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

The Gap has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes.

Business Strategy & Outlook

The Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes. Still, Gap has fair liquidity, and its Old Navy chain as a solid business. According to Euromonitor, Old Navy is the largest individual apparel brand by retail sales in the United States, and, despite ongoing issues, the Gap’s goal of $10 billion in annual sales for the label (up from $9.1 billion in 2021) as achievable in 2026. Old Navy, though, faces considerable competition in the discount apparel space from wide-moat Amazon, other e-commerce, outlet stores, and discounters like narrow-moat Ross Stores. Meanwhile, Old Navy already has more than 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As its matter of wary of the potential of these markets, one cannot view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, it will have about 1,500 locations in 10 years.

One cannot believe Gap’s once-powerful Gap and Banana Republic brands have competitive advantages, either. According to a 2019 presentation, Old Navy was generating about 80% of Gap’s operating profit even before the pandemic. Now, with scores of Gap and Banana Republic stores slated to be closed, the brands are permanently diminished. Moreover, while a necessary move, as a  doubt that downsizing will improve Gap’s overall margins very much. The firm says that it can reach 10% operating margins in about three years, but Gap’s long-term operating margins at just 8%. Further, one cannot think fast-growing Athleta has achieved a competitive advantage. Athleta grew to more than $1.4 billion in sales in 2021 from $249 million in 2012. However, at less than 10% of Gap’s sales, Athleta is not large or old enough to provide a moat for Gap. Moreover, while the brand benefits from a strong “athleisure” trend, it lacks the pricing power of direct competitor narrow-moat Lululemon.

Financial Strengths

One cannot think Gap has any liquidity concerns even though its free cash flow dropped significantly in 2020 and 2021 due to the COVID-19 crisis and it suffered an operating loss in 2022’s first quarter. In 2021’s third quarter, the firm issued $1.5 billion in new debt that matures in 2029 and 2031 ($750 million each) at interest rates of 3.625% and 3.875%, respectively, and subsequently paid down $1.9 billion in higher-interest debt. After these transactions, it closed March 2022 with $845 million in cash and investments and $1.8 billion in debt. Given that its earliest significant maturity is now seven years away, one cannot view Gap’s debt as a concern. Under normal circumstances, the firm generates significant cash flow, including more than $700 million in free cash flow to equity in 2019. Gap suspended dividend payments and share repurchases during the crisis but resumed both in 2021. The firm has signaled that it will continue to issue dividends despite recognizing a loss in 2022’s first quarter. It is been expected it will return around 30% of its earnings to shareholders as dividends over the next decade. Gap has also been a consistent purchaser of its own stock, having reduced its share count by about 47% between 2008 and 2021. The average yearly repurchases of about $500 million over the next 10 years. The repurchases as prudent when executed at a discount to in the assessment of the firm’s intrinsic value, as has recently been the case. The Gap’s capital expenditures to average 4% of sales over the next 10 years, in line with the 10-year historical average. Gap intends to open Old Navy and Athleta stores and continue to invest in digital capabilities and its supply chain to keep up with competitors.

Bulls Say

  • According to Euromonitor, Old Navy is the largest apparel brand in U.S. It competes in the discount apparel sector, which has been healthier than other areas of apparel retail. 
  • Athleta has established itself in the fast-growing women’s athleisure market, one of the bright spots in North America apparel. The number of Athleta stores will nearly double over the next decade. 
  • Gap’s e-commerce accounted for more than $6.4 billion in sales in 2021, 39% of its total sales. COVID-19 has accelerated e-commerce growth for Gap and others in the apparel space.

Company Description

Gap retails apparel, accessories, and personal-care products under the Gap, Old Navy, Banana Republic, and Athleta brands. Old Navy generates more than half of Gap’s sales. The firm also operates e-commerce sites, outlet stores, and specialty stores under various Gap names. Gap operates nearly 3,000 stores in North America, Europe, and Asia and franchises about 600 stores in Asia, Europe, Latin America, and other regions. Gap was founded in 1969 and is based in San Francisco.

(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

Developed markets like the United Kingdom as well as developing economies like Mexico to be increasingly pertinent to Brown-Forman Corp overall trajectory

Business Strategy and Outlook

Brown-Forman has established itself as a stalwart in matured spirits, an enclave of the distillation industry that it is seen as particularly attractive. In addition to brand recognition and distribution, companies in this industry benefit from scarcity value, the result of the consumer perception surrounding the aging of this type of alcohol and the pricing power that this begets. Against this industry backdrop, it is alleged that Brown-Forman’s portfolio, anchored by the Jack Daniel’s brand, boasts some of the highest cachet globally. 

The firm made its bones in whiskey, with Jack Daniel’s Tennessee Whiskey being the best-selling American whiskey in the world, but it also has strong tequila brands like el Jimador and Herradura. The resonance of its trademarks is reflected in its ability to parlay them into numerous line extensions, such as Jack Daniel’s Tennessee Honey, Apple, and ready-to-drink beverages. These provide stimulus to its top line, not only by maintaining mind share among its core consumers, but by expanding the types of palates to which its drinks appeal. Brown-Forman is also benefiting from growth abroad, buoyed by the broader resurgence in global demand for bourbon. It is probable that developed markets like the United Kingdom as well as developing economies like Mexico to be increasingly pertinent to its overall trajectory. 

Still, the company’s path will not be completely unencumbered. Tariff relief remains a near-term tailwind, but dollar strength figures to slow demand for (proportionately) more expensive U.S. exports. Go-to-market changes also add a degree of execution risk. Despite a successful transition to owned distribution in the U.K, where it previously partnered with Bacardi, future transitions (such as in Taiwan) may not yield similar results. Additionally, while COVID-19 accelerated secular trends in developed markets, developing markets face a more precarious outlook, particularly amid a backdrop of swelling inflation in nondiscretionary spending categories. Nevertheless, it is likely that Brown-Forman’s embedded advantages and experienced management team will help the company navigate these risks.

Financial Strength

Brown-Forman is in solid financial health, and from analyst’s vantage point, the coronavirus pandemic has not altered this reality. The company has a manageable balance sheet and commendable cash flow generation. Net leverage currently sits well below 2 times EBITDA, with ample capacity to tilt the capital structure toward debt as financial opportunities dictate. Still, management has historically been quite conservative with mergers and acquisitions, and no transformative transactions on the horizon in seen. Free cash flow has averaged nearly $675 million over the past five years (high teens as a proportion of sales), which is viewed as a worthy accomplishment in light of the heightened investment levels that have prevailed over the same time frame. Capital expenditures have averaged north of 3% of sales over the past five years, with management investing in production lines, warehousing facilities, and modernization and automation initiatives in its supply chain. It is anticipated that gradual normalization of capital outlays throughout expert’s explicit forecast, following a sharp increase in fiscal 2023, which stands to augment Brown-Forman’s long-term free cash flow margins despite recurring working capital investments in inventory. It is alleged that the stellar cash generation will continue supporting dividends and increases, as well as appreciable reductions in the share count. Moreover, the firm’s commitment to shareholder returns should not impinge on its liquidity, even amid COVID-19. In addition to $868 million in balance sheet cash as of the end of fiscal 2022, the company maintains consistent access to capital markets primarily through a commercial paper program (backed by its revolving credit facility) facilitating borrowings of up to $800 million.

Bulls Say’s

  • Brown-Forman has a foothold in multiple matured spirits categories, where market structure and consumer perception spawn robust pricing and operating margins. 
  • Flavoured line extensions in the Jack Daniel’s family should foster brand resonance among a new generation of alcohol consumers. 
  • COVID-19 impacts in important markets like the U.S. have proven muted, thanks to a confluence of portfolio and consumer demand dynamics.

Company Profile 

Brown-Forman is the largest U.S.-domiciled producer of distilled spirits. The firm reports only a single operating segment, and whiskey represents its primary business driver, generating roughly three quarters of sales, undergirded by the Jack Daniel’s brand as well as bourbons such as Woodford Reserve and Old Forrester. Notable nonwhiskey offerings include tequilas such as el Jimador and Herradura. The firm operates globally, with products sold in more than 170 countries, and adapts its route-to-consumer model depending on regulation as well as the prevailing competitive dynamics in a given market. For example, it sells through distributors in the U.S. but operates its own logistics apparatus in many other countries. The company remains under the control of the Brown family. 

(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

Dr. Reddy’s has made relatively strong inroads into development of biosimilars

Business Strategy and Outlook 

Dr. Reddy’s Laboratories is a global pharmaceutical company based in Hyderabad, India. It manufactures and markets generic drugs and active pharmaceutical ingredients in markets across the world, but predominantly in the United States, India, and Eastern Europe. Indian pharmaceutical manufacturers have seen success over the past decade in penetrating the U.S. market, where regulatory hurdles are lower than in Western Europe. With competition on price in a commodified space, the entry of low-cost manufacturers has facilitated a deflationary price environment for generic drugs since 2015, putting substantial pressure on the margins of established manufacturers. Conversely, in India and other countries with lower generics adoption, so-called “branded” generics have seen notable success. Brand generally supports customer loyalty and more-stable prices in these markets. Given the lack of public and private prescription drug insurance and a heavily fragmented supply chain in India, there are fewer catalysts driving the switch to unbranded generics.

Generic manufacturers have taken different approaches to combat margin pressure over the past few years. While some manufacturers have addressed competition by rationalizing their U.S. portfolio and discontinuing low-margin or unprofitable drugs, Dr. Reddy’s has remained focused on expanding its U.S. market share. While its U.S. portfolio has experienced slightly higher deflation compared with peers, its pipeline is increasingly leaning toward injectables and other complex generics that command higher margins and exhibit relatively more price stability. Dr. Reddy’s has made relatively strong inroads into development of biosimilars–near-generic equivalents of biologic drugs–predominantly in India and Russia. However, U.S. and EU approval of Dr. Reddy’s biosimilars remains improbable in the near future, given the relatively more stringent regulatory requirements and marketing investment.

Financial Strength

As of December 2021, Dr. Reddy’s held gross debt of INR 28 billion ($370 million), which is more than offset by the cash on the company’s balance sheet. With very low leverage, the company faces little liquidity risk. This compares favourably with other global generic manufacturers like Teva and Viatris, which are saddled with high leverage as a result of an aggressive acquisition strategy over the past decade. The company pays an annual dividend of $0.34 per share, which translates to a dividend yield of under 1%.

Bulls Say’s

  • Dr. Reddy’s low-labour-cost operations based in India and vertical integration likely provide a low-cost edge. 
  • In the U.S. and Russia, Dr. Reddy’s has grown quickly in OTC generics, which is an attractive segment of the market with slightly higher barriers to entry than conventional retail pharmacy drugs. 
  • Dr. Reddy’s strong branded generic presence in emerging markets provides significant growth opportunities with less price competition than typically seen in developed markets

Company Profile 

Headquartered in India, Dr. Reddy’s Laboratories develops and manufactures generic pharmaceutical products sold across the world. The company specializes in low-cost, easy-to-produce small-molecule generic drugs and active pharmaceutical ingredients. Its drug portfolio in recent years has included biosimilar drug launches in select emerging markets and has shifted toward injectables and more complex generic products. Geographically, the company’s sales are well dispersed across North America, India, and other emerging markets.

(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

No-Moat Gap’s Problems Are Undeniable, but Old Navy and Athleta Align With Market Trends

Business Strategy & Outlook

The Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes. Still, Gap has fair liquidity, and its Old Navy chain as a solid business. According to Euromonitor, Old Navy is the largest individual apparel brand by retail sales in the United States, and, despite ongoing issues, the Gap’s goal of $10 billion in annual sales for the label (up from $9.1 billion in 2021) as achievable in 2026. Old Navy, though, faces considerable competition in the discount apparel space from wide-moat Amazon, other e-commerce, outlet stores, and discounters like narrow-moat Ross Stores. Meanwhile, Old Navy already has more than 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As there is a wary of the potential of these markets, one cannot view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, one can forecast it will have about 1,500 locations in 10 years. No one can believe Gap’s once-powerful Gap and Banana Republic brands have competitive advantages, either. According to a 2019 presentation, Old Navy was generating about 80% of Gap’s operating profit even before the pandemic. Now, with scores of Gap and Banana Republic stores slated to be closed, the brands are permanently diminished. Moreover, while a necessary move, that downsizing will improve Gap’s overall margins very much. The firm says that it can reach 10% operating margins in about three years, but Gap’s long-term operating margins at just 8%.

Further, one does not think fast-growing Athleta has achieved a competitive advantage. Athleta grew to more than $1.4 billion in sales in 2021 from $249 million in 2012. However, at less than 10% of Gap’s sales, Athleta is not large or old enough to provide a moat for Gap. Moreover, while the brand benefits from a strong “athleisure” trend, it lacks the pricing power of direct competitor narrow-moat Lululemon.

Financial Strengths

One cannot think Gap has any liquidity concerns even though its free cash flow dropped significantly in 2020 and 2021 due to the COVID-19 crisis and it suffered an operating loss in 2022’s first quarter. In 2021’s third quarter, the firm issued $1.5 billion in new debt that matures in 2029 and 2031 ($750 million each) at interest rates of 3.625% and 3.875%, respectively, and subsequently paid down $1.9 billion in higher-interest debt. After these transactions, it closed March 2022 with $845 million in cash and investments and $1.8 billion in debt. Given that its earliest significant maturity is now seven years away, one cannot view Gap’s debt as a concern. Under normal circumstances, the firm generates significant cash flow, including more than $700 million in free cash flow to equity in 2019. Gap suspended dividend payments and share repurchases during the crisis but resumed both in 2021. The firm has signaled that it will continue to issue dividends despite recognizing a loss in 2022’s first quarter. The expect it will return around 30% of its earnings to shareholders as dividends over the next decade. Gap has also been a consistent purchaser of its own stock, having reduced its share count by about 47% between 2008 and 2021. As per the forecast average yearly repurchases of about $500 million over the next 10 years. The repurchases as prudent when executed at a discount to the assessment of the firm’s intrinsic value, as has recently been the case. The Gap’s capital expenditures to average 4% of sales over the next 10 years, in line with the 10-year historical average. Gap intends to open Old Navy and Athleta stores and continue to invest in digital capabilities and its supply chain to keep up with competitors.

Bulls Say

  • According to Euromonitor, Old Navy is the largest apparel brand in U.S. It competes in the discount apparel sector, which has been healthier than other areas of apparel retail. 
  • Athleta has established itself in the fast-growing women’s athleisure market, one of the bright spots in North America apparel. The number of Athleta stores will nearly double over the next decade. 
  • Gap’s e-commerce accounted for more than $6.4 billion in sales in 2021, 39% of its total sales. COVID-19 has accelerated e-commerce growth for Gap and others in the apparel space.

Company Description

Gap retails apparel, accessories, and personal-care products under the Gap, Old Navy, Banana Republic, and Athleta brands. Old Navy generates more than half of Gap’s sales. The firm also operates e-commerce sites, outlet stores, and specialty stores under various Gap names. Gap operates nearly 3,000 stores in North America, Europe, and Asia and franchises about 600 stores in Asia, Europe, Latin America, and other regions. Gap was founded in 1969 and is based in San Francisco.

(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

Oracle’s Q4 Beats Expectations but Outlook Doesn’t Surprise; Shares Fairly Valued

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

Business Strategy and Outlook 

Oracle is a best-in-breed provider of on-premises relational database technologies and enterprise resource planning, or ERP, software and is one of the most profitable companies in the software industry. However, growth has been lacking as more customers shift their workloads to the cloud, bypassing Oracle’s solutions. Despite Oracle’s cloud migration efforts, cloud competition will likely provide headwinds for Oracle. In turn, moat rating for Oracle is narrow, coupled with a negative moat trend rating. Oracle’s business is centred around its relational database which stores a treasure trove of data that is the lifeblood of many enterprises. Oracle’s software offerings leverage this database as its backend, while Oracle’s servicing and hardware businesses support these database tasks. Oracle remains a best-of-breed provider of on-premises databases and software, and customers face very high switching costs if they look to migrate elsewhere. However, the company is not being on the forefront of recent software trends, and new and potential customers appear to be looking past Oracle for their database needs. Database preferences are far wider today due to the sheer number of ways to manipulate data, and the different data storage practices this necessitates. In turn, Oracle is losing database market share to new database types that may be better suited to the cloud.

Additionally, the transition to the cloud is prompting enterprises to change software vendors away from all-in-one ERP systems to application specific that are best of breed. In response, Oracle is banking on its second-generation cloud to not only cater to its traditional enterprise workloads, like supporting databases, but also general use workloads. However, Oracle’s cloud as sub-scale to Amazon and others and it is doubted Oracle can close this gap soon. Oracle should still be successful in moving a significant amount of its traditional on-premises workloads to Oracle cloud. However, migrating all of its customers is not such a sure thing, as cloud-first software vendors have been able to take meaningful share from legacy Oracle customers.

Financial Strength

Oracle can be considered to be in healthy financial standing. As of fiscal 2020, Oracle had $43 billion in cash and equivalents versus $72 billion in debt. However, Oracle should generate robust free cash flow in the years ahead to settle these debt obligations over time. Oracle will have the capital to increase its total annual dividends to $1.28 in fiscal 2025 from $0.96 in fiscal 2020, as the company continues to make share repurchases and acquisitions. However, the magnitude of acquisitions will moderate as the company comes off of its buildout of its second-generation cloud product and has stressed their recent preference to build new capabilities in house. In terms of capital expenditures, Oracle will spend an average of $1.6 million per year over the next five years, as the company

Bulls Say’s

  • Oracle’s relational database should be able to post strong growth as customers continue to depend on its quality features, such as data partitioning which brings incomparable load balancing efficiency.
  • Oracle’s autonomous database and IaaS was built with ease of use in mind, which could bring a significant base of first-time Oracle users to the company, strengthening top line results.
  • Oracle’s stake in TikTok Global and cloud services to TikTok’s U.S. operations should add a significant boost to Oracle’s top line and attract more “general use” cloud customers.

Company Profile 

Oracle provides database technology and enterprise resource planning, or ERP, software to enterprises around the world. Founded in 1977, Oracle pioneered the first commercial SQL-based relational database management system. Today, Oracle has 430,000 customers in 175 countries, supported by its base of 136,000 employees.

(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

Dufry Should Benefit from Travel Recovery in 2022 Despite Geopolitical Uncertainty

investment stockbroker risk analysis using multiple devices. Financial analysis using phone app and laptop. Market trading profit.

Business Strategy and Outlook 

As a leading player in travel retail and a leading concession operator in airport retail with around 20% market share, more than double that of its next biggest peer, Dufry is well positioned to benefit from increasing global travel flows. Over the years, Dufry has played the role of consolidator in a globally fragmented industry, allowing it to achieve purchasing scale, breadth of store formats and product offer, and geographical diversification. We contend that airports capture the bulk of value in airport retail through concession fees of about 30%, owing to ownership of unique real estate assets. Nonetheless, we believe that Dufry, as the most efficient retail operator in over 400 locations globally, benefits from a purchasing scale that not many competitors or airports can match as a stand-alone entity (the global airport industry is rather fragmented and 70% publicly controlled, hindering consolidation). Dufry should thus be well positioned to withstand concession inflation pressure and consolidate the industry as weaker operators exit the market, which should increase its bargaining power in the long term. Dufry also provides value for suppliers (many of them fast-moving consumer goods companies and luxury brands) by giving exposure to an attractive high-growth distribution channel with brand-building opportunities to an affluent, captive audience.

We believe Dufry should be able to expand by about 3%-4% annually over the 10-year forecast period (from prepandemic levels) through a mix of organic growth (driven by increasing passenger numbers) and new concessions (gained organically or through consolidation). We expect operating margins (excluding acquisition-related amortization) to be broadly stable, with gross margin efficiencies and scale offset by airport concession inflation, both effects moderating over time.

Financial Strength

Dufry had around CHF 2.2 billion in available liquidity at the end of December 2021, which should be sufficient for many months under management’s assumption of CHF 20 million monthly cash burn with revenue 40% lower than 2019 levels and CHF 10 million monthly cash burn with revenue down 35% against 2019 levels. We assume revenue in 2021 to be 21% lower than that reached in 2019. Covenant testing has been delayed until 2023 with a threshold of 5 times net debt/adjusted operating cash flow. We expect the company to be in compliance with covenants as travel picks up. It is believed the liquidity risk for the company can be considered low

Bulls Say’s

  • Dufry is well positioned to benefit from increasing passenger flows, which have historically grown faster than global GDP. 
  • Investment in digital initiatives, such as “reserve online, collect at the airport,” could increase spending per passenger, as actual airport buying may be currently limited by the time constraints. 
  • Dufry has room to expand its business into new geographies (Asia) and new business areas (downtown duty-free, duty-free on cruise ships)

Company Profile 

Dufry is the world’s largest duty-free shop operator and leader in travel retail. It commands about 12%-13% share in a fragmented global travel retail market, including around 20% in airport retail (more than double that of the next biggest competitor), through its presence in 65 countries and about 420 locations globally; airports make up over 80% of the company’s total revenue. Dufry’s main markets are Europe (45% of revenue), Americas (about 45% revenue each), and Asia, the Middle East, and Australia.

(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

Maintaining CHF 620 Fair Value Estimate for Narrow-Moat Lonza; Shares Undervalued

Business Strategy & Outlook:   

Lonza Group has been a dominant player in the contract development and manufacturing space for decades. The company thinks the outlook for Lonza looks bright, especially as drug manufacturing becomes more complex with biologics and cell and gene therapies playing larger roles in the overall mix. Lonza’s 2021 CHF 4.2 billion divestment of its former specialty ingredients business to Bain Capital and Cinven as positive since it allows for an increased focus on further expanding its biopharma contract manufacturing business. Lonza’s specialty ingredients customers were large consumer goods and industrials players, which had significant bargaining power. As a result, this segment had lower margins and shorter contracts of one to three years compared with its lengthy contracts for its biopharma manufacturing business. 

Lonza maintains an extensive network of partnerships with pharmaceutical and biotechnology firms that leverage its expertise and scale to optimize drug production and avoid the risks of in-house manufacturing. Company anticipates outsourcing penetration will continue to incrementally increase, driven by the complexities of biologic manufacturing. Only one-third of pharmaceutical manufacturing is currently conducted in-house while two-thirds are outsourced. Additionally, the customer relationships in Lonza’s contract manufacturing segment are sticky and long-lasting, as drug companies tend to stick with trusted suppliers with good track records of regulatory compliance. Biopharma customers are likely to continue outsourcing manufacturing in order to benefit from access to flexible capacity and manufacturing improvements.

Financial Strengths:  

Lonza is in fair financial health, and company expects the business to continue providing a steady stream of cash. The company has historically utilized debt, particularly for acquisitions. The company ended 2017 with CHF 3.8 billion in debt after acquiring Capsugel with a mix of debt and equity. Since then, the company has steadily deleveraged. It is expected that the company will be able to meet its financial obligations with its free cash flow. Lonza also divested its specialty ingredients business in July 2021 for CHF 4.2 billion. Management is using the proceeds from the divestment to further improve its biopharma manufacturing capabilities. The management team has a continued record of returning cash to shareholders in the form of dividends, with a dividend of CHF 3.00 paid in 2021. The payout ratio as a percentage of adjusted earnings per share has varied between 20% and 40% over the last few years, depending on cash needed for capital expenditures. The payout ratio has trended down in recent years due to increased investment in new manufacturing capabilities. Due to the business’ strong cash flow, the management will maintain its dividend policy and utilize cash for dividend payments, debt paydown, internal investment, and opportunistic deals.

Bulls Say: 

  • The pharma biotech and nutrition segment are a sticky business with long-term contracts and high switching costs for its customers.
  • As drug portfolios are increasingly made up of complex drugs like biologics and emerging therapies, Lonza’s biopharma customers will be more reliant on outsourced manufacturing.
  • With its global scale, Lonza is less dependent on any one customer or drug, which allows it to better absorb surprising late-stage failures or drops in demand

Company Description:  

Lonza Group is a contract development and manufacturing organization, or CDMO. It operates under four segments: small molecules, biologics, cell & gene, and capsules & health ingredients. Lonza derives its revenue primarily from long-term supply agreements with pharmaceutical customers. The company provides a range of development and manufacturing services throughout the entire lifecycle of a product from drug research to commercial supply. The majority of Lonza’s customers are pharmaceutical and biotechnology companies, academic institutions, and government research organizations.

(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

Medtronic Finishes Fiscal 2022 as Anticipated; No Change to Our FVE on Tempered View of 2023

Business Strategy & Outlook:   

Medtronic’s standing as the largest pure-play medical device maker remains a force to be reckoned with in the med-tech landscape. Pairing Medtronic’s diversified product portfolio aimed at a wide range of chronic diseases with its expansive selection of products for acute care in hospitals has bolstered Medtronic’s position as a key partner for its hospital customers. Medtronic has historically focused on innovation, designing and manufacturing devices to address cardiac care, neurological and spinal conditions, and diabetes. All along, the firm has remained focused on its fundamental strategy of innovation. It is often first to market with new products and has invested heavily in internal research and development efforts as well as acquiring emerging technologies. However, in the postreform healthcare world where there are higher hurdles for securing reimbursement for next-generation technology, Medtronic has slightly shifted its strategy to include partnering more closely with its hospital clients by offering greater breadth of products and services to help hospitals operate more efficiently. By partnering more closely and integrating itself into more hospital operations, Medtronic is well positioned to take advantage of more business opportunities in the value-based reimbursement environment, in our view. In particular, Medtronic has been pioneering risk-based contracting around some of its cardiac and diabetes products, which company thinks is attractive to hospital clients and payers alike. 

Company has always appreciated Medtronic’s diverse portfolio, where certain waning product lines would be offset by growth in other categories. The addition of devices and consumables used in the surgical suite should further stabilize potential speed bumps in individual product lines. The COVID-19 disruption added more near-term turbulence, especially with supply chain issues and delays in nonpandemic patient volume, but the company remains confident that underlying demand for many of these therapies and Medtronic’s ongoing innovation should prevail over the longer term.

Financial Strengths:  

Medtronic’s financial health deteriorated somewhat after financing a significant portion of the Covidien merger with new debt issuance. Covidien shareholders owned about 30% of the combined entity at the time of the merger, which allowed the combined entity to invert to Covidien’s Irish domicile, lowering its tax rate and enhancing its ability to access overseas cash. At the end of January 2016, Medtronic owed $36 billion in debt, or around 4 times adjusted EBITDA, which is up from around 2 times historically. Since then, the firm has paid off approximately $14 billion of the debt. The firm ended fiscal 2022 with debt to adjusted EBITDA around 3 times, which is manageable, but slightly higher than the 2.5 times that is common in the medical technology industry. Nonetheless, the firm generates strong cash flow that can be put toward tuck-in acquisitions. Beyond its debt obligations and M&A, the firm aims to return a minimum of 50% of its annual free cash flow to shareholders but has been in the 60% to 100% range in recent years, primarily through its dividend and peripherally due to opportunistic share repurchase

Bulls Say: 

  • Medtronic has historically held roughly 50% share in its core heart devices. It’s also the market leader in spinal products, insulin pumps, and neuromodulators for chronic pain. 
  • Medtronic’s pipeline contains treatments for atrial fibrillation, mitral valve disease, and renal denervation for hypertension. If these new therapies prove effective, Medtronic could dominate three more potentially large markets. 
  • Medtronic often finds novel ways to apply familiar technologies, like using the implantable electronic stimulation in pacemakers to address fecal incontinence and chronic pain

Company Description:  

One of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its portfolio includes pacemakers, defibrillators, heart valves, stents, insulin pumps, spinal fixation devices, neurovascular products, advanced energy, and surgical tools. The company markets its products to healthcare institutions and physicians in the United States and overseas. Foreign sales account for almost 50% of the company’s total 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.

Categories
Global stocks Shares

Vertex’s Narrow Moat Based on Intangible Assets From CF Drugs; Diversified Pipeline Supports Growth

Business Strategy and Outlook

Vertex was once known for discovering Incivek, a blockbuster hepatitis C drug now overshadowed by a robust cystic fibrosis franchise with megablockbuster potential. The company’s approved cystic fibrosis drugs are Kalydeco, Orkambi, Symdeko, and Trikafta, which will make Vertex eligible to treat about 90% of the CF population, assuming international and pediatric approvals. Vertex is anticipated to maintain its dominant position in CF, given the strong efficacy of its therapies, lengthy patents, and lack of competition, while developing pipeline candidates in other rare indications to spur growth. Cystic fibrosis is a rare indication characterized by a progressive and deadly decline in lung function, affecting approximately 83,000 people worldwide. Since its 2012 launch, Kalydeco has captured most of its target patient population (less than 10% of CF patients with specific genetic mutations) and has become the backbone of combination therapies, including Orkambi, Symdeko, and Trikafta. Orkambi’s launch in 2015 expanded the eligible patient population by adding CF patients with homozygous F508del mutations, but its uptake was slower because of its safety profile. Symdeko’s 2018 launch didn’t come with any worries over safety and contributed over $700 million in revenue in its first year, targeting the same population as Orkambi plus some additional patients. Trikafta, a triple-combination therapy, has had a strong launch since its U.S. approval in 2019, significantly expanding the company’s addressable patient population to heterozygous patients. 

Vertex’s comprehensive approach has already shaped the treatment of CF and earned it a dominant position worldwide. The chronic nature of therapy and limited competition on the horizon heighten the CF market’s attractiveness. Given these positive market dynamics, Vertex’s CF program could possibly grow to over $11 billion within the forecast period. Vertex’s pipeline spans several rare diseases, including CTX001 for beta-thalassemia and sickle-cell disease, VX-147 for APOL1-mediated kidney disease, and small-molecule inhibitors for pain. The CF franchise will provide ample cash for the development of these candidates.

Financial Strength

Vertex is in strong financial health, given its robust cash flow generation and low debt. At the end of 2021, Vertex held $7.5 billion in cash and investments and had about $557 million in total finance lease obligations. Vertex reached profitability in 2017, and its cystic fibrosis portfolio continues to expand. The company launched its triple combination therapy, Trikafta, in the U.S. in 2019, and it is expected to operate at maintainable profitable levels throughout the explicit forecast. Vertex has utilized its cash to expand its pipeline outside of cystic fibrosis, which has included acquisitions, collaboration agreements, and ongoing internal research and development. Vertex is expected will continue using its ample cash flow to build a more diversified rare-disease portfolio as it looks beyond the cystic fibrosis market.

Bulls Say’s

  • The firm’s cystic fibrosis therapies are poised to dominate the lucrative market for the foreseeable future, based on the disease-modifying potential of the drugs, chronic use by patients, and limited competition. 
  • Vertex’s leading drug candidates were mostly discovered in-house, lending credibility to its drug discovery technology and potential to generate additional pipeline candidates. 
  • Vertex’s combination therapies have lengthy patents, protecting the profitable cystic fibrosis portfolio from generics.

Company Profile 

Vertex Pharmaceuticals is a global biotechnology company that discovers and develops small-molecule drugs for the treatment of serious diseases. Its key drugs are Kalydeco, Orkambi, Symdeko, and Trikafta/Kaftrio for cystic fibrosis, where Vertex therapies remain the standard of care globally. In addition to its focus on cystic fibrosis, Vertex is diversifying its pipeline through gene-editing therapies such as CTX001 for beta-thalassemia and sickle-cell disease, small-molecule inhibitors targeting acute and chronic pain using non-opioid treatments, and small-molecule inhibitors of APOL1-mediated kidney diseases. Vertex is also investigating cell therapies to deliver a potential functional cure for type 1 diabetes.

(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

We Increase Lufthansa’s FVE as We Update Our Model

Business Strategy & Outlook

Deutsche Lufthansa is a European network carrier utilizing a hub-and-spoke model. Its major hubs are Frankfurt, Munich, Vienna, and Zurich and flies under the Lufthansa, Swiss Air, and Austrian Airlines brands. As a result of the coronavirus downturn the group embarked on a cost and fleet restructuring program, which will see it emerge as a smaller business. Despite the smaller size the group to become a more profitable business as a result of structural cost reductions and fleet efficiencies and forecast EBIT growth of 8.5% per year to 2026 from 2019 pre coronavirus levels. However, the negative about the prospects for shareholder value creation due to the high level of indebtedness. 

In 2020, the group received a government-backed support package totaling EUR 9 billion, which included an equity stake of 20% by the German government for EUR 306 million. As part of the approval process the European Commission required the group to surrender 26 slots at its Frankfurt and Munich hubs to new competitors. Despite the recent EUR 2.1 billion rights issue, the group remains highly indebted, which may require additional capital restructuring if cash flows don’t recover to suitable levels to deleverage organically. Due to the group’s indebtedness and highly uncertain timing of a recovery in cash flows, there is still a wide range of possible outcomes for the group’s equity value. The company will retire and dispose of its older fleet, which will see the group emerge with 100 to 150 fewer aircraft than its current 760-strong fleet. The group is in the process of restructuring its cost base and aims to reduce its current 138,000 employees by 16% and cut the management team by 20% by 2022. The group can drive higher load factors as a result of better utilization of a more efficient fleet and emerge with a structurally higher EBIT margin of 8% in 2025, which compares with an average margin of 7% over the five years pre-COVID-19.

Financial Strengths 

The Lufthansa is in a weak financial position due to its high levels of indebtedness. The coronavirus pandemic dealt a heavy blow to the aviation industry, resulting in record losses, cash outflows, and growing debt levels. To bolster liquidity, the group agreed to a EUR 9 billion government support package, which included the German state taking a 20% ownership in the group. Net debt, including pension provisions of EUR 7.6 billion, at the end of December 2021 equated to EUR 15.6 billion. The group is highly geared, with a net debt to prepandemic EBITDA ratio of 3.5 times, and it could require multiple years of deleveraging to restore the balance sheet to maintainable levels.

Bulls Say

  • COVID-19 presents the group with a unique opportunity to structurally lower its cost base and emerge from the crisis with better profitability. 
  • The airline has dominant positions at the key European hubs of Frankfurt and Munich, which could be an early beneficiary of a recovery in air travel. 
  • Fleet reduction through the retirement of older and less efficient aircraft could lead to a more rational fleet with higher load factors and unit revenue.

Company Description

Deutsche Lufthansa is a European airline group. The company operates under the Lufthansa, Swiss Air, Austrian Airlines and Euro wings brands. In 2019, the company carried 145 million passengers to its network of 318 destinations globally. The group’s main airport hubs are Frankfurt, Munich, Vienna and Zurich. The company generated sales of EUR 36.4 billion in 2019. 

(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.

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