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

Caesars Continues to See Strong U.S. Physical and Digital Demand, but Not Enough to Warrant a Moat

Business Strategy and Outlook

As a result of the acquisition of the legacy Caesars business by Eldorado (closed July 2020), we estimate Caesars holds more than a 10% revenue share of the domestic casino gaming market; this represents around 100% of the company’s total EBITDA. Caesars has realized over $1 billion in combined revenue and cost synergies from its merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR. Despite this successful acquisition record, Morningstar analysts don’t believe Las Vegas and other U.S. gaming regions contribute to a moat for Caesars. U.S. gaming demand is lower than in Asian regions like Macao and Singapore, where the propensity to gamble is much higher. Also, the 1,000 commercial and tribal casinos in the U.S. serve a total population of 330 million, well in excess of the 41 and 2 casinos found in Macao and Singapore, respectively, with Chinese and Singaporean populations of 1.4 billion and 5.9 million, respectively. Further, supply growth in U.S. gaming is increasing in 2021-23, with two resorts opening in Las Vegas that add a mid-single-digit percentage to market room supply. This compares with negligible additions in either Macao or Singapore, where we see no additional licenses for the foreseeable future.

That said, Caesars’ U.S. casinos are positioned to benefit from the multi-billion-dollar sports betting and iGaming market. Caesars plans to invest around $1 billion in its digital assets in the next few years, which supports Morningstar analysts forecast for about 8% of the company’s total revenue to be generated from this segment in 2026.

After reviewing Caesars’ fourth-quarter results, Morningstar analyst have decreased its fair value estimate to $108 per share from $113, driven by increased digital spend. Morningstar analyst’s valuation places a 10 times enterprise value/EBITDA multiple on analysts’ 2023 EBITDAR forecast. Drivers of forecast remain anchored in revenue and EBITDAR margins across the company’s Las Vegas and regional assets.

Financial Strength 

Caesars’ debt levels are elevated. In 2019, excluding financial lease obligations, legacy Caesars’ debt/adjusted EBITDA measured a hefty 7.8 times, while legacy Eldorado came in at 3.7 times. Morningstar analysts see Caesars’ debt/adjusted EBITDA reaching 7.9 times in 2022 and then 6.4 times in 2023 as global leisure and travel market demand continue to recover from the pandemic, aided by company cost and revenue synergies that analysts estimate to total over $1 billion. Morningstar analysts expect the $7.5 billion in free cash flow in 2022-26 as focused on reducing debt levels and investing in the digital sports and iGaming markets, with share repurchases and dividends not occurring until 2025. Caesars has no meaningful debt maturity until 2024, when $4.8 billion is scheduled to come due. 

Bull Says

  • Caesars’ best-of-breed management stands to generate cost and revenue synergies from its merger with Eldorado. 
  • Caesars has the largest property (around 50 domestic casinos versus roughly 20 for MGM) and loyalty presence (65 million members versus MGM’s roughly high-30 million), which presents cross-selling opportunities. 
  • Morningstar analysts see Caesars’ domestic properties as well positioned to benefit from the $6.2 billion U.S. sports betting revenue opportunity in 2024.

Company Profile

Caesars Entertainment includes around 50 domestic gaming properties across Las Vegas (50% of 2021 EBITDAR before corporate and digital expenses) and regional (63%) markets. Additionally, the company hosts managed properties and digital assets, the latter of which produced material EBITDA losses in 2021. Caesars’ U.S. presence roughly doubled with the 2020 acquisition by Eldorado, which built its first casino in Reno, Nevada, in 1973 and expanded its presence through prior acquisitions to over 20 properties before merging with legacy Caesars. Caesars’ brands include Caesars, Harrah’s, Tropicana, Bally’s, Isle, and Flamingo. Also, the company owns the U.S. portion of William Hill (it plans to sell the international operation in early 2022), a digital sports betting platform.

 (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.

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Global stocks Shares

MetLife’s Elevated 2021 Variable Investment Income Not Likely to Last

Young woman trading stock market by touching.

Business Strategy & Outlook:

MetLife, like other life insurers, has its financial results tied to interest rates. It’s unlikely that interest rates will return to pre-financial-crisis levels, and MetLife has forecasted to face this headwind for the future. The returns of equity just shy of 10% over the next five years. MetLife has taken steps to simplify its business. In 2017, it spun off Brighthouse, its retail arm focused on variable annuities. MetLife also is divesting its property and casualty insurance (auto) business, which makes sense as there is minimal strategic benefit to having a small auto insurance business in its portfolio.

MetLife’s business is relatively undifferentiated. Whether sold individually or to employers, the pricing is the primary driver for MetLife’s customers. Given the relatively low fixed costs of an insurer’s income statement, this does not lend itself to MetLife having a competitive advantage. Some of MetLife’s entries into new markets (such as pet insurance and health savings accounts) are potentially more differentiated, but these are unlikely to be material in the near to medium term. In 2012, MetLife launched MetLife Investment Management, which currently manages $181 billion of institutional third-party client assets, a fraction of the $669 billion managed through the general account and a fraction of what some of its peers manage. Asset management is viewed as potentially moaty, but given the size of MetLife’s third-party asset management, it is viewed as material to the firm’s overall financial results.

Financial Strength:

The life insurance business model typically entails significant leverage and potentially exposes the industry to outlier capital market events and unanticipated actuarial changes. MetLife is not immune to these risks, and during the financial crisis, its returns on equity decreased. Overall, MetLife has generally been prudent, but the risks inherent to the industry should not be ignored. 

Equity/assets (excluding separate accounts) was 11.6% at the end of 2021, higher than the 11.1% average since 2010. In Japan, MetLife’s solvency margin ratio was 911% (as of Sept. 30, 2021), well above the 200% threshold before corrective action would be required. The solvency margin ratio measures an insurer’s ability to pay out claims in unfavorable conditions.

Bulls Says:

  • MetLife’s international operations, particularly Asia and Latin America, provide opportunities for growth.
  • MetLife’s reorganization will lead to a more transparent entity that produces steadier cash flow.
  • If interest rates were to rise, MetLife would benefit through higher reinvestment yields.

Company Profile:

MetLife–once a mutual company before the 2000 demutualization–is the largest life insurer in the U.S. by assets and provides a variety of insurance and financial services products. Outside the United States, MetLife operates in Japan and more than 40 countries in Latin America, Asia-Pacific, Europe, and the Middle East.

(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.

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Global stocks

Domino’s Pizza Enterprises food inflation anticipated in 2H22

Investment Thesis:

  • Trading below our valuation. 
  • Potential for solid growth in Europe and Japan, substantial opportunities, that the Company is positioned to take advantage of.
  • Strong market position in all of DMP’s existing geographies.
  • DMP is ahead of the curve with the use of technology and innovative offerings for its customers.
  • Acquisition in Europe to bring in top line revenue growth.
  • Strong management team.
  • Improving margin outlook (i.e., operating leverage benefits).

Key Risks:

  • Acquisition integrations not going to plan.
  • Missing market expectations on sales and earnings growth. 
  • Dietary concerns that drive customers to healthier alternatives.
  • Increased cost in ingredients and labor.
  • Market pressures from the competition. 
  • Departure of key management personnel. 
  • Corporate office having to increase financial support to struggling franchisees.  
  • Any further negative media articles especially around underpayment of wages at the franchisee level.
  • Any emerging concerns around store rollout (such as cannibalization or demographics not supportive of new stores).
  • Increase in commodity prices due to ongoing Russia-Ukraine conflict.

Key Highlights:

  • Trading update: For first 6 weeks of 2H22, Network Sales up +6.0% (+1.7% on a same store sales basis) vs +20.9% (+10.1% on same store basis) in pcp and new organic store additions of 23 (vs 11 in pcp) with the Company remaining on track to expand its network by +500 during FY22 (including Taiwan acquisition).
  • Food inflation anticipated in 2H22.
  • FY22 same store sales growth slightly below 3–5-year outlook of +3-6%.
  • 3–5-year annual outlook of +3-6% same store sales growth, +9-12% new organic store additions and ~$100-150m net capex remains intact.
  • Group milestone of 6,650 stores by 2033 with total opportunity of 2.1x current market size (Europe milestone of 3,050 stores by 2033 with total opportunity of 2.3x current market size, ANZ store target of 1200 by 2025-2028 with total opportunity of 1.4x current market size, and Asia milestone of 2,400 stores by 2033 with total market opportunity of 2.3x current market size).   
  • Australia region Highlight includes Network Sales grew +6.4% over pcp to $689.6m (same store sales up +1.7%), however, EBIT declined -6.1% over pcp to $60.3m with margin declining -180bps to 15%, reflecting investment in franchisees (Project Ignite ~$6m) and full & partial temporary store closures arising from Covid-19 (NZ was closed for 4 full weeks during August with Auckland stores closed for a more extended period of time). Online penetration grew with online sales growing +9.7% over pcp to $545.1m and online now representing 79% of total network sales, up +230bps over pcp. The Company opened 3 new stores increasing total store count to 863. 

Company Description:

Domino’s Pizza Enterprises Limited (DMP) operates retail food outlets. The Company offers franchises to the public and holds the franchise rights for the Domino’s brand and network in Australia, New Zealand, Europe and Japan. 

(Source: Banyantree)

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.

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Global stocks Shares

CGC reported solid FY 21 results driven by International segment to grow its revenue by 30%

Investment Thesis 

  • Improving momentum at the operational level and the stock is trading well below our valuation.
  • Positive thematic play on food supply for a growing global and domestic population.
  • Leading market positions in five core categories (Berries, Mushrooms, Citrus, Tomato and Avocado via the recent acquisition).
  • Near-term challenges could persist a little while longer (e.g. extreme weather and drought)
  • Execution of domestic berry growth program continues, while China berry expansion is gaining momentum. 
  • Balance sheet risk has been removed with the recent capital raising.
  • Given the number of downgrades, management will likely need to rebuild trust with its guidance and execution.

Key Risks

  • Further deterioration in weather conditions leading to pressure on earnings.
  • Further deterioration in earnings could put the balance risk at risk again.  
  • Weather affecting crops or any significant increase in insurance expense. This risk is mitigated as CGC has crop insurance (hail, wind, fire) and structure insurance.
  • Any power outage causing crops to be destroyed per incident.
  • Any significant increase in costs of power, affecting earnings.
  • Any disruption to operations from health and safety issues.
  • Any disruptions or issues associated with water, irrigation and water recycling.
  • Negotiations with supermarket giants Coles (Wesfarmers), Woolworths and independent grocers result in erosion of margins.
  • Pricing pressures arising from either competitors, or insufficient demand.
  • Increased costs due to lower water allocations. 

1H22 Results Highlights                

Relative to the pcp:   

  • Revenue increased +4.8% to $1220.6m, driven by International up +30% (+40% in CC) with both regions performing strongly with production and pricing improvements. 
  •  EBITDA-S increased +10.6% (+14% in CC) to $218.2m, with International up +33.9% (+49.2% in CC) underpinned by strong China pricing and additional production from increased footprint and yield, partially offset by -1.3% decline in Farms & Logistics segment amid Covid-19 lockdowns impacting foodservice/market industry. 
  •  NPAT-S increased +16% (+25% in CC) to $64m with higher D&A amid major capex programs going-live and impact of acquisitions was more than offset by reduced tax expense amid increased contribution from China. Statutory NPAT declined -32% (-28% in CC) to $41.4m. 
  •  Operating cashflow of $114.6m declined -16.8%, amid increased working capital in 2H21 (consistent with normal cycle) and $23.1m tax payments. 
  •  Operating capex increased +51% to $43.2m (expect CY22 to be $55-60m) and growth capex of $84.4m increased +68% amid continuation of international expansion. 
  •  Net debt increased +108% to $299.2m leading to leverage increasing +0.86x to 1.85x, still within target range of 1.5-2x. 
  •  The Board declared a fully franked final dividend of 5cps bringing FY21 payout to 9.0cps (flat over pcp). 

Company Profile

Costa Group Holdings Ltd (CGC) grows and markets fruit and vegetables and supplies them to supermarket chains and independent grocers globally. CGC has leading market positions in five core categories of Berries (Blueberries, strawberries and raspberries), Mushrooms, Citrus, Tomato and Avocado via the recent acquisition.

(Source: Banyantree)

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.

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Global stocks

Coles Group reported 1H22 results reflecting modest sales growth despite cycling elevated sales

Investment Thesis

  • Strong market position in supermarkets, with significant scale and penetration providing a competitive advantage.
  • Increasing private labels penetration – COL recently reiterated its target of 40% penetration.
  • Relatively defensive earnings (food tends to be largely non-discretionary).
  • Undemanding valuation relative to main domestic competitor Woolworths. 
  • Improved focus and capital allocation now that the Company is demerged. 
  • Supply chain automation and upgrades should lead to efficiency gains.
  • In our view, the deal with Ocado puts Coles in a leadership position for online delivery. 
  • Flybuys is a highly attractive asset which could be monetized. 

Key Risks

  • Significant competitive pressures (including the emergence of new players) could erode margins. 
  • Management resets earnings base at the upcoming Strategy update in June 2019.
  • Online disruption (full online offering).
  • Automation and supply chain upgrades will require significant capital expenditure, cost of which has not been fully identified. 
  • Balance sheet could be stretched once adjusted for leases. 
  • Cost inflation runs ahead of top line growth. 

1H22 Results Highlights 

  • Sales revenue growth of +1.0% to $20.6bn and +9.2% on a two-year basis despite cycling elevated Covid-related sales in the pcp.
  • EBITDA of $1,762m was down -2.2%, and EBIT of $975m, was down -4.4% and impacted by higher Covid-19 disruption costs, related travel restrictions on Express’ earnings and transformation project costs. EBIT margin of 4.7%, was down -27bps.
  • NPAT of $549m, was down -2.0%.
  • Smarter Selling benefits in excess of $100m in 1H22; On track to deliver over $200m of benefits in FY22.
  • Cash realisation of 117% and a strong balance sheet (leverage ratio of 2.7x) with a net cash position of $54m (excluding lease liabilities). COL retained solid investment grade credit ratings with S&P and Moody’s.
  • The Board declared a fully franked interim dividend of 33.0cps and retained an annual target dividend payout ratio of 80% to 90%.
  • In February 2020, Coles conducted a review into the pay arrangements for all team members who received a salary and were covered by the General Retail Industry Award 2010 (GRIA). To date COL has incurred $13m of remediation costs.

Company Profile 

Coles Group Ltd (COL) is an Australian retailer (supermarket and liquor), demerged from Wesfarmers (WES) which acquired the business in 2007. As at 30 June 2018, Coles processed more than 21 million customer transactions on average each week, employed over 112,000 team members and operated 2,507 retail outlets nationally. The Company has three main operating segments: Supermarkets, Liquor and Convenience. The Company will also retain a 50% ownership stake in flybuys loyalty programs. 

(Source: BanyanTree)

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.

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Global stocks Shares

G8 Education Ltd Long term Outlook remains positive with growing population; Announced share buyback

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

Investment Thesis

  • Trading below our valuation. 
  • Long-term outlook for childcare demand remains positive with growing population (organic and net immigration). 
  • Greater focus on organic growth as well as acquired growth. 
  • National footprint allows the Company to scale better than competitors and mum and dad operators.
  • Potential takeover target by a global operator. 
  • Leverage to improving occupancy levels – (rough estimates) a 1.0% improvement in occupancy equates to $10-11m revenue and approx. $3m EBIT benefit.

Key Risk

  • Execution risk with achieving its operating leverage and occupancy targets.
  • Increased competition leading to pricing pressure. 
  • Increased supply in places leading to reduced occupancy rates. 
  • Value destructive acquisition(s). 
  • Adverse regulatory changes or funding cuts to childcare.
  • Recession in Australia.
  • Dividend cut   

CY21 Results Highlights Given the disruption to CY20 results, comparing the CY21 results to pre-Covid CY19 results. 

  • Group core revenue of $828m was down -6.9% (or down ~$62m) vs CY19 due to lower occupancy (down 2.1% vs CY19) impacting revenue by ~$50m and a $48m impact from the centers divested since CY19. Partly offsetting these were higher average net fees of $16m and $20m of temporary government support relating to Covid-19. 
  •  Core centre NPBT of $137.8m was down -7.7% on CY19, however core centre NPBT margin of 16.6% was mostly flat on CY19 (16.8%) driven by cost management (effective booking and attendance levels; roster optimization) and removal of negative or low margin centers through lease surrender or divestment. 
  •  Group’s cash conversion of 107% was higher vs CY19 101% despite lower overall operating cash flows (driven by lower EBITDA), in part driven by the benefits of lower interest payments (refinance and lower net debt levels). 
  •  GEM finished the year with a strong balance sheet, with a net debt position of $26m and leverage (net debt / EBITDA) of 0.2x. 
  • The Board declared a fully franked dividend of 3cps, representing a payout ratio of 56% and within the target payout ratio range of 50-70% of NPAT. The Company also announced an on-market buyback “to be determined by appropriately balancing between shareholder returns and leverage levels, the uncertain earnings recovery outlook driven by Covid-19, the funding of strategic priorities including the improvement program and the property investment program and other funding needs included for wage remediation and network optimization.”

Company Profile

G8 Education Limited (GEM) owns and operates care and education services in Australia and Singapore through a range of brands. The Company initially listed on the ASX in December 2007 under the name of Early Learning Services, but later merged with Payce Child Care to become G8 Education.

(Source: Banyantree)

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.

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Global stocks

Cochlear Limited’s net profit was up +26% to $158m, driven by strong sales growth & improved gross margin.

Investment Thesis:

  • Attractive market dynamics – growing population requiring hearing aids, improving health in EM providing more access to devices such as hearing aids and relatively underpenetrated market. There remains a significant, unmet and addressable clinical need for cochlear and acoustic implants that is expected to continue to underpin the long‐term sustainable growth of COH. 
  • Market leading positions globally.
  • Direct-to-consumer marketing expected to fast track market growth.
  • Best in class R&D program (significant dollar amount) leading to continual development of new products and upgrades to existing suite of products.
  • New product launches driving continued demand in all segments.
  • Attractive exposure to growth in China, India and more recently Japan.
  • Solid balance sheet position.
  • Potential benefit from Australian tax incentive. Subject to successful passage of legislation, the patent box tax regime for medical technology and biotechnology should encourage development of innovation in Australia by taxing corporate income derived from patents at a concessional effective corporate tax rate of 17%, with the concession applying from income years starting on or after 1 July 2022.

Key Risks:

  • Product recall.
  • Sustained coronavirus outbreak which delays recommencement of hospital operations in China.
  • R&D program fails to deliver innovative products.
  • Increase in competitive pressures.
  • Change in government reimbursement policy.
  • Adverse movements in AUD/USD.
  • Emerging market does not recoup – significant downside to earnings. 

Key Highlights:

  • Revenue increased +12% to $815m driven by demand for sound processor upgrades and new acoustic implant products, despite Cochlear implant revenue continuing to be impacted by Covid‐related restrictions which caused lower overall operating theatre capacity. Cochlear implant units increased +7% to 18,598.
  • Statutory net profit of $169m includes $12m in innovation fund gains after‐tax. Underlying net profit was up +26% to $158m, driven by strong sales growth and improved gross margin, with some benefit from lower‐than‐expected operating expenses.
  • The Board declared an interim dividend of $1.55 per share, up +35% and equates to a payout of 65% of underlying net profit (up from 61% in the pcp). Management expects dividend payout to be around 70% for the full year, in line with our target payout.
  • COH’s balance sheet remains strong with net cash of $506m and operating cash flows sufficient to fund investing activities and capex.
  • Cochlear implant units increased +7% to 18,598 units, driven by strong growth in emerging markets (up +30%), offsetting a decline in developed markets (down -2%). Revenue was up +2% to $457.9m, with a mix shift to the emerging markets.
  • For the emerging markets, unit volumes overall increased around +30% with a strong recovery from Covid‐related surgery deferrals experienced across most countries. Surgeries in a few countries, including China, are trading above pre‐Covid levels. India and Brazil are recovering well although volumes are still materially below pre‐Covid levels.
  • In service segment revenue increased +21% to $256.5m, driven by a growing recipient base. Sound processor upgrade revenue saw a strong growth due to pent-up demand following the restricted access to clinics during Covid lockdowns.
  • In acoustics segment Revenue increased +40% to a record $100.9m, reflecting strong demand for new products and a recovery from Covid‐related surgery delays.

Company Description:

Cochlear Ltd (COH) researches, develops and markets cochlear implant systems for hearing impaired people. COH’s hearing implant systems include Nucleus and Baha and are sold globally. COH has direct operations in 20 countries and 2,800 employees. 

(Source: Banyantree)

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.

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Global stocks Shares

QBE FY21 statutory NPAT improve to $750m, as premiums shot up by an average of 9.7% during the year

Sydney, Australia - March 14, 2013: The Australia Stock Exchange big board viewed from the sidewalk in front of the exchange building in Sydney. The ASX board displays real-time stock information for companies listed on the exchange.

Investment Thesis 

  • New CEO announced could bring a fresh perspective and potential rebasing of earnings. 
  • As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. 
  • Solid global reinsurance program should insulate earnings from catastrophe claims.
  • Expected prolonged period of lower interest rates (which does not benefit QBE’s investment portfolio).
  • Committed to the share buyback program.
  • Undertook a simplification process and sold non-core operations.

Key Risks

  • New CEO announced could bring a fresh perspective and potential rebasing of earnings. 
  • As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. 
  • Solid global reinsurance program should insulate earnings from catastrophe claims.
  • Expected prolonged period of lower interest rates (which does not benefit QBE’s investment portfolio).
  • Committed to the share buyback program.
  • Undertook a simplification process and sold non-core operations.

1H22 Results Highlights                

Relative to the pcp:   

  • Statutory NPAT improved to $750m from a loss of $1,517m in pcp, reflecting a material turnaround in underwriting profitability. Adjusted net cash profit after tax improved to $805m from a loss of $863m in pcp and equated to ROE of 10.3%. 
  •  GWP grew +22% to $18,457m reflecting the strong premium rate environment (average group-wide rate increases averaged +9.7%) as well as improved customer retention and new business growth across all regions with growth in Crop exceptionally strong at 51% due to the significant increase in corn and soybean prices coupled with targeted organic growth. Excluding Crop, GWP increased +18%, or +10% in excess of premium rate increases, up +600bps over pcp, including growth in excess of rate of +15%, +7% and +11% in North America, International and Australia Pacific, respectively. 
  • Combined operating ratio improved -10.5% over pcp to 93.7% as pcp was significantly impacted by Covid-19 claims and adverse prior accident year claims development. North America Crop business reported a combined operating ratio of 92.7%, declining -550bps over pcp. 
  •  Statutory expense ratio declined -140bps over pcp to 13.6% amid operational efficiencies, remaining on track to reach 13% by 2023. 
  • Catastrophe claims were $905M (6.6% of net earned premium vs 5.8% in pcp), up +31.5% over pcp and 90bps above the Group’s increased allowance. 
  • Investment income declined -46% over pcp to $122m amid negative mark-to-market impact of higher risk-free rates on fixed income portfolio. 
  •  Capital position strengthened with indicative pro-forma APRA PCA multiple increasing +0.03x to 1.75x, at the higher end of 1.6–1.8x target range and pro-forma gearing (debt/capital) declining -170bps to 24.1%, within the 15–30% target range. 
  •  Probability of adequacy (PoA) of net outstanding claims reduced -80bps to 91.7% but remained towards the top end of our 87.5–92.5% target range. 

Company Profile

QBE Insurance Group Ltd (QBE) is a global general insurer that underwrites commercial and personal policies across North America, Australia and New Zealand, Europe and emerging markets. QBE’s Equator Re segment is its captive reinsurer, providing reinsurance protection to the entire Group’s operating divisions.

 (Source: Banyantree)

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.

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Global stocks Shares

Cost Absorption Normalizes as Top Line Growth Moderates at No-Moat Wayfair

Business Strategy and Outlook

Wayfair continues to take share in the fragmented home goods market. 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. 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 our 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 generate positive free cash flow to equity over our forecast, even with constraints from infrastructure spend in Europe and IT investment.

Given Wayfair’s lifecycle position, with significant growth potential but also corresponding expenses to achieve market share gains, we expect ROICs to be volatile. We think Wayfair can hit some of its long-term goals, but the duration of execution to achievement is trickier. While it should exceed its prior 25%-27% gross margin target longer term (we forecast reaching 29% due to higher private label mix), we don’t see operating expenses in management’s targeted range 15%-19% of sales until beyond 2031. We plan to watch post pandemic customer acquisition cost trends to determine whether Wayfair could develop a network effect.

Financial Strength 

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 Dec. 30, 2021, 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 ($2.4 billion at the end of December) to help cover expenses like operating lease obligations.Over the past two fiscal years, the company has turned 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 we consider a reasonable run rate as the brand invests back into the business to further support top line growth and improving profitability. Morningstar analysts don’t 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 we would expect to at least partially be deployed in 2022 after shares declined nearly 16% during calendar 2021.

Bull Says

  • 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 we anticipate.

Company Profile

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, DwellStudio, 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)

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.

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Global stocks

Jazz Reports Strong Q4, Raising FVE to $172 on Improved Near-Term Outlook; Shares Undervalued

Business Strategy and outlook

Jazz Pharmaceuticals added its leading drug, Xyrem, to its portfolio in 2005 with the acquisition of Orphan Medical for about $123 million. This was a great price for the then newly approved drug, which became a blockbuster. At that point, Xyrem was the only approved treatment for cataplexy (sudden muscle weakness or paralysis) in narcolepsy; it has since garnered additional approvals for excessive daytime sleepiness in patients with narcolepsy. Jazz reached a settlement in 2017 with Hikma Pharmaceuticals to not allow generics on the market until January 2023. Jazz will retain some economic profit from royalties on generic sales and a shared distribution program. 

Management has been focused on diversifying its portfolio, with the new drug approvals of Zepzelca (for metastatic small-cell lung cancer), Rylaze (for acute lymphoblastic leukemia), and Xywav (for the treatment of cataplexy, EDS, and idiopathic hypersomnia). Strong launches and commercialization efforts for these drugs will be crucial for Jazz to diversify its portfolio. Acquiring recently launched drugs has been part of Jazz’s portfolio diversification strategy. In May 2021, Jazz acquired GW Pharmaceuticals for the hefty price of $7.2 billion. GW contributed $677 million to Jazz’s overall 2021 revenue, largely driven by its leading product, Epidiolex. This drug is a cannabidiol for the treatment of severe, rare forms of epilepsy.

Financial Strength

Jazz is in a decent financial position thanks to historically strong cash flow generation from Xyrem’s sales of $7.2 billion. GW’s leading drug, Epidiolex, could be a potential blockbuster grossing over $1 billion annually by 2023. Company has already received FDA approval and is also marketed in Europe. This acquisition allows Jazz to reach patient populations with rare and severe forms of epilepsy with approved indications for Epidiolex as young as one year of age. 

The GW acquisition will be dilutive to both GAAP and non-GAAP adjusted net income in the near term, and it will damp adjusted ROICs. Historically, management has pursued both larger deals ($1 billion or more) and smaller, early-stage deals for growth while spending a low-double-digit percentage of sales on R&D. Once the acquisition of GW is fully integrated and management has deleveraged, the company will continue making acquisitions to help expand and diversify its portfolio.

Bulls Say

  • The GW acquisition allows Jazz to reach patient populations with rare and severe forms of epilepsy with approved indications for Epidiolex as young as one year of age.
  • Jazz’s extensive network of sleep doctors should give the company a competitive edge when marketing its new sleep therapies.
  • Xyrem’s historically strong cash generation has allowed the company to make recent acquisitions to help diversify its portfolio.

Company Profile

Jazz Pharmaceuticals is an Ireland-domiciled biopharmaceutical firm focused primarily on treatments for sleeping disorders and oncology. Jazz has nine approved drugs across neuroscience and oncology indications; its portfolio includes Xyrem and Xywav for narcolepsy, Zepzelca for the treatment of metastatic small-cell lung cancer, Rylaze for acute lymphoblastic leukemia, and Vyxeos for acute myeloid leukemia. In May 2021, Jazz acquired GW Pharmaceuticals and gained its leading product, Epidiolex for the treatment of severe, rare forms of epilepsy.

(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.