offices, urgent care clinics, and freestanding emergency rooms across nearly 20 states and a small foothold in England 

(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

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.

Categories
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.

Categories
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)

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