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

2022 Summer Will Be a Major Test for United’s International Travel Business

Business Strategy and Outlook:

United Airlines is the most internationally focused U.S.-based carrier by operating revenue, with almost 40% of 2019 revenue coming from international activities. Before the COVID-19 pandemic, much of the company’s story focused on realizing cost efficiencies to expand margins. It is anticipated that United’s international routes will not be as pressured, but that international flights will be difficult to fill until a COVID-19 vaccine is developed and distributed. A recovery in business travel is believed to be critical for United to maintain the attractive economics of the frequent flier program. Business travellers will often use miles from a cobranded credit card to upgrade flights when their company is unwilling to pay a premium price. Banks are willing to pay top dollar for these frequent flier miles, which provides a high-margin income stream to United.

The COVID-19 pandemic has presented airlines with the sharpest demand shock in history, and most of our projections are based on our assumptions around how illness and vaccinations affect society. A full recovery in capacity and an 80%-90% recovery in business travel is expected that subsequently grows at GDP levels over the medium term.

Financial Strength:

United has a roughly average debt burden relative to peer U.S. carriers, but an average airline balance sheet is not strong in absolute terms. United carries a large amount of debt, comparatively thin margins, and substantial revenue uncertainty. As the pandemic has wreaked havoc on air travel demand and airlines’ business models, liquidity has become more important than in recent years. The primary risks to airline investors are increased leverage and equity dilution as airlines look to bolster solvency while demand is in the doldrums.

United’s priority after the pandemic will be deleveraging the balance sheet, but it is expected that this will take several years due to the firm’s thin margins. United came into the pandemic with a reasonable amount of debt, with the gross debt/EBITDA ratio sitting at roughly 4.5 times in 2019. United, like all airlines, has materially increased its leverage since February 2020 and has issued debt and received support from the government to survive a previously unfathomable decline in air traffic. As of the fourth quarter of 2021, United has $33.4 billion of debt and $18.3 billion of cash on the balance sheet.

Bulls Say:

  • United has renewed its frequent flier partnership with Chase, potentially creating room for long-term margin expansion. 
  • An increasing focus on capacity restraint across the industry, combined with structurally lower fuel prices, should boost airlines’ financial performance over the medium term. 
  • Leisure travellers have more comfortable with flying during the COVID-19 pandemic.

Company Profile:

United Airlines is a major U.S. network carrier. United’s hubs include San Francisco, Chicago, Houston, Denver, Los Angeles, New York/Newark, and Washington, D.C. United operates a hub-and-spoke system that is more focused on international travel than legacy peers.

(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

Discover Ends 2021 With a Decent Quarter as Purchasing Volume Impresses but Loan Growth Remains Slow

Business Strategy and Outlook

Despite initial fears, Discover came through the COVID-19 pandemic with few issues. Its credit card portfolio–its largest source of income–shrank 7% in 2020, a year when most credit card issuers saw declines in the double digits. Perhaps more surprisingly, net charge-offs fell in 2020 and have remained well below normal levels since, both in absolute terms and as a percentage of total loans. We anticipate credit costs will be higher in 2022 but given how low the firm’s delinquency rates are we do not expect a full return to normal credit costs until 2023. We don’t expect this to put any pressure on the bank’s balance sheet as Discover is in a strong financial position to withstand higher credit losses. 

Discover generates most of its revenue through interest income from its credit cards (roughly 70% of its net revenue). While the company has strong positions in the private student debt and personal loan markets in addition to operating its own payment network, its long-term health will be driven by its ability to build and sustain its portfolio of credit card receivables. Discover’s credit card business has been performing very well in recent years, with receivable growth and credit results better than most of its peers. With the majority of its credit cards and student loans charging variable interest rates, the bank will also be a beneficiary of rising interest rates, though this is limited by the firm’s reliance on online deposits. 

In the long run, Discover must continue to deal with the challenges that come with being smaller than many of its competitors in size and scope. Many of the traditional banks that the company competes with can offer their cardholders a broader selection of products and services. Discover’s more traditional competitors often benefit from a lower cost of funding driven by their strong deposit bases. While it is unlikely that Discover will ever fully replicate the product offerings of some its peers, it has made good progress in improving its funding cost through the use of online savings accounts. We are encouraged by its initial forays into checking accounts, as this should help Discover further narrow the cost of funding gap

Financial Strength

Efforts to conserve capital by suspending share buybacks in the initial stages of the pandemic paid off and the company was able to navigate the uncertainty of 2020 and 2021 with ease. Despite increasing shareholder returns in the second half of the year, Discover came out of 2021 in a strong financial position, ending the year with a common equity Tier 1 capital ratio of ratio of 14.8%. We expect the firm to continue its share repurchases in 2022 as Discover works to move back toward its target Tier 1 ratio of 10.5%. In our view, this is an adequate reserve ratio, given that historically the firm has had strong underwriting standards with credit card net charge-off rates below its peers.

 The firm has had success in improving its funding, with more than 70% of total funding now coming from deposits. On the other hand, Discover primarily relies on online savings accounts and brokered deposits. This means it must compete on price for accounts, giving it a higher cost of funding than many of its peers. The company is seeking to mitigate this with an expansion into online checking, but these efforts are still in their early stages.

Bulls Say’s

  • Discover has consistently been able to generate returns on equity that are among the highest of its peers. 
  • Discover’s credit card receivables growth has been above the industry average for some time now. This outperformance continued in 2020 when its receivables balance shrank less than its peers’. 
  • Discover has made good progress in improving its deposit base through online savings accounts and more recently online checking.

Company Profile 

Discover Financial Services is a bank operating in two distinct segments: direct banking and payment services. The company issues credit and debit cards and provides other consumer banking products including deposit accounts, students loans, and other personal loans. It also operates the Discover, Pulse, and Diners Club networks. The Discover network is the fourth-largest payment network in the United States as ranked by overall purchase volume, and Pulse is one of the largest ATM networks in the country.

(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

Fresenius Position as Top Dialysis Service Provider does remain Symbolic and Unique

Business Strategy and Outlook

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

The company’s position as the top dialysis service provider and equipment maker in the world remains symbiotic and unique. Fresenius’ experience operating over 4,100 dialysis clinics around the globe (about 1,000 more than the next-largest player, DaVita) gives it insights into caregiver and patient needs to inform service offerings and product innovation. Fresenius uses clinical observations to develop and then manufacture even better technology to treat ESRD patients. It outfits all its clinics with its own brand of equipment and consumables, which has margin implications related to system costs and operating efficiency for staff. However, other dialysis clinics appreciate Fresenius’ technology as well, and Fresenius claims about 35% market share in dialysis equipment/consumables while serving only 9% of ESRD patients through its global clinics. Especially telling, main rival DaVita remains one of Fresenius’ top product customers. 

With growing clinical and payer support for at-home treatments, Fresenius is taking aim at those ESRD therapies with significant investments, too. It recently purchased NxStage Medical for home hemodialysis, which appears differentiated in the industry for its ease of use and physical size. The company also aims to improve on its peritoneal dialysis offering where Baxter has traditionally excelled.

Financial Strength

Fresenius maintains a manageable balance sheet, despite its high lease-related obligations and capital-allocation strategy that includes acquisitions and significant returns to stakeholders. The company receives investment-grade ratings from the three major U.S. rating agencies, which should help it access the debt markets for any necessary refinancing. As of September 2021, Fresenius owed EUR 9 billion in debt and had lease obligations around EUR 5 billion. On a net debt/EBITDA basis, leverage stood at roughly 3 times, which appears manageable and in line with the firm’s previous long-term goal of 2.5-3.0 times, which excluded lease obligations. After generating over EUR 3 billion of free cash flow in 2020 including government aid, free cash flow looks likely to decline to about EUR 1.5 billion before rising to about EUR 2.0 billion by 2026. It is not held the firm will face any significant refinancing risks during the next five years even as it continues to push cash out to stakeholders and pursue acquisitions. While acquisitions remain difficult to predict, the company pays a dividend to shareholders (EUR 0.4 billion in 2020) and makes distributions to noncontrolling interests (EUR 0.4 billion in 2020). It also repurchased EUR 0.4 billion in shares in 2020, and it is alleged more repurchases going forward. With those expected outflows to stakeholders and significant debt maturities coming due in the foreseeable future, it is supposed Fresenius may be an active debt issuer going forward.

 Bulls Say’s

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

Company Profile 

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

(Source: MorningStar)

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

Wynn’s Macao Gaming License to Be Renewed for 10 Years, Supporting Its Regulatory Intangible Asset

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Business Strategy and Outlook

COVID-19 continues to materially affect Wynn’s Macao operations (50% of estimated 2024 EBITDA), which we view as transitory. But the Macao government continues to heavily regulate VIP play, elevating long-term operational risk. Wynn has outsize exposure to the expected long-term shift away from VIP gaming revenue toward nongaming and mass play. Still, we see an attractive long-term growth opportunity in Macao, with Wynn’s high-end iconic brand positioned to participate.

Long term, we see solid visitation and gaming growth for Macao, aided over the next several years as key infrastructure projects to alleviate the region’s congested traffic (Pac On Terminal and Hong Kong Bridge opened in 2018, the light-rail transit at the end of 2019, reclaimed land, and development of Hengqin island) continue to come on line, which should expand constrained carrying capacity, thereby driving higher visitation and spending levels. Our forecast for annual mid-single-digit visitation growth over the next decade is supported by China outbound travel that we expect will average high-single-digit annual growth over the next 10 years. On Jan. 14, the Chinese government announced its intention to renew Wynn’s Macao gaming license (the source of the company’s narrow moat) for 10 years, which along with plans to develop further with its Crystal Pavilion project stands to benefit the company with regard to the region’s growth opportunity. Still, the Macao market is highly regulated, and as a result, the pace and timing of growth are at the discretion of the government. We expect upcoming developments that add attractions and improve Macao’s accessibility will improve the destination’s brand, supporting our constructive long-term view on Macao.

The Las Vegas region (50% of estimated 2024 EBITDA) doesn’t offer the long-term growth potential or regulatory barriers of Macao, so we do not believe it contributes to Wynn’s moat. Still, its Wynn Interactive sports betting and iGaming brand, Boston property Encore (opened June 2019), and Vegas project (convention centre plus room and golf renovations) are set to provide incremental growth.

Financial Strength

Wynn’s financial health is more stressed than that of peers Las Vegas Sands and MGM, but the company has taken steps to lift its liquidity profile, including suspending its dividend, cutting discretionary expenses, tapping credit facilities, and issuing debt. As a result, the company has enough liquidity to operate at near-zero revenue through 2022. Should the pandemic’s impact last longer, we expect the company’s banking partners will continue to work with Wynn, given its intact regulatory intangible advantage (the source of its narrow moat), which drives cash flow generation potential. This view is supported by narrow-moat Wynn Macau surviving through 2014-15 when its debt/EBITDA temporarily rose to around 8 times, above the 4.5-5.0 covenants in those years. Finally, we believe the Chinese government could aid Macao operators if necessary, given that the nation wants the region to become a world destination resort. Wynn entered 2020 with debt/adjusted EBITDA of 5.7 times, but the metric turned negative in 2020 and was elevated in 2021 (estimated at 15.4), as demand for leisure and travel collapsed during the this period due to the COVID-19 outbreak. As demand recovers in the next few years, we expect leverage to reach 9.9 times, 7.7 times, and 6.5 times in 2022, 2023, and 2024, respectively.

Bulls Say’s

  • Wynn is positioned to participate in the long-term growth of Macao (76% of pre-pandemic 2019 EBITDA) and has room share of 9% with the opening of its Cotai Palace property in 2016.The ability to continuously innovate and commercialize new technologies should enable Aptiv to generate excess returns over its cost of capital.
  • Wynn has a narrow economic moat, thanks to possessing one of only six licenses awarded to operate casinos in China.
  • A focus on the high-end luxury segment of the casino industry allows the company to generate high levels of revenue and EBITDA per gaming position in the industry

Company Profile 

Wynn Resorts operates luxury casinos and resorts. The company was founded in 2002 by Steve Wynn, the former CEO. The company operates four megaresorts: Wynn Macau and Encore in Macao and Wynn Las Vegas and Encore in Las Vegas. Cotai Palace opened in August 2016 in Macao, Encore Boston Harbour in Massachusetts opened June 2019. Additionally, we expect the company to begin construction on a new building next to its existing Macao Palace resort in 2022, which we forecast to open in 2025. The company also operates Wynn Interactive, a digital sports betting and iGaming platform. The company received 76% and 24% of its 2019 pre-pandemic EBITDA from Macao and Las Vegas, respectively

(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

BlackRock: Largest AUM, Backed by iShares Platform

Business Strategy and Outlook

BlackRock is at its core a passive investment shop. Through its iShares exchange-traded fund platform and institutional index fund offerings, the wide-moat firm sources two thirds of its managed assets (and close to half of annual revenue) from passive products. In an environment where retail-advised and institutional clients are expected to seek out providers of passive products, as well as active asset managers that have greater scale, established brands, solid long-term performance, and reasonable fees, it is apprehended that BlackRock is well-positioned. The biggest differentiators for the firm are its scale, ability to offer both passive and active products, greater focus on institutional investors, strong brands, and reasonable fees. It is alleged that the iShares ETF platform as well as technology that provides risk management and product/portfolio construction tools directly to end users, which makes them stickier in the long run, should allow BlackRock to generate higher and more stable levels of organic growth than its publicly traded peers the next five years. 

With $10.010 trillion in total assets under management, or AUM, at the end of 2021, BlackRock is the largest asset managers in the world. Unlike many of its competitors, the firm is currently generating solid organic growth with its operations, with its iShares platform, which is the leading domestic and global provider of ETFs, riding a secular trend toward passively managed products that began more than two decades ago. This has helped the company maintain above average levels of annual organic growth despite the increased size and scale of its operations. Although it is held the secular and cyclical headwinds to make AUM growth difficult for the U.S.-based asset managers over the next five to 10 years, it is still perceived BlackRock generating at least 3%-5% average annual organic AUM growth, driven by its commitment to passive investing, ESG strategies, and geographic expansion, with slightly higher levels of revenue growth on average and stable adjusted operating margins (range-bound between 46% and 48% of revenue) during 2022-26.

Financial Strength

BlackRock has been prudent with its use of debt, with debt/total capital averaging just over 15% annually the past 10 calendar years. The company entered 2022 with $6.6 billion in long-term debt, composed of $750 million of 3.375% notes due May 2022, $1 billion of 3.5% notes due March 2024, EUR 700 million of 1.25% notes due May 2025, and $700 million of 3.2% notes due March 2027, $1 billion of 3.25% notes due April 2029, $1 billion of 2.4% notes due April 2030, and $1.25 billion of 1.9% notes due May 2031. The company also has a $4.4 billion revolving credit facility (which expires in March 2026) but had no outstanding balances at the end of September 2021. Expecting the firm to fully repay the notes due this year, and assuming that BlackRock matches analyst’s earnings projections for 2022, the firm should enter next year with a debt/total capital ratio of less than 15%, debt/EBITDA (by our calculations) at 0.8 times, and interest coverage of more than 30 times. BlackRock has historically returned the bulk of its free cash flow to shareholders via share repurchases and dividends. That said, the firm did spend $693 million on two acquisitions in 2018, $1.3 billion on eFront in 2020, and $1.1 billion for Aperio Group in early 2021, so bolt-on deals look to be part of the mix in the near term. As for share repurchases, BlackRock expects to spend $375 million per quarter on share repurchases during 2022 but will increase its allocation to buybacks if shares trade at a significant discount to intrinsic value. The company spent $1.2 billion on share repurchases during 2021. BlackRock increased its quarterly dividend 18% to $4.88 per share early in 2022. 

Bulls Say’s

  • BlackRock is the largest asset manager in the world, with $10.010 trillion in AUM at the end of 2021 and clients in more than 100 countries. 
  • Product diversity and a heavier concentration in the institutional channel have traditionally provided BlackRock with a much more stable set of assets than its peers. 
  • BlackRock’s well-diversified product mix makes it fairly agnostic to shifts among asset classes and investment strategies, limiting the impact that market swings or withdrawals from individual asset classes or investment styles can have on its AUM.

Company Profile 

BlackRock is the largest asset managers in the world, with $10.010 trillion in AUM at the end of 2021. Product mix is fairly diverse, with 53% of the firm’s managed assets in equity strategies, 28% in fixed income, 8% in multi-asset class, 8% in money market funds, and 3% in alternatives. Passive strategies account for around two thirds of long-term AUM, with the company’s iShares ETF platform maintaining a leading market share domestically and on a global basis. Product distribution is weighted more toward institutional clients, which by our calculations account for around 80% of AUM. BlackRock is also geographically diverse, with clients in more than 100 countries and more than one third of managed assets coming from investors domiciled outside the U.S. and Canada.

(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

PG&E on Path to Test California Wildfire Insurance Fund After Dixie Fire Report

Business Strategy and Outlook

PG&E emerged from bankruptcy on July 1, 2020, after 17 months of negotiating with 2017-18 Northern California fire victims, insurance companies, politicians, lawyers, and bondholders. Shareholders lost some $30 billion in settlements, fines, and costs, but PG&E exited with bondholders made whole and shareholders still in control.

PG&E will always face public and regulatory scrutiny as the largest utility in California. That scrutiny has escalated with the deadly wildfires and power outages. Legislative and regulatory changes during and since the bankruptcy have reduced PG&E’s financial risk, but the state’s inverse condemnation strict liability standard remains a concern. CEO Patti Poppe faces a tall task restoring PG&E’s reputation among customers, regulators, politicians, and investors

PG&E is well positioned to grow rapidly, given the investment needs to meet California’s aggressive energy and environmental policies. PG&E is set to invest $8 billion annually for the next five years, leading to 10% annual growth. After suspending its dividend in late 2017, PG&E should be positioned to reinstate it in 2024 based on the bankruptcy exit plan terms.

California’s core ratemaking regulation is highly constructive with usage-decoupled rates, forward-looking rate reviews, and allowed returns well above the industry average. California regulators are expected to support premium allowed returns to encourage energy infrastructure investment to support the state’s clean energy goals, including a carbon-free economy by 2045. This upside is partially offset by the uncertain future of PG&E’s natural gas business, which could shrink as California decarbonizes its economy.

The $59 billion bankruptcy was PG&E’s second in 20 years and likely its last. The bankruptcy exits terms all but guarantee a state takeover if PG&E has any safety or operational missteps. PG&E is still under court and regulatory supervision following the 2010 San Bruno gas pipeline explosion. The  estimated fines and penalties from the San Bruno disaster and allegations of poor recordkeeping resulted in $3 billion of lost shareholder value.

Financial Strength

Following the bankruptcy restructuring, PG&E has substantially the same capital structure as it did enter bankruptcy with many of the same bondholders after issuing $38 billion of new or reinstated debt. PG&E’s $7.5 billion securitized debt issuance would eliminate $6 billion of temporary debt at the utility and further fortify its balance sheet. The post-bankruptcy equity ownership mix is much different. PG&E raised $5.8 billion of new common stock and equity units in late June 2020, representing about 30% ownership. Another $3.25 billion of new equity came from a group of large investment firms. The fire victims trust owned 22% and legacy shareholders retained about 26% ownership at the bankruptcy exit. The fire victims’ trust plans to sell its stake over time but had not sold any shares as of late 2021. It is expected that PG&E to maintain investment-grade credit ratings. Also, it is expected consolidated EBITDA/interest coverage will remain near 5 times on a normalized basis. State legislation in 2019 will help mitigate some of PG&E’s fire-related risks and support investment-grade credit ratings. Bankruptcy settlements with fire victims, insurance companies, and municipalities totalled $25.5 billion, of which about $19 billion was paid in cash upon exit. PG&E entered bankruptcy after a sharp stock price drop in late 2018 made new equity prohibitively expensive and the company was unable to maintain its 52% required equity capitalization. It is estimated that PG&E will invest up to $8 billion annually during the next few years. Tax benefits and regulatory asset recovery should eliminate any equity needs at least through 2023. It is also estimated that PG&E’s bankruptcy exit plan restricts it from paying a dividend until late 2023. Before PG&E cut its dividend in late 2017, the anticipated 6% annual dividend growth, in line with earnings growth. In May 2016, PG&E’s board approved the first dividend increase since the 2010 San Bruno gas pipeline explosion.

Bulls Say’s

  • California’s core rate regulation is among the most constructive in the U.S. with usage-decoupled revenue, annual rate true-up adjustments, and forward-looking rate setting.
  • Regulators continue to support the company’s investments in grid modernization, electric vehicles, and renewable energy to meet the state’s progressive energy policies.
  • State legislation passed in August 2018 and mid-2019 should help limit shareholder losses if PG&E faces another round of wildfire liability.

Company Profile 

PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.3 million electricity customers and 4.4 million gas customers in 47 of the state’s 58 counties. PG&E operated under bankruptcy court supervision between January 2019 and June 2020. In 2004, PG&E sold its unregulated assets as part of an earlier post-bankruptcy reorganization.

 (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.

Categories
Global stocks

Normalizing Capital Markets Revenue Is a Theme for Goldman Sachs and Other Investment Banks

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Business Strategy and Outlook

Goldman Sachs is already making progress on the strategic plan that it laid out at the beginning of 2020. The company’s financial targets include a return on equity greater than 13% and a return on tangible equity greater than 14%. COVID-19 boosted revenue in 2020 and 2021 with high trading caused by economic uncertainty and companies issuing debt and equity to initially bolster capital and then later issuing debt and equity to take advantage of low interest rates and a strong stock market. Over the next five years, Morningstar analyst model Goldman Sachs achieving a normalized return on equity of around 12% and a return on tangible common equity of 13%.

Given Morningstar analyst forecast, Goldman Sachs should trade at about 1.4-times tangible book value. Its investment management business has become a priority. Assets under supervision exceeded $2.1 trillion at the end of 2020, while related investment management fees have exceeded 15% of net revenue compared with 11%-12% before 2008. Investment management is a relatively stable, higher return-on-capital business that is well suited to the current regulatory environment. Goldman has also built out a large virtual bank and had deposits of $260 billion at the end of 2020 compared with $39 billion in 2009. The deposit base and related net interest income will add more stability to the company’s revenue stream and balance sheet.

Normalizing Capital Markets Revenue Is a Theme for Goldman Sachs and Other Investment Banks

Goldman Sachs’ revenue remained relatively strong in the fourth quarter of 2021, but expenses, including compensation, seemed to be a bit higher than expected. The company reported net income to common shareholders of $3.8 billion, or $10.81 per diluted share, on $12.6 billion of net revenue. Net revenue of $12.6 billion in the fourth quarter was about 13% higher than the company’s 2020 quarterly average and 45% higher than its 2017 to 2019 quarterly average and cemented 2021 as a year of record revenue totaling $59 billion. Return on tangible equity was a very healthy 16.4% in the quarter and 24.3% for the year. With all that said, the fourth quarter’s revenue and net earnings were also the lowest of 2021 and determining a more normal level of revenue for the company will be primary theme for Goldman Sachs and other investment banks in 2022 and 2023. We don’t anticipate making a significant change to our $356 fair value estimate for narrow-moat Goldman Sachs.The recent record revenue at Goldman Sachs can roughly be broken down into two parts: more volatile capital markets-related and steadier client asset-based. The more capital markets-related revenue (such as underwriting, institutional trading, and equity investment gains) are over 70% of net revenue and contributed about $19 billion of the $23 billion of net revenue growth at the company since 2019, according to Morningstar analyst calculations. 

Bulls Say 

  • More-stable investment management and net interest income could cause investors to reassess Goldman’s earnings quality and increase their willingness to pay a premium for it. 
  • The company has a record of success with higher-volume, lower-margin businesses, and this capability could prove useful in adapting to over-the-counter derivatives reform and changes in fixed-income trading. 
  •  Several of the company’s primary U.S. and European competitors have been forced to restructure, which could give Goldman an opportunity to gain market share

Company Profile

The Goldman Sachs Group, Inc. is a leading global financial institution that delivers a broad range of financial services across investment banking, securities, investment management and consumer banking to a large and diversified client base that includes corporations, financial institutions, governments and individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.

 (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

New Oriental Education: Restructuring Impact Remains Unclear

Business Strategy and Outlook:

New Oriental Education, or EDU, is a large-scale leading provider of private tutoring in China. EDU offers a diversified portfolio of educational programs, services, and products to students in different areas. Not only does EDU offer K-12 after-school tutoring, but EDU also offers other test preparations for both overseas and domestic examinations. In non-academic fields, EDU offers adult English and other languages, and it also provides services in vocational training, such as corporate training, marketing, accounting, human resources, IT and PRC Bar. EDU has been able to raise its fees via new students or new programs to cover rising costs, driving an improving margin as utilization and operational efficiency continues to improve.

A key tenant of EDU’s strategy is to improve operational efficiency in the near term. EDU is guiding 20%-25% year-over-year growth per year for its learning center capacity for the next three years and we believe that offline classes should gradually open as the impact of the coronavirus gradually fades. Also, EDU will continue to close down underperforming centers, which also implies improving operating efficiency. EDU is aiming to raise its student retention rate to 65% from 63% in fiscal 2021.

Financial Strength:

The company’s financial status has been healthy over the past years, with a clean balance sheet and steady cash inflows. EDU has been generating net cash since 2011 with steady cash flow. However, uncertainty is expected to be ahead before the end of 2021, when businesses are required to restructure–with the estimation of 62% of their business being required to be spun off.

Bulls Say:

  • Well-established reputation and dominant position in China. 
  • Successful expansion with strong student enrolment in China should drive growth. 
  • Likely to benefits in the longer term as one of the first movers in online education known as Koolearn.com.

Company Profile:

EDU, founded in 1993, is the largest well-established one-stop shopping private educational services provider in China. EDU has had over 52.8 million student enrollments, including about 8.4 million enrollments in fiscal 2019. As of third-quarter fiscal 2020, EDU had a network of 1,416 learning centers, including 99 schools, 12 bookstores and access to a national network of online and offline bookstores through 160 third-party distributors and over 38,400 highly qualified teachers in 86 cities. EDU offers a diversified portfolio of educational programs, services and products to students in different age groups, including K-12 after-school tutoring for major academic subjects, overseas and domestic test preparations, nonacademic languages and services in vocational training, and so on.

(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

Key Catalyst For Trip.com: International Business A Hand In Recovery

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Business Strategy and Outlook

Narrow-moat Trip.com competes in China’s crowded online travel agent (OTA) industry by leveraging the largest selection of both domestic and international hotels in China on its platform and relying on user stickiness as a one-stop shop for travel ticketing, accommodations, and packaged tours. The platform is now also generating revenue from advertisement in which it hopes to take 3-5% of the ad market, but nearly all its revenue streams are travel-related, and COVID-19 lockdowns in China has cratered demand due to the inability to travel or unwillingness to quarantine. 

It is anticipated 2022 to be another challenging year for the travel industry as it is valued Trip.com’s revenue to recover to only 65% of 2019 levels. The company believes it can reach long-term non-GAAP operating margins of 20-30% on the back of its international, outbound, and high-star hotel businesses given their higher monetization rates, but the lack of demand has impacted these businesses, and total international revenue has declined to less than 5% of the mix and caused operating margin to be negative. Prior to the pandemic in 2019, international revenue was 25% of the mix and non-GAAP operating margins were 19%. It is alleged that reaching its long-term margin will rely heavily on the recovery, but the pandemic has been a significant headwind and has delayed its progress. It is supposed that outbound international travel should eventually recover but visibility is still limited, and further COVID-related setbacks could add to the uncertainty and possibility that the company could fall short of its long-term outlook. 

The other key business that will drive margins is its high-star domestic hotels which generates the highest take-rate on its platform at 9-10%. Trip.com charges low rates for its budget hotels to attract new users and directs them to its high-star hotels for future bookings as its traffic acquisition strategy, where it hopes to retain users through its wide selection of hotel, ticketing, and packaged tour options. Currently, this business has already recovered to 62% of 2019 levels, and thus it is alleged that the imminent key catalyst for Trip.com will be its international business.

Financial Strength

Trip.com operates as an asset-lite company and tends to not commit heavy resources to capital expenditures other than acquisitions for its operations. As of third-quarter 2021, net debt was almost 0 as Trip.com had nearly identical CNY 57.414 billion of debt against CNY 57.411 of cash and investments. Short-term liquidity is also safe with a quick ratio of over 1 time which should reflect some margin of safety and is representative of Trip.com’s financial strength. Trip.com has CNY 45 billion of short-term debt due, and should COVID-19 headwinds continue, it is seen the company issue debt in order to cover short-term expenses to navigate through COVID-19 but given history of low net debt and 15%-20% EBITDA margin, it is not expected to be an issue. The online travel business is not capital-intensive and has historically generated positive free cash flows. The exceptions to Trip.com was mostly due to acquisitions and capitalized operating expenses. In 2014, negative free cash flow for Trip.com was mainly due to its large investment in fixed assets of CNY 4.8 billion, mostly due to its new office building of CNY 3 billion. In 2016, negative free cash flow was mainly due to the merger with Qunar, and Trip.com returned to free cash flow positive from 2017 to 2019. It is projected cash flow to be negative in 2021 due to COVID-19 but should be positive in 2022 even as revenue recover to only 65% of 2019 levels as given in our base-case scenario.

 Bulls Say’s

  • The company can eventually reach its 20%-30% long-term operating margin target as COVID-19 subsides.
  • International and outbound business will eventually recover and drive margins upwards. Margin expansion will be dictated by its higher-margin businesses, including international air and hotels. 
  • The industry will see less competition in the future than before due to current headwinds faced, and thus lesser disruptions to its long-term business plan.

Company Profile 

Trip.com is the largest online travel agent in China and is positioned to benefit from the country’s rising demand for higher-margin outbound travel as passport penetration is only 12% in China. The company generated about 78% of sales from accommodation reservations and transportation ticketing in 2020. The rest of revenue comes from package tours and corporate travel. Prior to the pandemic in 2019, the company generated 25% of revenue from international business, which is important to its margin expansion. Most of sales come from websites and mobile platforms, while the rest come from call centers. The competes in a crowded OTA industry in China, including Meituan, Alibaba-backed Fliggy, Toncheng, and Qunar. The company was founded in 1999 and listed on the Nasdaq in December 2003. 

(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

Robust balance sheet and ample liquidity support Pilgrim’s Pride Corp endure market volatility

Business Strategy and Outlook

Although Pilgrim’s Pride is the second-largest poultry producer in the countries in which it operates, we don’t believe it has carved out an edge. About 70% of Pilgrim’s products are undifferentiated and therefore have difficulty commanding price premiums and higher returns. Further, its profit margins can be quite volatile, as several factors outside the firm’s control affect costs (weather, flock disease, global trade). Prices of feed ingredients can be quite volatile, surging in 2008 and leading to Pilgrim’s bankruptcy. Since then, the industry has moved to new pricing strategies, which are helping protect the processors from revenue/cost mismatches. However, despite Pilgrim’s size, we don’t believe this affords it a scale cost advantage, underpinning our no-moat rating. 

In August, JBS, which owns 80% of Pilgrim’s, proposed to buy the remaining 20% for $26.50 per share. The board is reviewing the deal, and if approved, it will be put to a shareholder vote (excluding JBS). The offer appears light, at a 20% discount to our $34 fair value estimate and at 6.5 times adjusted EBITDA, compared with the 9.1 times for which Sanderson Farms was acquired one week prior to the offer. 

As 50% of Pilgrim’s sales stem from food service, the pandemic impaired sales and margins in 2020; organic sales were down 2.4%, and adjusted operating margins fell 240 basis points to 3.7%. But trends are recovering as vaccines become more widely available, and we expect no lasting effects. We are optimistic on the long-term global demand for chicken, as developed market consumers have been shifting consumption of red meat toward poultry, and in emerging markets, a growing middle class is driving higher per capita consumption of protein. Pilgrim’s should benefit from strong demand in China, as the country eliminated its ban on U.S. chicken in late 2019. Further, China has a shortage of protein after a 2019 outbreak of African swine fever resulted in a 40% reduction in the country’s hog population. The disease is still not fully contained, so this supply shortage should support global protein prices once the pandemic subsides and should result in strong export demand.

Financial Strength

Pilgrim’s strong balance sheet (net debt/adjusted EBITDA at a very manageable 2.2 times as of September 2021) and sufficient liquidity ($1.5 billion cash on hand and available cash through its credit facilities) should help the firm withstand market volatility. Pilgrim’s has no debt maturities until 2023, does not pay a dividend, and has sufficient liquidity and debt capacity to fund $400 million in annual capital expenditures. Even beyond the pandemic, the business is inherently cyclical with many factors outside management’s control, but we applaud changes that have improved the predictability of earnings. Chicken pricing contracts now link costs and prices. In addition, Pilgrim’s now maintains diversified exposure to fresh chicken across large, tray pack, and small bird segments, which helps stabilize margins. The firm also maintains geographical diversification, with 62% of 2020 revenue from the U.S., 27% from Europe, and 11% from Mexico. The firm has stated its optimal net debt/adjusted EBITDA range is 2-3 times, which we think is manageable, but we wouldn’t want it to move above that range on a sustained basis, given the unpredictable nature of profits despite improvements. We think it’s likely that over the next few years Pilgrim’s will make acquisitions that we have not modelled, we don’t think leverage will exceed its 2-3 times target over an extended horizon. However, given the unpredictable size, timing, and characteristics, we have opted instead to model excess cash flow being allocated to special dividends beginning in 2026, as the company prefers this approach instead of regular dividends and share repurchases are constrained by limited float. We model dividends beginning at $2.17 per share in 2026 and gradually increasing to $2.86 per share throughout our explicit forecast.

Bulls Say’s

  • The global protein shortage resulting from China’s African swine fever outbreak should support global protein prices, which should stabilize and enhance Pilgrim’s profit margins. 
  • Pilgrim’s has an opportunity to unlock value through structurally boosting the profits of its European operations by applying best practices from the U.S. and Mexico and using its key customer strategy to change the producer/customer dynamic. 
  • In November 2019, China eliminated its ban on imports of U.S. poultry, which should help boost Pilgrim’s exports.

Company Profile 

Pilgrim’s Pride is the second-largest poultry producer in the U.S. (62% of 2020 sales), Europe (27%), and Mexico (11%). The 2019 purchase of Tulip, the U.K.’s largest hog producer, marks the firm’s entrance into the pork market, which represented 11% of 2020 sales. Pilgrim’s sells its protein to chain restaurants, food processors, and retail chains under brand names Pilgrim’s, Country Pride, Gold’n Plump, and Just Bare. Channel exposure is split evenly between retail and food service, with most of the food-service revenue coming from quick-service restaurants. JBS owns 80% of Pilgrim’s outstanding shares.

(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.