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

We See a Long Growth Runway for Allegion’s Seamless Access Strategy

Business Strategy & Outlook

Allegion, a global leader in security products and solutions, was spun off from Ingersoll-Rand in December 2013. No longer forced to compete for capital from a conglomerate parent, Allegion is now able to employ a more robust acquisition strategy to expand its scale, technological capabilities, and product portfolio. At over 70% of sales and 80% of segment profitability, Allegion’s Americas segment is the firm’s largest and strongest business, with a leading position in locks, exit devices, and door controls. The Americas business has been the key driver of Allegion’s stable, industry-leading profitability, which is a testament to the firm’s market position and pricing power. the Americas business to post mid-to-high single-digit organic growth after the coronavirus-fueled downturn in 2020-21 as the segment capitalizes on increased retrofit and upgrade spending across commercial and residential end markets that is drive by the convergence of electronics and mechanical security solutions, elevated U.S. residential construction, and strategic acquisitions. The segment’s already strong profit margins should benefit from a mix-shift to higher-priced electronics products and operating leverage on increased volumes, partially offset by structurally lower profit margins from the acquired access technologies business.

The company’s international businesses are subscale, which factors into the segment’s weak margin performance relative to Allegion’s strong Americas segment; however, the company is working diligently to keep strengthening these businesses through restructuring, channel development, and strategic acquisitions that build scale and expand the company product portfolio. These initiatives appear to be working as the international segment reported record profitability in fiscal 2021 (11% adjusted operating margin). The international segment profitability will continue to improve as these initiatives take hold. Like the Americas segment, this segment should also benefit from the convergence of electronic and mechanical security technology.

Financial Strengths

As part of the spinoff transaction in 2013, Allegion paid a $1.3 billion one-time dividend to Ingersoll-Rand. Allegion issued a commensurate amount of debt in 2013 to fund the dividend to its former parent. Since then, Allegion’s gross debt/EBITDA leverage ratio has improved to approximately 2.0 currently. Management continues to target an investment-grade rating on its debt going forward. 

Allegion has approximately $1.4 billion of outstanding debt, which consists of approximately $250 million outstanding on the company’s term facility, $400 million of 3.2% senior notes due in 2024, $400 million of 3.55% senior notes due in 2027, and $400 million of 3.5% senior notes due in 2029. In 2021, Allegion incurred about $50 million of net interest expense and generated approximately $618 million of adjusted EBITDA, which equates to a comfortable EBITDA coverage ratio of about 12 times. The Allegion’s use of leverage is reasonable, and the company’s free cash flow generation should comfortably support its debt service requirements and future capital allocation decisions. Given the firm’s reasonable use of leverage and consistent free cash flow generation, the Allegion’s financial health is satisfactory.

Bulls Say

  • Allegion’s strong market position and pricing poourr in North America should continue to support the firm’s stable, industry-leading profitability.
  • The convergence of electronic and mechanical security products and increased infrastructure spending should drive sales growth and margin expansion opportunities.
  • Allegion generates strong free cash flow and is a balanced capital allocator. The company can continue to use its free cash flow to increase its dividend, repurchase shares, and make value-accretive acquisitions and invest in lead-edge technology ventures.

Company Description

Allegion is a global security products company with a portfolio of leading brands, such as Schlage, von Duprin, and LCN. The Ireland-domiciled company was created via a spinoff transaction from Ingersoll-Rand in December 2013. In fiscal 2021, Allegion generated 68% of sales in the United States. The company mainly competes with Swedish-based Assa Abloy AB and Switzerland-based Dormakaba.

(Source: Morningstar)

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

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

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

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

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

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

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

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Global stocks Shares

Coinbase Falls From Grace in Q1 as Falling Revenue Meets Rapidly Increasing Costs

Business Strategy and Outlook

As the leading U.S.-based cryptocurrency exchange, Coinbase has positioned itself as the reliable on-ramp into the cryptocurrency space for new and experienced cryptocurrency traders alike. The company’s reputation, regulatory compliance, and track record as a custodian have allowed it to maintain transaction fees above many of its peers despite operating in a crowded field with hundreds of competing firms trying to grab market share in the rapidly growing space. Unlike traditional exchanges in the U.S., Coinbase fulfills multiple roles in the trading ecosystem by acting as an exchange, asset custodian, and broker. Coinbase has continued to branch off into adjacent businesses offering cryptocurrency collateralized loans, a crypto debit card, blockchain infrastructure support, and data analytics services. 

While these new businesses expand the company’s presence in the cryptocurrency space and add new revenue streams, the company still earns the majority of its income through the transaction fees traders pay when they trade on Coinbase’s platform. These fees are charged as a percentage of trade’s total value. This creates a strong correlation between Coinbase’s trading fee revenue and the size cryptocurrency market. 

Due to its breadth of its service offerings and the connection between cryptocurrency prices and trading revenue, Coinbase’s short- and long-term results are deeply tied to the health and growth of cryptocurrencies as an asset class. Cryptocurrency adoption continues to rise but questions regarding the long-term viability of cryptocurrency, the role of speculation in current market prices remain unanswered. Additionally, Coinbase has dramatically increased its spending in recent quarters, creating the prospect of a prolonged period of unprofitability should cryptocurrency prices and trading volume not increase in short order. Given the speculative nature of cryptocurrency prices, this reliance on market conditions will create considerable uncertainty in Coinbase’s results going forward.

Financial Strength

Coinbase is in an excellent financial position, particularly after receiving an influx of capital from private-investment-in-public-equity investors coinciding with its direct listing on the Nasdaq exchange. Coinbase saw a spike in trading volume in 2021, leading the company to generate more net income in the first quarter of the year than in the entirety of 2020. As a result, the company ended March 2022 with more than $6 billion in cash and $1.3 billion in cryptocurrency against less than $3.4 billion in debt. The decision to keep strong cash reserves makes sense given how volatile the company’s revenue generation can be. Coinbase needs to keep sufficient financial reserves to protect itself in the event of a major market collapse. Keeping the company relatively unleveraged will be an important step in keeping the exchange financially secure in the long term through market cycles.

Bulls Say’s

  • Coinbase has established itself as the leading U.S. cryptocurrency exchange and established a strong reputation for security in an industry filled with risk for traders. 
  • Coinbase has been able to accelerate the rate at which it lists new cryptocurrencies, giving the company more exposure to the growth of the asset class. 
  • There is a global market for cryptocurrency. Regulatory approval from international regulators will allow Coinbase to expand its operations and increase its footprint globally

Company Profile 

Founded in 2012, Coinbase is the leading cryptocurrency exchange platform in the United States. The company intends to be the safe and regulation-compliant point of entry for retail investors and institutions into the cryptocurrency economy. Users can establish an account directly with the firm, instead of using an intermediary, and many choose to allow Coinbase to act as a custodian for their cryptocurrency, giving the company breadth beyond that of a traditional financial exchange. While the company still generates the majority of its revenue from transaction fees charged to its retail customers, Coinbase uses internal investment and acquisitions to expand into adjacent businesses, such as prime brokerage, data analytics, and collateralized lending.

(Source: MorningStar)

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

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

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

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

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

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

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

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Global stocks

Demand Continues to Rationalize From Pandemic Lift at Wayfair, Leading to Top-Line Struggles

Business Strategy & Outlook

Wayfair should be able to continue to take share in the fragmented home goods market, which it believes represents a more than $800 billion global opportunity between North America and Europe. The firm’s differentiation comes by way of product breadth and its logistics network, which permits faster delivery of both small and large parcels than most of its peers. Faster delivery is a function of fewer touch points, reducing damage and improving Wayfair’s brand equity with each positive delivery experience. However, the peers will continue to attempt faster delivery, spurring rising competition. Targeting a wide consumer base with a customer aged 20-64 years old (200 million domestic households) with income of $25,000-$250,000 also means Wayfair is competing with mass-market retailers, specialty retail, and low-cost providers, making it harder to stay top of mind. This, along with no switching costs, underlies a no-moat rating.

Wayfair’s inventory-light model benefits inventory turns, a strategy has freed up capital to spend on customer acquisition and retention, leading to 27 million active users as of December 2021 who spend around $500 per year (versus 1.3 million users who spent $300 in 2012). This implies its product mix and marketing are resonating with end users. The pandemic pulled forward the capture of positive free cash flow to 2020, and scale should allow Wayfair to return to positive free cash flow to equity levels again in 2023, even with constraints from infrastructure spend in Europe, IT investment, and slower than historical growth.

Given Wayfair’s lifecycle position, with significant growth potential but also corresponding expenses to achieve market share gains and ROICs to be volatile. The Wayfair can hit some of its long-term goals, but the timeline to achievement is trickier. While it should exceed its prior 25%-27% gross margin target longer term, one cannot see operating expenses in management’s targeted range 15%-19% of sales until beyond 2031. To watch post pandemic customer acquisition cost trends to determine whether Wayfair could develop a network effect.

Financial Strengths

Wayfair carries modest levels of debt, keeping its financial profile stable as it grows into a more mature business. It carried about $3 billion in long-term debt at competitive rates on its balance sheet as of March 31, 2022, after executing a $535 million convertible raise in April 2020 and another $1.5 billion convertible raise in August 2020. The firm also has access to liquidity through its $600 million credit facility, which matures in 2026. There is cash and marketable securities ($2 billion at the end of March) to help cover expenses like operating lease obligations.

Over the past two fiscal years, the company generated positive free cash flow positive (CFO minus capital expenditures plus site and software development costs). Free cash flow has averaged about 1% of revenue during the past five years, a metric that should average a mid-single-digit rate over the next decade benefiting from increasing scale. Capital expenditures have averaged 2% of sales over the last five years, which a reasonable run rate as the brand invests back into the business to further support top line growth and improving profitability. One cannot expect the board to initiate a dividend in the near term, given the volatile cash flow pattern that Wayfair has generated in recent years and the need for the firm to continue to invest heavily in technology and customer acquisition. However, in August 2021 it authorized a $1 billion share buyback program, which one cannot expect to be deployed until business demand stabilizes.

Bulls Say

  • Different brands in the Wayfair portfolio cater across income and age demographics, offering some resiliency in cases of macroeconomic cyclicality and economic uncertainty.
  • Over the last five years, the company has expanded into untapped markets such as Canada, the United Kingdom, and Germany. Additionally, international opportunities could provide location and revenue growth and improved brand awareness.
  • B2B represents around 10% of sales and targets a $200 billion total addressable market in the U.S. and Europe. This opportunity could grow materially faster than the anticipate.

Company Description

Wayfair engages in e-commerce in the United States and Europe. At the end of 2021, the firm offered more than 33 million products from 23,000-plus suppliers for the home sector under the brands Wayfair, Joss & Main, AllModern, Dour llStudio, Birch Lane, and Perigold. This includes a selection of furniture, decor, decorative accent, housewares, seasonal decor, and other home goods. Wayfair was founded in 2002 and is focused on helping people find the perfect product at the right price.

(Source: Morningstar)

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

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

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

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

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

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

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

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Global stocks Shares

Sysco’s Cost Advantage and Growth Strategy Are Driving Impressive Market Share Gains

Business Strategy & Outlook

The Sysco possesses a narrow moat, rooted in its cost advantages. The firm benefits from lower distribution cost given its closer proximity to customers, complemented by scale-enabled cost advantages such as purchasing power and resources to provide value-added services to its customers. While COVID-19 created a very challenging environment, the U.S. food-service market has fully recovered, with volumes exceeding pracademic levels as of March 2022. Sysco has emerged as a stronger player, in our view, with $2 billion in new national account contracts (3% of pracademic sales) and a 10% increase in independent restaurant customers.

In 2021, Sysco laid out its three-year road map, termed “recipe for growth” which will be funded by the elimination of $750 million in operating expenses between fiscals 2021 and 2024. The plan should allow Sysco to grow 1.5 times faster than the overall food-service market by fiscal 2024. Sysco is investing to eliminate customer pain points by removing customer minimum order sizes while maintaining delivery frequency and lengthening payment terms. It improved its CRM tool, which now uses data analytics to enhance prospecting, rolled out new sales incentives and sales leadership, and is launching an automated pricing tool, which should sharpen its competitive pricing while freeing up time for sales reps to pursue more value-added activities, such as securing new business. Sysco also developed the industry’s first customized marketing tool, harnessing its significant customer data to generate tailored messaging that should resonate with each customer, a tool that has been increasing Sysco’s share of wallet. Further, Sysco has switched to a team-based sales approach, with product specialists that should help drive increased adoption of Sysco’s specialized product categories such as produce, fresh meats, and seafood. Lastly, Sysco is launching teams that specialize in various cuisines (Italian, Asian, Mexican) that should drive market share gains in ethnic restaurants. Looking abroad, Sysco has a new leadership team in place for its international operations, increasing the confidence that execution will improve.

Financial Strengths

The Sysco’s solid balance sheet, with $4 billion of cash and available liquidity (as of March) relative to $11 billion in total debt, positions the firm well to endure the pandemic. Sysco has a consistent track record of annual dividend increases, even during the 2008-09 recession and the pandemic. A 5%-10% annual increases each year the forecast, maintaining its target of a 50%-60% payout ratio. 

Sysco has historically operated with low leverage, generally reporting net debt/adjusted EBITDA of less than 2 times. Leverage increased to 2.3 times after the fiscal 2017 $3.1 billion Brakes acquisition, and above 3 times in fiscals 2020 and 2021, given the pandemic. But the leverage will fall back below 2 times by fiscal 2024, given debt paydown and recovering EBITDA.  Calls for free cash flow averaging 3% of sales annually over the next five years. In May 2021, Sysco shifted its priorities for cash in order to support its new Recipe for Growth strategy. It’s new priorities are capital expenditures, acquisitions, debt reduction when leverage is above 2 times, dividends, and opportunistic share repurchase. Its previous priorities were capital expenditures, dividend growth, acquisitions, debt reduction, and share repurchases. In fiscal 2023-24, as it invests to support accelerated growth, Sysco should spend 1.4% of revenue on capital expenditures, falling to 1.1% thereafter. In fiscal 2021 Sysco completed the $714 million acquisition of Greco and Sons and the $500 million acquisition of The Coastal Companies.To invest about $100 million to $200 million annually on acquisitions thereafter. Finally, the model $500 million-$600 million in annual expenditures to buyback about 1% of outstanding shares annually. A prudent use of cash when shares trade below the assessment of intrinsic value.

Bulls Say

  • As Sysco’s competitive advantage centers on its position as the low-cost leader,  Sysco should be able to increase market share in its home turf over time.
  • Sysco has gained material market share during the pandemic, allowing it to emerge a stronger competitor.
  • The company is performing well under the leadership of CEO Kevin Hourican (in place since 2020), with his Recipe for Growth strategy driving improved sales growth and profit margins.

Company Description

Sysco is the largest U.S. food-service distributor, boasting 17% market share of the highly fragmented food-service distribution industry. Sysco distributes over 400,000 food and nonfood products to restaurants (66% of revenue), healthcare facilities (9%), education and government buildings (8%), travel and leisure (5%), and other locations (14%) where individuals consume away-from-home meals. In fiscal 2021, 83% of the firm’s revenue was U.S.-based, with 8% from Canada, 3% from the U.K., 2% from France, and 4% other.

(Source: Morningstar)

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

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

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

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

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

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

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

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Global stocks Shares

Inflated Raw Material Costs In Conjunction With Significant Market Competition To Impede Growth For Catalent Inc.

Business Strategy and Outlook

Catalent is a leading contract development and manufacturing organization, or CDMO. The company has 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 drug manufacturing. The challenges and compliance risks associated with changing a drug’s manufacturing process create a sticky relationship for Catalent’s customers. Drug companies tend to stick with trusted suppliers with good track records of regulatory compliance, which makes them unlikely to switch to a different CDMO. Catalent provides a range of development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products throughout the entire life cycle of a product from the drug development process to commercial supply. Outsourcing penetration is anticipated to continue incrementally increasing, driven by the complexities of biologics manufacturing. 

Biologics are large, complex molecules such as antibodies, recombinant proteins, vaccines, and cell and gene therapies. Catalent’s biologics segment accounted for 48% of its fiscal year 2021 revenue. The biologics manufacturing process requires around-the-clock maintenance, with an emphasis on maintaining the integrity of the cell and its DNA as well as keeping the cells free of contaminants. The same cell line reproduces to continue making the product until the end of the drug’s life. Therefore, for clients to switch manufacturers would require establishing a new cell line that would result in variations, or transferring the technology, which makes it vulnerable to changes as well. Biopharma customers are likely to continue outsourcing to CDMOs in order to benefit from access to flexible capacity and manufacturing improvements. According to Industry Standard Research, only one third of pharmaceutical manufacturing is currently conducted in-house while two thirds are outsourced.

Financial Strength

Catalent is in fair financial health, and the business is expected to continue providing a steady stream of cash. The company has historically utilized debt, particularly for acquisitions. Catalent ended 2021 with $3.2 billion in total debt after completing several acquisitions over the last few years of biologics-focused businesses, cell and gene therapy companies, and a gummies manufacturer. Catalent is focused on expanding its biologics capabilities to meet increased demand for complex biologics manufacturing and diversify its offerings to customers. The company is expected to be able to meet its financial obligations thanks to continued strong growth. At the end of 2021, Catalent had nearly $900 million in cash and equivalents, which is considered a healthy amount to support additional growth.

Bulls Say’s

  • Contract development and manufacturing organizations like Catalent have sticky businesses 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, Catalent’s biopharma customers will be more reliant on outsourced manufacturing. 
  • With its global scale, Catalent is less dependent on any one customer or drug, which allows it to better absorb unexpected late-stage trial failures or drops in demand.

Company Profile 

Catalent is a contract development and manufacturing organization, or CDMO. It operates under four segments: biologics, softgel and oral technologies, oral and specialty delivery, and clinical supply services. Catalent derives its revenues primarily from long-term supply agreements with pharmaceutical customers. The company provides a range of development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products throughout the entire life cycle of a product from the drug development process to commercial supply. Catalent has over 50 facilities across four continents.

(Source: MorningStar)

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

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

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

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

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

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

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

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Lower Copaxone Sales, US Generic Competition, Unfavorable Exchange Rates Weigh on Teva’s Results

Business Strategy & Outlook: 

Israel-based Teva Pharmaceutical is one of the largest global generic drug manufacturers, with a significant presence in the United States and in Western Europe. Generic drug manufacturers with large exposure to the U.S. have fared very poorly compared with the overall market over the past few years due to factors that resulted in a highly deflationary generic drug price environment. To combat further margin deterioration, the largest, most capable manufacturers have invested more heavily in development and marketing of complex generics and biosimilars, which face much less competition and price erosion than small-molecule generics. 

Founded in 1901, Teva was a small wholesale drug business in Jerusalem that converted into a local drug manufacturer during World War II with the rise in demand. The company consolidated the market in 1960 to create the largest drugmaker; it later expanded into Europe and the U.S. and then into generics in 1984 with the passage of the Hatch-Waxman Act. In the following 30 years, Teva completed roughly 30 acquisitions to further its position as the largest global generic manufacturer with roughly 90 manufacturing and research and development facilities worldwide. Despite efforts to curb margin deterioration by eliminating unprofitable drugs in the portfolio, Teva’s top and bottom lines have been negatively affected by a 70% decline in sales for its largest specialty drug, Copaxone, following generic entry and competition from new therapies. At its peak in 2013, Copaxone generated $4.3 billion in sales and contributed one fifth of total company revenue. While the company’s specialty drug pipeline is deep and consists of several novel biologic products and biosimilars, the growth is expected to be anemic over the next few years with slow generic revenue growth and a further decline in Copaxone sales. The company forecasts $750 million in Copaxone revenue in 2022.

Financial Strengths:

As of year-end 2021, Teva holds net debt of $20.9 billion, with $1.4 billion due in 2022, $2.1 billion due in 2023, and $2.0 billion due in 2024. The company’s $2 billion in cash and free cash flow generated from operations gives us some assurance that Teva should meet its obligations in the near term. Legal risk from ongoing litigation related to opioids, price-fixing, and Copaxone is also a risk to liquidity over the next several years. The base assumption calls for $2 billion in a cash settlement paid over a period of 15 years.

Bulls Say:

  • As a leading global generic manufacturer, Teva enjoys economies of scale over its smaller peers.
  • Teva’s specialty portfolio represents one fifth of sales and diversifies the company from generic drug deflation risk.
  • Teva’s biosimilar for Humira is anticipated to launch in the U.S. in 2023, which should bolster specialty segment sales.

Company Description: 

Based in Israel, Teva is one of the world’s largest generic drug manufacturers, with over 3,500 products marketed in over 60 countries. While a majority of its revenue is attributed to prescription generic drugs, Teva develops and markets its own branded specialty and biopharmaceutical products, primarily in the U.S. and in Europe. The company’s branded portfolio generates one fifth of total revenue and consists of patented therapies targeting central nervous system conditions (Austedo, Ajovy, Copaxone), oncology (Bendeka/Treanda), and respiratory conditions (ProAir, Qvar). While global competition has facilitated the commodification of small-molecule generic drugs, Teva’s portfolio rationalization has resulted in less overall price erosion versus peers.

(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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Vehicle Repair Demand Continues to Strengthen, Benefiting LKQ’s Q1 Results

Business Strategy & Outlook

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. The company has built scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, boosting productivity. The company’s strong distribution network will support its ability to keep order fulfilment rates high in both aftermarket and salvage products.

The company’s strategy focuses on being a one-stop shop for repair professionals, ranging from salvage products to aftermarket and remanufactured parts. LKQ’s parts are a strong alternative to original equipment manufacturers’ parts, exhibiting high quality in comparison. While insurance companies aren’t usually direct customers, they do have sway over which parts are used in vehicle repairs. LKQ’s alternative parts allows insurance companies to reduce their cost base while also reducing the cycle time for repairs. Historically, the company has used acquisitions to build up its capabilities and footprint, but that has changed over the past few years. LKQ has shifted its focus to integrating its businesses and improving its cost structure, and it will aim to make smaller tuck-in acquisitions as opposed to larger deals.

 LKQ is well positioned to compete as electric vehicle adoption increases. The shift to EVs will present new revenue opportunities for the company. In both hybrid and full-electric vehicles, new parts will be needed to keep vehicles on the road. For example, to see increased demand for battery-related parts and a need for remanufactured or refurbished batteries.

LKQ has exposure to end markets with attractive tailwinds. The demand for repair work will be strong in the near term, largely due to vehicle owners taking in their cars for overdue servicing (delayed by the COVID-19 pandemic). The high average age of vehicles will also support demand for repair work.

Financial Strengths

LKQ maintains a sound balance sheet. Its debt balance stood at $2.8 billion in 2021, down from $3.7 billion in 2019. LKQ’s management team has been focused on strengthening the balance sheet over the past few years. The company’s net leverage position (net debt/EBITDA) has steadily improved, declining from nearly 3 times to under 2 times in 2021. This resulted in LKQ reaching investment-grade status.

In terms of liquidity, the company will be on solid footing over the long term. In 2021, LKQ had a cash balance of nearly $300 million, but this will likely increase over the forecast, given the company’s shift in its acquisition strategy. In the past, LKQ was more willing to acquire companies to expand its capabilities and footprint. Going forward, the company will focus on small tuck-ins, freeing up more cash to reinvest in its business, repurchase shares and grow its dividend. A stronger cash position will help LKQ quickly react to a changing operating environment as well as meet any near-term debt obligations (no major maturities until 2024). The comfort in LKQ’s ability to access $1.2 billion in credit facilities. LKQ’s solid balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favours organic growth and also returns cash to shareholders.

 LKQ can generate solid free cash flow throughout the economic cycle. The company to generate over $1 billion in free cash flow in midcycle year, supporting its ability to return free cash flow to shareholders through share repurchases and dividends. Additionally, free cash flow growth over the next decade will be supported by improving EBITDA margins in LKQ’s Europe business, which to be in the low-double-digit range over the next five years.

Bulls Say

  • Growth in miles driven increases the wear and tear on vehicles, requiring more maintenance and repair work to keep them on the road, benefiting LKQ.
  • LKQ’s collision business could see rising demand from increasing auto claims as more drivers return to the road following the COVID-19 pandemic.
  • Increasing adoption of hybrid vehicles presents new revenue opportunities for LKQ, such as new battery related parts, in addition to its ICE-related parts.

Company Description

LKQ is a leading global distributor of non-OEM automotive parts. Initially formed in 1998 as a consolidator of auto salvage operations in the United States, it has since greatly expanded its scope to include distribution of new mechanical and collision parts, specialty auto equipment, and remanufactured and recycled parts in both Europe and North America. It still maintains its auto salvage business and owns over 70 LKQ pick-your-part junkyards. Separate from the self-service business, LKQ purchases over 300,000 salvage automobiles annually that are used to extract parts for resale. Globally, LKQ maintains approximately 1,700 facilities.

(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

Increased focus from management on digitalization as Beiersdorf lags its peers in terms of its share of digital sales

Closeup of a stock market broker working with graphs on digital tablet at office. Rear view of stock agent reading bad report and graph. Back view of multiethnic businessman analyzing fall sales.

Business Strategy and Outlook

Beiersdorf’s strategy, C.A.R.E.+, focuses on three key growth drivers: skincare prioritization, white-space penetration, and an acceleration of digital transformation. Vincent Warnery, the new CEO appointed in May 2021, has emphasized his continued support for the strategy, having been part of Beiersdorf’s executive board at the time it was introduced in 2019. In the past few years, Beiersdorf has put the strategy into action by focusing its innovation program on the skincare category, with an emphasis on facial care, as the fastest-growing subcategory. It is anticipated for this strategy to be wise, given that the facial care segment features both faster growth and higher margins than the body care segment, in which Beiersdorf, and its flagship brand Nivea, have been historically over-indexed. 

Nivea is a EUR 4 billion brand and accounts for about two thirds of the sales in the consumer segment and over half of the group sales. The brand has a long history in Europe and is the largest brand in skincare globally, albeit in a highly fragmented market. Under Warnery, the business is moving toward a more centrally driven model, with a newly appointed global head of Nivea being responsible for all the branding decisions, allowing markets to focus on execution rather than adaptation of communication or brand strategy. However, it is alleged cohesiveness in marketing, repositioning to faster growing segments, and investments in digital are still needed to bring back some of the brand’s lost lustre. 

White-space penetration is another area emphasized by management as the business looks to decrease its reliance on Europe, and looks to expand its business, primarily in the U.S. and China. There is also increased focus from management on digitalization as Beiersdorf lags its peers in terms of its share of digital sales. Given all these initiatives, it is likely for the mix to be the largest contributor to margin expansion over the medium term, while marketing and sales investment will likely remain elevated to enable the implementation of the strategy

Financial Strength

Beiersdorf has one of the strongest balance sheets among consumer staples coverage. The company held EUR 1 billion of cash as well as EUR 4.5 billion in current and non-current securities on its balance sheet at the end of 2021, while debt only amounted to EUR 0.6 billion. This translates into a net debt to EBITDA of negative 4 times, using both cash and securities. The company argues that this conservative financial policy enables management to successfully navigate periods of crisis such as those experienced during the Covid-19 pandemic. However, it is held, this level of cash may be excessive, especially since shareholder distributions have been meagre, with dividends kept flat at EUR 0.70 for over a decade and a lack of share buy-back initiatives. Holding the dividend constant, it is projected the payout ratio (using net income) will decrease from 25% in 2021 to just 14% in five years. Leveraging up to 2 times debt/EBITDA, including cash and securities and the more than 2 EUR billion that Beiersdorf holds in treasury stock, could finance a transformative deal through cash of up to EUR 8 billion. However, given the company’s clear preference for conservative balance sheet management, it is not probable that there will be a significant appetite for a large deal, with management continuing to pursue bolt-on acquisitions and small deals in areas that complement the strategy of expanding their presence in skincare, such as the recent Chantecaille acquisition.

Bulls Say’s

  • Beiersdorf’s clear focus on skincare and the efforts to reposition Nivea into facial care has the potential to pay out in both superior growth and improved margin over the midterm. 
  • The move toward a centrally managed model should benefit the business, with more cohesive marketing and increased digital investment helping to rejuvenate Nivea. 
  • With its low cost of financing, cash and securities of EUR 5.5 billion, slowing global organic growth, and highly fragmented categories, it is likely, Beiersdorf will eventually be involved in industry consolidation.

Company Profile 

Beiersdorf is a Germany-based company engaged in producing personal-care products, with a focus on manufacturing cosmetic products. The company operates through two business segments. Consumer provides skincare and beauty care products and operates portfolio brands such as Nivea, Eucerin, La Prairie, Labello, Hansaplast, Elastoplast, and Florena. The other business segment markets self-adhesive system and product solutions, primarily for industrial customers, under the Tesa brand. Beiersdorf is majority-owned by Maxingvest. 

(Source: MorningStar)

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

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

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

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

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

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

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

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CS: History of Poor Risk Management Drives Discounted Valuation

Business Strategy & Outlook: 

Credit Suisse’s true underlying profitability has been masked for the better part of a decade by multiple restructuring charges and the cost of running down a legacy book of unprofitable assets. The new management team at the helm of Credit Suisse hoped that it addressed all issues during 2020, but new problematic exposures continue to crop up. This suggests a deeper risk management malaise at Credit Suisse. Credit Suisse has some very good, profitable, and generally asset-light business with good long-term secular growth prospects–especially in wealth management/private banking and the Swiss universal bank. The discount that the market has imposed on the rating of Credit Suisse relative to UBS and its other peers should, however, remain in place until Credit Suisse can convince investors that it has addressed its risk management deficiencies. 

Credit Suisse will have to report several quarters of results free from the large non-recurring items that have historically marred its results. There is a strong long-term secular trend that sees the wealth of high-net-worth individuals and families growing ahead of global nominal GDP. The ultra-high net worth and family office segment, where Credit Suisse has focused most of its attention, is a particularly attractive segment. The threat of digital disintermediation is reduced and the need for bespoke solutions and strong relationship between banker and client remains. The current negative interest rate environment obscures the benefits of Credit Suisse’s very strong deposit franchise that provides it with ample surplus liquidity. Currently, this is damaging to Credit Suisse’s net interest income–it needs to invest its excess liquidity in short-term risk-free assets that currently pays no or negative interest. Credit Suisse has, however, starting passing on these costs to selected clients.

Financial Strengths:

Credit Suisse has a common equity Tier 1 ratio of 14.4% currently, ahead of its own internal capital target of a 14% common equity Tier 1 ratio. This is comfortably ahead of its regulatory minimum capital requirement of 10%. However, Credit Suisse’s leveraged ratio of 4.2% is more of a constraint, with a regulatory minimum requirement of 3.5% and an internal target of 4.5%. Credit Suisse intends to pay out 25% of its earnings as a dividend and it has not announced new share buybacks.

Both Credit Suisse’s liquidity coverage ratio and its net stable funding ratio are comfortably above 100%, which indicates sound liquidity. These ratios, while helpful, do not fully capture the quality of a bank’s funding. One should also consider the structure of a bank’s funding–where the relatively lower importance of wholesale deposits in Credit Suisse’s funding mix is a clear positive. However, private banking/wealth management clients will typically be more sophisticated than the average retail banking client and therefore more likely to withdraw funds in times of stress. The private banking deposits are as sticky as general retail deposits, although they remains stickier than wholesale funding.

Bulls Say:

  • Credit Suisse looks set to emulate UBS and transform its business model into a wealth manager with a complementary investment bank, which would increase profitability and reduce earnings volatility.
  • Credit Suisse has run down a massive book of EUR 126 billion to EUR 45 billion over the past four years, incurring pretax losses of EUR 16 billion in the process. This has obscured the performance and profitability of the core business.
  • Credit Suisse generates the bulk of its earnings in stable and low-risk private banking/wealth management and Swiss commercial banking.

Company Description:

Credit Suisse runs a global wealth management business, a global investment bank and is one of the two dominant Swiss retail and commercial banks. Geographically its business is tilted toward Europe and the Asia-Pacific.

(Source: Morningstar)

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

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

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

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

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

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

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

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Carnival’s Return to Profitability in Sight Despite Omicron and Geopolitical Speed Bumps

Business Strategy & Outlook:

Carnival remains the largest company in the cruise industry, with nine global brands and 91 ships at 2021 fiscal year-end. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, in recent years, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing. However, global travel has waned as a result of COVID-19, which has the potential to spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon. As consumers have slowly resumed cruising since the summer of 2021 (after a year-plus no-sail halt), the cruise operators will have to continue to reassure passengers of both the safety and value propositions of cruising. 

On the yield side, the Carnival is expected to see some pricing pressure as future cruise credits continue to be redeemed through 2022, a headwind partially mitigated by the return of capacity via full deployment of the fleet. And on the cost side, higher spend to maintain tighter cleanliness and health protocols should keep expenses inflated. Aggravating profits will be staggered reintroduction of the fleet through the first half of 2022, crimping near-term profitability and ceding previously obtained scale benefits. As of March 22, 2022, 75% of capacity was already deployed and the entire fleet should be sailing by the important summer season. These persistent concerns, in turn, should lead to average returns on invested capital including goodwill, that are set to languish below our 10.4% weighted average cost of capital estimate until 2026, which supports our no-moat rating. While Carnival has carved out a broad offering across demographics, the product still has to compete with other land-based vacations and discretionary spending for share of wallet. It could be harder to capture the same percentage of spending over the near term given the perceived risk of cruising, heightened by persistent media attention.

Financial Strengths:

Carnival has secured adequate liquidity to survive a slow resumption of domestic cruising, with around $7 billion in cash and investments at the end of February 2022. This should cover the company’s cash burn rate through the end of the redeployment ramp-up, which had run around $500 million or more in recent months due to higher ship startup costs. The company has raised significant levels of debt since the onset of the pandemic with $35 billion in total debt, up from around $12 billion at the end of 2019. The company has less than $3 billion in short term and $2 billion in long-term debt coming due over the next year (as of Feb. 28, 2022).

The company is focused on reducing debt service as soon as reasonably possible in order to reduce future interest expense. It has also actively pursued the extension of maturities, limiting the cash demand on debt service over the near term.  Carnival has just over one year’s worth of liquidity to operate successfully in a no-revenue environment. There is no anticipation on an imminent credit crunch in the near term, even with no associated revenue (which the company has successfully resumed capturing), as long as capital markets continue to function properly. Additionally, in order to free up cash to support operating expenses, Carnival eliminated its dividend in 2020 ($1.4 billion in 2019). Another $3 billion in current customer deposits were on the balance sheet, offering working capital that can be utilized to run the business and indicating demand for cruising still exists. And capital markets remain open to financing, with the company announcing a $500 million at-the-market equity raise at the end of January 2022, indicating access to cash is still plentiful.

Bulls Say:

  • As Carnival deploys its fleet, passenger counts and yields could rise at a faster pace than we currently anticipate as capacity limitations are repealed.
  • A more efficient fleet composition (after pruning 19 ships at the onset of the pandemic) may benefit the cost structure to a greater degree than initially expected, as sailings fully resume.
  • The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators had capacity for nearly 4 million passengers in 2020, which provides an opportunity for long-term growth with a new consumer.

Company Description:

Carnival is the largest global cruise company, with 91 ships in its fleet at the end of fiscal 2021, with all of its capacity set to be redeployed by summer 2022. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival’s brands attracted about 13 million guests in 2019, prior to COVID-19.

(Source: Morningstar)

General Advice Warning

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