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.

Categories
Global stocks

Strong Demand and Pricing Power Persist for D.R. Horton Despite Higher Mortgage Rates

Business Strategy and Outlook

D.R. Horton is the largest U.S. homebuilder (by volume) with an extensive geographic footprint, wide product breadth, value focus, and financial flexibility. Management is focused on continuing to expand the business while generating sustainable returns on invested capital and positive cash flows throughout the housing cycle. Residential construction has been a bright spot of the U.S. housing market during the pandemic, and we expect continued housing market strength over the next decade with housing starts averaging 1.6 million units annually. While affluent urban dwellers migrating to the suburbs was a key source of demand in 2020-21, we expect first-time buyers to be a main contributor to future housing demand.

Recognizing the importance of the price-conscious first-time buyer in the continued recovery, D.R. Horton launched Express Homes, its true entry-level product, in spring 2014. This bet has paid off thus far as Express Homes has outperformed initial expectations and now accounts for over 30% of homes sold. Although competing products have entered the market, we believe D.R. Horton has a first-mover advantage that will boost its growth over the coming years. With ample land supply and product offerings catering to entry-level, move-up, higher-end, and active adult homebuyers, D.R. Horton is well positioned to capitalize on the demographic tailwinds driving the recovery.

Financial Strength

The average selling price of new orders increased 22% year over year to $383,600, and the average 30-year fixed mortgage rate has increased 50 basis points (to 3.55%) since the end of December 2021. While higher home prices and mortgage rates have worsened affordability, we think Horton offers more affordable homes than many of its competitors. Furthermore, Horton’s ASPs are not far from the median sales price of existing single-family homes ($364,300 in December). The company has $4 billion in total homebuilding liquidity, including $2 billion of unrestricted homebuilding cash and $2 billion capacity on a revolving credit facility.

D.R. Horton’s goal is to have at least $1.0 billion of liquidity at any given quarter-end, but is more likely to have $1.5-$2 billion available to ensure an adequate level of financial flexibility. The homebuilder has $3.3 billion of outstanding homebuilding debt with maturities staggered through fiscal 2028: $350 million is due in 2022, $700 million is due in 2023, $500 million is due in 2025, $500 million is due in 2026, $600 million is due in 2027, and $500 million is due in 2028.

Bulls Say’s

  • Current new-home demand is still robust and inventory of existing homes remains tight. The supply/ demand imbalance will take years to address and will support pricing power for homebuilders.
  • Demand for entry-level housing should remain strong as the millennial generation forms households. D.R. Horton’s Express Homes brand is positioned to capitalize on this underserved market.
  • D.R. Horton’s strategic relationship with publicly traded land developer Forestar and its growing property rental businesses should help fuel future growth.

Company Profile

D.R. Horton is a leading homebuilder in the United States with operations in 98 markets across 31 states. D.R. Horton mainly builds single-family detached homes (over 90% of home sales revenue) and offers products to entry-level, move-up, luxury buyers, and active adults. The company offers homebuyers mortgage financing and title agency services through its financial services segment. D.R. Horton’s headquarters are in Arlington, Texas, and it manages six regional segments across the United States.

(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 Shares

Sensata To Use Bolt-on M&A To Supplement Sensor Content Growth In Its Core Markets

Business Strategy and Outlook

It is understood Sensata Technologies is a differentiated supplier of sensors and electrical protection. The firm has oriented itself to benefit from secular trends toward electrification, efficiency, and connectivity, and it is supposed that investors will see meaningful topand bottom-line growth as upon an automotive market recovery. 

Despite the cyclical nature of the automotive and heavy vehicle markets, electric vehicles (EVs) and stricter emissions regulations provide Sensata the opportunity to sell into new sockets, which has allowed the firm to outpace underlying vehicle production growth by about 4% historically. It is alleged such outperformance is achievable over the next 10 years, given the expectations for a fleet mix shift toward EVs and Sensata’s growing addressable content in higher-voltage vehicles. 

It is observed, Sensata’s ability to grow its dollar content in vehicles demonstrates intangible assets in sensor design, as it works closely with OEMs and Tier 1 suppliers to build its products into new sockets. It is also believed the mission-critical nature of the systems into which Sensata sells gives rise to switching costs at customers, leading to an average relationship length of 31 years with its top 10 customers. As a result of switching costs and intangible assets, it is held Sensata benefits from a narrow economic moat and will earn excess returns on invested capital for the next 10 years. 

Over the next decade, it is anticipated Sensata to use bolt-on M&A to supplement sensor content growth in its core markets. Sensata established a leading share in the tire pressure monitoring system (TPMS) market in 2014 with its acquisition of Schrader, and it is implicit acquisitions will play a key role in allowing the firm to enter new, higher-growth, adjacent markets. Recent acquisitions of GIGAVAC and Xirgo will allow Sensata to compete in the electric vehicle charging infrastructure and telematics markets, respectively, which is likely to begin to bolster the top line and margins near the end of analyst’s explicit forecast and beyond.

Financial Strength

Sensata Technologies is leveraged, but it is held that its balance sheet is in good shape, and that it generates enough cash flow to fulfill all of its obligations comfortably. As of Dec. 31, 2021, the firm carried $4.2 billion in total debt and $1.7 billion cash and equivalents. Sensata closed out 2021 with a net leverage ratio of 2.8 times, which is squarely in management’s target range of 2.5-3.5 times. Over the next few years, it is probable Sensata to stay in its target leverage range as it continues to engage in supplemental M&A. Between 2023 and 2026, Sensata has $2.1 billion total in debt maturing, with $400 million-$700 million coming due each year. It is projected the firm to easily fulfill its obligations with its cash balance and cash flow—it is foreseen over $700 million in average annual free cash flow over Analyst’s explicit forecast. Finally, it is noted that Sensata has a variable cost structure that allows it to keep a relatively healthy balance sheet during difficult demand environments. Even with weak end markets in 2019 and 2020 that shrunk the top line, Sensata’s free cash flow generation held steady, with its free cash flow conversion jumping to 130% in 2020.

Bulls Say’s

  • Sensata should benefit from secular trends toward electrification, efficiency, and connectivity to continue outgrowing global vehicle production. 
  • Fleet management is an opportunity for Sensata to expand its margins and create a recurring base of revenue in an emerging, high-growth market. 
  • Sensata has some of the sensor industry’s highest margins and strong free cash flow conversion, providing it with capital to invest in organic and inorganic growth.

Company Profile 

Sensata Technologies is a leading supplier of sensors for transportation and industrial applications. Sensata sells a bevy of pressure, temperature, force, and position sensors into the automotive, heavy vehicle, industrial, heating, ventilation, and cooling (HVAC), and aerospace markets. The majority of the firm’s revenue comes from the automotive market, where it holds the largest market share for tire pressure monitoring systems. 

(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

Cushman And Wakefield PLC To Post Healthy Growth Rates

price of btc is going to breakout

Business Strategy and Outlook

Cushman & Wakefield underwent a major business transformation after the combination of DTZ, Cassidy Turley and Cushman & Wakefield in 2015. The combination of these three firms expanded its geographical presence, added incremental capabilities, and gave the company adequate scale to effectively compete with its larger rivals CBRE and JLL for lucrative global contracts from multinational clients. The company has benefitted from the secular trends in the real estate services industry and has been able to grow strongly through organic growth opportunities, strategic in-fill acquisitions and by actively recruiting fee earning teams. M&A is a strategic pillar for the company in its quest to become a single source provider for the full spectrum of real estate related services on a global footprint and the company has demonstrated a track record of successful integrations and broker onboarding. 

The GAAP operating margin of the company has been negatively impacted by restructuring & integration related charges, and various efficiency related projects over the past several years. However, it is alleged that these investments were necessary for the firm and the enhanced scale and efficiency improvements from the prior initiatives will contribute positively toward margin accretion on a midcycle basis in the upcoming years. It is also anticipated non-recurring changes to normalize, resulting in positive earnings and cash flow generation that can be reinvested into the business. 

The leasing and capital market segments which make up about 38% of fee revenue provides full-service brokerage and has a higher cyclicality in revenue. By contrast, the property & facility management segment, which make up about 54% of fee revenue, represents the outsourcing business and provides a contractual stream of revenue. The valuation & other segment contributes 8% of fee revenue and provides solutions related to workplace strategy, digitization, valuation and so on. The company should be able to post healthy growth rates as it continues to take share from its smaller competitors and benefits from rising capital flows into real estate, increasing corporate outsourcing and growth in urbanization.

Financial Strength

Cushman & Wakefield has somewhat concerned financial health. The company had a total debt of $3.2 billion and net debt of $2.0 billion as of the end of third quarter in 2021. This resulted in a net debt/adjusted EBITDA ratio of about 2.8 times. Management has repeatedly stated that debt reduction is not a strategic priority, and they are comfortable with a debt/adjusted EBITDA ratio in mid 2s. Debt maturity timeline is not an issue for the company as most of the debt matures after 2024. The company is also in a comfortable position with respect to liquidity with a total liquidity of $2.2 billion consisting of cash and a revolving credit facility. This gives the firm enough flexibility to fund its operations, pursue M&A and invest in organic growth opportunities. The company has used leverage for in-fill acquisitions in the past to achieve adequate scale and capabilities to compete with its larger rivals. The company is currently using approximately 40% debt to fund its capital structure, which makes it significantly more leveraged than its larger competitors CBRE and JLL, which are currently using approximately 5.0% debt. Additionally, it has not been able to consistently generate positive operating cash flows since 2015 because of the significant investments in integration and efficiency related projects. This makes the company vulnerable to macroeconomic downturns and the cyclicality in the commercial real estate. It is likely the cash flow generation capacity of the business to improve in the upcoming years as it achieves scale and the nonrecurring expenses normalize. Although it isn’t viewed, the company’s high level of debt as an immediate liquidity concern, a prolonged downturn could call its underlying financial stability into question. While it is anticipated the firm to benefit from various secular tailwinds, it is alleged that management should err on the side of caution and refrain from taking too much incremental debt, given the cyclical nature of the industry.

Bulls Say’s

  • As one of the largest of only a few truly international one-stop shops, Cushman & Wakefield is poised to continue taking share from competitors in a growing industry that increasingly rewards scale. 
  • The trend of corporate outsourcing represents a significant opportunity and area of growth for Cushman & Wakefield. 
  • Increased scale and the recent efficiency initiatives should help the company achieve material margin accretion in the upcoming years.

Company Profile 

Cushman & Wakefield is the third largest commercial real estate services firm in the world with a global headquarters in Chicago. The firm provides various real estate-related services to owners, occupiers and investors. These include brokerage services for leasing and capital markets sales, as well as advisory services such valuation, project management, and facilities management. 

(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

Carnival’s Return to Full-Year Profitability Postponed Until 2023 as Omicron Dampens Demand

Business Strategy and 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), it is suspected that the cruise operators will have to continue to reassure passengers of both the safety and value propositions of cruising. On the yield side, it is expected Carnival to see some pricing pressure as future cruise credits continue to be redeemed in 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 Jan. 13, 2022, 67% of capacity (50 ships) was already deployed and around 96% of the fleet should be sailing by the end of February.

Financial Strength:

Carnival has secured adequate liquidity to survive a slow resumption of domestic cruising, with $9.4 billion in cash and investments at the end of November 2021. This should cover the company’s cash burn rate over the ramp-up, which has run around $500 million or more per month recently due to higher ship start-up costs. The company has raised significant levels of debt since the onset of the pandemic closing fiscal 2021 with $28.5 billion in long-term debt, up from less than $10 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 versus $33 billion in total debt. The company is focused on reducing debt service as soon as reasonably possible, as evidenced by the refinancing of over $9 billion in debt, which reduced future annual interest by around $400 million per year. It has also actively pursued the extension of maturities, limiting the cash demand on debt service over the near term.

Bulls Say:

  • As Carnival deploys its fleet, passenger counts and yields could rise at a faster pace than we currently anticipate if capacity limitations are repealed. 
  • A more efficient fleet composition (after pruning 19 ships during COVID-19) may help contain fuel spending, benefiting the cost structure to a greater degree than initially expected, once 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 Profile:

Carnival is the largest global cruise company, with 91 ships in its fleet at the end of fiscal 2021, with 98% of its capacity set to be redeployed by May 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.

Categories
Global stocks

BlackRock Will Continue to Thrive in a More Difficult Environment for Active Asset Managers

Business Strategy and Outlook

With wide-moat-rated BlackRock crossing the $10 trillion mark in assets under management at the end of 2021, concerns about the firm being too large to grow have emerged again. It seems that this complaint come up when the company had just over $1 trillion in AUM back during the 2008-09 financial crisis, as well as just about every time the firm has passed another trillion-dollar marker during the past decade. While one of our key bear points on BlackRock is that the sheer size and scale of its operations would end up eventually being the biggest impediment to the firm’s longer-term growth, we don’t believe we are quite there yet.

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 its annual revenue) from passive products. And unlike many of its competitors, BlackRock is currently generating solid organic growth with its operations, primarily driven by 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.

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.

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.

Categories
Global stocks Shares

Strong Revenue Growth Continued in Pentair’s Fourth Quarter, but Cost Inflation Pressured Margins

Stock market digital graph chart on LED display concept. A large display of daily stock market price and quotation. Indicator financial forex trade education background.

Business Strategy and Outlook

Pentair is a pure play water company manufacturing a wide range of sustainable water solutions, including energy-efficient swimming pool pumps, filtration solutions, as well as commercial and industrial pumps. Pentair’s business is organized into two segments: consumer solutions and industrial & flow technologies. Consumer solutions (58% of Pentair’s sales in 2021) concentrates on business-to-consumer sales and includes aquatic systems as well as residential and commercial filtration. 

The aquatic systems business, which offers a full line of energy-efficient equipment for residential and commercial swimming pools (including pumps, filters, heaters, and other equipment and accessories), is the crown jewel in Pentair’s portfolio, as it is both its fastest-growing and most profitable business. Industrial & flow technologies (42% of sales in 2021) focuses on business-to-business sales and consists of industrial filtration (including the food and beverage end market), residential irrigation flow, and commercial and infrastructure flow.

Financial Strength

Pentair ended the fourth quarter of 2021 with $894 million of long-term debt while holding $95 million in cash and equivalents. Debt maturities are reasonably well laddered, with only about $88 million maturing in 2022. Furthermore, the company has an additional $764 million available under its revolving credit facility. The company is bound by a debt/EBITDA covenant that requires that the ratio not exceed 3.75 times.

Narrow moat-rated Pentair reported solid fourth-quarter results, as its full-year sales of $3,765 million and adjusted EPS of $3.40 both surpassed our previous estimates ($3,709 million and $3.35, respectively). For full-year 2022, management expects sales growth of 6% to 9% and adjusted EPS in the range of $3.70 to $3.80. After rolling our model forward one year, we’ve modestly bumped our fair value estimate for Pentair to $70 from $69, mostly due to time value of money as well as reversing the implementation of a probability-weighted change in the U. S. statutory tax rate in our model.

Bulls Say’s 

  • Pentair is a pure play water company poised to benefit from demand for sustainable and energy-efficient water solutions. 
  • The pool business continues to deliver solid revenue growth, consistent market share gains, and lucrative operating margins. 
  • Recent acquisitions of Pelican Water and Aquion will bolster Pentair’s portfolio of water solutions in the residential and commercial markets.

Company Profile 

Pentair is a global leader in the water treatment industry, with 10,000 employees and a presence in 25 countries. Pentair’s business is organized into two segments: consumer solutions and industrial & flow technologies. The company offers a wide range of water solutions, including energy-efficient swimming pool equipment, filtration solutions, and commercial and industrial pumps. Pentair generated approximately $3.8 billion in revenue and $686 million in adjusted operating income in 2021.

(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 Shares

Norfolk Southern’s Intermodal a Key Long-term Growth Opportunity

Business Strategy and Outlook

Norfolk Southern is a well-managed enterprise, and from the start of the rail renaissance in 2004 through 2008, it posted the highest margins among U.S. Class I railroads. However, its operating ratio (expenses/revenue) deteriorated to 75.4% in 2009 and remained stuck between 69% and 73% from 2010 to 2015. This pales in comparison to progress made by peers Union Pacific and Canadian Pacific, which lack Norfolk’s exposure to Appalachian coal. However, by 2017 the rail was back on track, and it has achieved record ORs in each year since, including an adjusted 60.1% in 2021. In recent years, Norfolk renewed its commitment to pricing discipline and margin gains, particularly via precision railroading initiatives, which have driven more efficient use of locomotive assets, labor, and fuel. It is anticipated incremental gains as the firm continues to refine its PSR playbook. Of note, in late 2019, former Canadian National CEO Claude Mongeau (2010-16) joined Norfolk’s board of directors in part to help bolster the rail’s PSR efforts. 

Norfolk hauls coal directly from Illinois and Appalachian mines, and transfers Powder River Basin coal eastward from the Western rails. Thus, coal-demand headwinds and changes in environmental regulations will probably remain a factor over the long run, despite near-term improvement off lows posted in 2020. That said, coal runs in unit trains hauling exclusively coal (often using customers’ cars), thus it is believed that the rail can continue to adjust its train and crew starts to match demand conditions. 

Norfolk generated healthy volume growth near 5% on average within its intermodal franchise over the past decade. In fact, intermodal revenue surpassed coal in 2014 and is now the highest-volume segment (roughly 60% of 2020-21 carloads versus 9% for coal). Capital projects targeting capacity and velocity improvement have helped the rail capitalize on net positive truck-to-rail conversion activity over the years. Norfolk’s domestic intermodal volume may face congestion-related constraints lingering into early 2022, but it is still seen as intermodal as a key long-term growth opportunity.

Financial Strength

At year-end 2021, Norfolk Southern held an ample $839 billion of cash and equivalents compared with $13.8 billion of total debt ($12.1 billion in 2020). Historically, the rail generates steady free cash flow, despite investing heavily in its network (capital expenditure averaged 16% of revenue over the past five years). Norfolk deploys this cash on dividends and share repurchases, and occasionally borrows to boost these returns to shareholders. Share repurchases eased briefly 2020 due to pandemic risk to cash flow, but they ramped back up by year-end, and it is held, repurchase activity to remain active in the years ahead. Norfolk Southern operates with a straightforward capital structure composed mostly of senior notes. In terms of liquidity, the rail also has an $800 million revolving credit facility and a $400 million accounts receivable securitization program for short-term needs–both programs are fully available and undrawn as of third-quarter 2021. In 2021, Norfolk’s total debt/adjusted-EBITDA came in near 2.5 times (2.7 times in 2020). It is projected 2.2 times in 2022. The historical five-year average is 2.4 times. Interest coverage (EBITDA/interest expense) was a comfortable 9 times in 2021, versus 7 times in 2020. Overall, Norfolk’s balance sheet is healthy and it is anticipated the firm will have no issues servicing its debt load in the years ahead.

 Bulls Say’s

  • Norfolk Southern reignited operating ratio improvement in 2016 after stagnating over the preceding six years. With help from precision railroading, the rail reached OR records in each of the past four years.
  • Norfolk Southern runs one of the safest railroads in the U.S., as measured by injuries per hours worked; this boosts service levels and helps to keep costs down. 
  • Compared with trucking, shipping by rail is less expensive for long distances (on average) and is four times more fuel-efficient per ton-mile. These factors should help support longer-term incremental intermodal growth.

Company Profile 

Class-I railroad Norfolk Southern operates in the Eastern United States. On roughly 21,000 miles of track, the firm hauls shipments of coal, intermodal traffic, and a diverse mix of automobile, agriculture, metal, chemical, and forest products. 

(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 Shares

Dr. Reddy’s Continues to Weather Generic Drug Erosion in Core Markets

Business Strategy and Outlook

Dr. Reddy’s Laboratories is a global pharmaceutical company based in Hyderabad, India. It manufactures and markets generic drugs and active pharmaceutical ingredients in markets across the world, but predominantly in the United States, India, and Eastern Europe. Indian pharmaceutical manufacturers have seen success over the past decade in penetrating the U.S. market, where regulatory hurdles are lower than in Western Europe. With competition on price in a commodified space, the entry of low-cost manufacturers has facilitated a deflationary price environment for generic drugs since 2015, putting substantial pressure on the margins of established manufacturers. Conversely, in India and other countries with lower generics adoption, so-called “branded” generics have seen notable success. 

Generic manufacturers have taken different approaches to combat margin pressure over the past few years. While some manufacturers have addressed competition by rationalizing their U.S. portfolio and discontinuing low-margin or unprofitable drugs, Dr. Reddy’s has remained focused on expanding its U.S. market share. While its U.S. portfolio has experienced marginally higher deflation compared with peers, its pipeline is increasingly leaning toward injectables and other complex generics that command higher margins and exhibit relatively more price stability.

Financial Strength

Overall, Dr. Reddy’s reported a relatively uneventful third quarter, with higher revenue across the board largely due to new product launches and market share gain. The company’s revenue grew 8% to INR 53.2 billion ($715 million) on a year-over-year basis driven by new product launches and higher sales volumes in the global generics business. North America generics, which represents the largest share of company revenue (35%), was positively affected during the quarter by launches for four new products but negatively impacted by erosion within in generic drug portfolio. On a sequential basis, revenue fell 8%, largely due to price erosion in generics and reduction of volume of COVID-19-related products.

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

Bulls Say’s 

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

Company Profile 

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

(Source: Morningstar)

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 Shares

Demand for Construction Equipment Continue to Flourish, Benefiting Caterpillar

Business Strategy and Outlook

Caterpillar will continue to be the leader in the global heavy machinery market, providing customers an extensive product portfolio consisting of construction, mining, energy, and transportation products. For nearly a century, the company has been a trusted manufacturer of mission-critical heavy machinery, which has led to its position as one of the world’s most valuable brands. Caterpillar’s strong brand is underpinned by its high-quality, extremely reliable, and efficient products. Customers also value Caterpillar’s ability to lower the total cost of ownership. 

The company’s strategy focuses on employing operational excellence in its production process, expanding customer offerings, and providing value-added services to customers. Since 2014, Caterpillar has taken steps to reduce structural costs and its fixed asset base by implementing cost management initiatives and by either closing or consolidating numerous facilities, reducing its manufacturing floorspace considerably. Over the past decade, the company has continually released new products and upgraded existing product models to drive greater machine efficiency. Customers also rely on the services that Caterpillar provides, for example, machine maintenance and access to its proprietary aftermarket parts. Furthermore, its digital applications help customers interact with dealers, manage their fleet, and track machine performance to determine when maintenance is needed. 

Caterpillar has exposure to end markets that have attractive tailwinds. On the construction side, the company will benefit from legislation aimed at increasing infrastructure spending in the U.S. The country’s road conditions are in poor condition, which has led to pent-up road construction demand. In energy, the improvement in the price of oil since COVID-19 lows will encourage exploration and production companies to increase oil and gas capital expenditures, leading to increased sales of Caterpillar’s oil-well-servicing products. That said, it is believed mining markets will have limited upside, as fixed-asset investment growth in China starts to slow, likely capping commodity price upside.

Financial Strength

Caterpillar maintains a sound balance sheet. On the industrial side, the net debt/adjusted EBTIDA ratio was relatively low at the end of 2021, coming in at 0.2. Total outstanding debt, including both short- and long-term debt was $9.8 billion. Caterpillar’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favours organic growth and returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of year-end 2021 stood at $8.4 billion on its industrial balance sheet. It is comforting to find comfort in Caterpillar’s ability to tap into available lines of credit to meet any short-term needs. Caterpillar has access to $10.9 billion in credit facilities for the consolidated business (including financial services), of which, $2.9 billion is available to the industrial business. Caterpillar’s focus on operational excellence in its industrial operations and improved cost base has put the company on better footing when it comes to free cash flow generation throughout the economic cycle. The company can generate $6 billion in free cash flow in our midcycle year, supporting its ability to return nearly all its free cash flow to shareholders through dividends and share repurchases. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total debt stood at $28 billion in 2021, along with $27 billion in finance receivables and $826 million in cash. In our view, Caterpillar enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  • Increased infrastructure spending in the U.S. and emerging markets will lead to more construction equipment purchases, substantially boosting Caterpillar’s sales growth. 
  • Higher fixed-asset investment growth in China strengthens support for increased investment in mining capital expenditures, benefiting Caterpillar. 
  • A continued recovery from the temporary demand shock in oil prices will lead to increased oil and gas capital expenditures, leading to more engine, transmission, and pump sales for Caterpillar.

Company Profile 

Caterpillar is an iconic manufacturer of heavy equipment, power solutions, and locomotives. It is currently the world’s largest manufacturer of heavy equipment with over 13% market share in 2021. The company is divided into four reportable segments: construction industries, resource industries, energy and transportation, and Caterpillar Financial Services. Its products are available through a dealer network that covers the globe with over 2,000 branches maintained by 168 dealers. Caterpillar Financial Services provides retail financing for machinery and engines to its customers, in addition to wholesale financing for dealers, which increases the likelihood of Caterpillar product sales.

(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

Improved near-term outlook for Eastman; shares slightly undervalued

Business Strategy and Outlook:

Through acquisition and internal development, Eastman owns a solid portfolio of specialty chemicals. Eastman’s specialty chemicals include plastics and components used in safety glass, window tinting, and specialty plastics, which offer a solid growth profile. To increase its specialty portfolio, the firm invests roughly 4% of sales from its additives and functional products and advanced materials segments into research and development, which is in line with its specialty chemical peers. Eastman is well positioned to meet growing demand for auto window interlayers, including heads-up displays, and specialty plastics.

Eastman also holds a solid position in acetate tow, which is primarily used to make cigarette filters. The acetate tow industry has experienced falling prices due to overcapacity in China over the past several years. However, a handful of players dominates the industry, a factor that led to disciplined capacity shutdowns by all of the major companies during the industry downturn. To offset some of the decline, Eastman has been investing in capacity for other uses for its fibers, including fabrics and apparel.

Financial Strength:

Eastman is in good financial health. As of Dec. 31, 2021, Eastman carried around $4.7 billion in net debt on its balance sheet. Management reported net debt/adjusted EBITDA was a little less than 2.2 times. With strong free cash flow generation and the sale of its adhesive resins portfolio for $1 billion in cash in 2022, it is assumed that Eastman will have no trouble meeting its financial obligations, including dividends. Assuming no major acquisitions are made, the company will be able to maintain leverage ratios within management’s long-term target of 2.0-2.5 times over a number of years. However, the cyclical nature of the chemicals business could cause coverage ratios to fluctuate from year to year.

Bulls Say:

  • Eastman is well positioned to meet evolving chemical demands in auto window interlayers and tires through its best-in-class patented products. 
  • Eastman’s investments in plants that use sustainable based feedstocks, including recycled chemicals and wood pulp, should benefit from growing demand for specialty plastics made from these feedstocks. 
  • As Eastman continues to develop new patented products, it should expand its specialty chemicals business, which generates higher margins and commands some degree of pricing power.

Company Profile:

Established in 1920 to produce chemicals for Eastman Kodak, Eastman Chemical has grown into a global specialty chemical with manufacturing sites around the world. The company generates the majority of its sales outside of the United States, with a strong presence in Asian markets. During the past several years, Eastman has sold noncore businesses, choosing to focus on higher-margin specialty product offerings.

(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.