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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Dollar Tree’s Price Hike Should Help, but Long-Term Competition Remains a Concern

Business Strategy and Outlook:

Dollar Tree’s namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but, before the pandemic, its Family Dollar unit (acquired in 2015) struggled to generate top-line and margin growth. Dollar Tree banner is better positioned long-term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results.

Accounting for around half of sales, the Dollar Tree banner’s wide assortment of products at $1.25 or less has appealed to customers, drawing a broad range of low to middle-income consumers. We believe the concept has room to grow (with square footage rising by a low- to mid-single-digit percentage long term), expanding in new markets while also increasing density. The chain’s fast-changing assortment creates a treasure hunt experience that has a history of drawing customers (posting nearly 3% same-store sales growth on average over the past five years) and has been hard for online retailers to match.

Financial Strength:

Though it took on considerable debt to fund its 2015 purchase of Family Dollar, Dollar Tree’s leverage-reduction efforts have left it on sound financial footing. Its strong balance sheet and free cash flow generation should suffice to fund growth and investments necessary to maintain low price points and respond to competitive pressure. The firm ended fiscal 2020 with net debt at less than three-quarters adjusted EBITDA, the latter of which covered interest expense more than 17 times. Furthermore, capital expenditures to fuel store growth are fairly discretionary, so Dollar Tree should be able to curb targets if needed in the event of financial strain.

Bulls Say:

  • Dollar Tree’s $1.25 price point concept is differentiated, holding absolute dollar costs low for customers while allowing the retailer to realize higher margins than conventional retailers. 
  • Small ticket sizes make it difficult for online retailers to contend with Dollar Tree’s single-price-point model as shipping costs weigh on their ability to compete profitably. 
  • As its two banners become more closely integrated and the store network expands, Dollar Tree should leverage its supply chain and distribution infrastructure investments, generating resources to fuel its low-price model.

Company Profile:

Dollar Tree operates discount stores in the U.S. and Canada, including over 7,800 shops under both its namesake and Family Dollar units (nearly 15,700 in total). The eponymous chain features branded and private-label goods, generally at a $1.25 price. Nearly 50% of Dollar Tree stores’ fiscal 2020 sales came from consumables (including food, health and beauty, and household paper and cleaning products), just over 45% from variety items (including toys and housewares), and 5% from seasonal goods. Family Dollar features branded and private-label goods at prices generally ranging from $1 to $10, with over 76% of fiscal 2020 sales from consumables, 9% from seasonal/electronic items (including prepaid phones and toys), 9% from home products, and 6% from apparel and accessories.

(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

Dollar Tree Inc: Distinguished by its $1.25 price point concept

Business Strategy and Outlook

Dollar Tree’s namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but, before the pandemic, its Family Dollar unit (acquired in 2015) struggled to generate top-line and margin growth. It is suspected the Dollar Tree banner is better positioned long-term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results. We expect the pandemic’s effects to be confined to the near term, leaving the long-term competitive dynamic intact. 

Accounting for around half of sales, the Dollar Tree banner’s wide assortment of products at $1.25 or less has appealed to customers, drawing a broad range of low to middle-income consumers. The concept has room to grow (with square footage rising by a low- to mid-single-digit percentage long term), expanding in new markets while also increasing density. The chain’s fast-changing assortment creates a treasure hunt experience that has a history of drawing customers (posting nearly 3% same-store sales growth on average over the past five years) and has been hard for online retailers to match. With basket sizes small and the average transaction resulting in a modest bill, we consider the segment relatively well insulated from the digital threat. 

Prospects are murkier at Family Dollar, which has struggled since its acquisition, though the pandemic has provided a fleeting sales lift. Evenly distributed between urban and rural areas, it is anticipated that the chain’s presence in cities is especially susceptible to competitive pressures from a bevy of convenience stores, mass merchandisers, and grocers. While its mix of low prices and convenience carries appeal, particularly among customers that do not have nearby alternatives, It is expected that the benefits of operational improvements and tighter integration with Dollar Tree will largely be offset by competitive strain.

Despite the headwinds, both chains should deliver long-term top-line and margin growth in aggregate, capitalizing on consumers’ desire for convenience and value even as the landscape becomes more challenging.

Financial Strength

Though it took on considerable debt to fund its 2015 purchase of Family Dollar, Dollar Tree’s leverage-reduction efforts have left it on sound financial footing, in our view. Its strong balance sheet and free cash flow generation should suffice to fund growth and investments necessary to maintain low price points and respond to competitive pressure. With the stores remaining open and catering to essentials, we expect little difficulty with navigating the challenges presented by the pandemic. The firm ended fiscal 2020 with net debt at less than three-quarters adjusted EBITDA, the latter of which covered interest expense more than 17 times, neither mark troubling. Despite aggressive growth in the Dollar Tree banner (from under 4,000 stores at the start of fiscal 2010 to more than 7,800 at the end of fiscal 2020) and performance improvement investments at Family Dollar, cash generation has been strong. It is expected to have free cash flow to the firm to average 5% of sales over our explicit forecast. Furthermore, capital expenditures to fuel store growth are discretionary, so Dollar Tree should be able to curb targets if needed in the event of financial strain. Annual outlays to average 3%-4% of sales over the next decade, or just over $1 billion. We do not anticipate Dollar Tree will introduce a dividend. Instead, we expect it to direct excess funds to share repurchases, consistent with its practice before the Family Dollar purchase (the firm bought back an average of just under $500 million in shares annually from fiscal 2010 to 2014, adding $200 million in fiscal 2019 and $400 million in fiscal 2020). In the long term, we assume the company uses around 60% of its cash flow from operations to buy shares.

Bulls Say’s

  • Dollar Tree’s $1.25 price point concept is differentiated, holding absolute dollar costs low for customers while allowing the retailer to realize higher margins than conventional retailers. 
  • Small ticket sizes make it difficult for online retailers to contend with Dollar Tree’s single-price-point model as shipping costs weigh on their ability to compete profitably. 
  • As its two banners become more closely integrated and the store network expands, Dollar Tree should leverage its supply chain and distribution infrastructure investments, generating resources to fuel its low-price model.

Company Profile 

Dollar Tree operates discount stores in the U.S. and Canada, including over 7,800 shops under both its namesake and Family Dollar units (nearly 15,700 in total). The eponymous chain features branded and private-label goods, generally at a $1.25 price. Nearly 50% of Dollar Tree stores’ fiscal 2020 sales came from consumables (including food, health and beauty, and household paper and cleaning products), just over 45% from variety items (including toys and housewares), and 5% from seasonal goods. Family Dollar features branded and private-label goods at prices generally ranging from $1 to $10, with over 76% of fiscal 2020 sales from consumables, 9% from seasonal/electronic items (including prepaid phones and toys), 9% from home products, and 6% from apparel and accessories.

(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

Nike’s Powerful Brand and E-Commerce Position It Well Despite Some Short-Term Issues

Business Strategy and Outlook

We view Nike as the leader of the athletic apparel market and believe it will overcome the challenge of COVID-19 despite near-term supply issues. Morningstar analyst think Nike’s strategies allow it to maintain its leadership position. In mid-2017, Nike announced a consumer-focused realignment. It is investing in its direct-to-consumer network while reducing the number of retail partners that carry its product. In North America and elsewhere, the firm is reducing its exposure to undifferentiated retailers while increasing distribution through a small number of retailers that bring the Nike brand closer to consumers, carry a full range of products, and allow it to control the brand message. Nike’s consumer plan is led by its Triple Double strategy to double innovation, speed, and direct connections to consumers. Triple Double includes cutting product creation times in half, increasing membership in Nike’s mobile apps, and improving the selection of key franchises while reducing its styles by 25%. We think these strategies will allow Nike to hold share and pricing.

Although its recent results in China have been inconsistent due to supply issues and a political controversy, Morningstar analyst still believe Nike has a great opportunity for growth there and in other emerging markets. Moreover, with worldwide distribution and huge e-commerce that totaled about $9.3 billion in fiscal 2021, Nike should benefit as more people in China, Latin America, and other developing regions move into the middle class and gain broadband access.

Financial Strength

 Nike is in excellent financial shape to weather the COVID-19 crisis. At the end of fiscal 2021’s second quarter, Nike had $9.4 billion in long-term debt but $15.1 billion in cash and short-term investments.Nike does not have any long-term debt maturities until May 1, 2023, when its $500 million in 2.25% senior unsecured debt matures, but it does have significant endorsement commitments that, as of the end of fiscal 2021, totaled at least $5.5 billion over the ensuing five fiscal years. The firm produced nearly $19 billion in free cash flow to equity over the past five years, and Morningstar anlayst estimate it will generate more than $38 billion in free cash flow to equity over the next five. Nike issued $1.6 billion in dividends in fiscal 2021 and analyst forecast an average annual dividend payout ratio of about 30% over the next decade. Over the next five fiscal years, Morningstar analyst forecast that Nike will repurchase about $19 billion in stock and issue $11 billion in dividends. 

Bull Says

  • Nike has a great opportunity in fast-growing markets like China. More than 70% of Nike’s growth over the next five years may come from outside North America. 
  • Nike’s Triple Double strategy of increased innovation, direct-to-consumer sales, and speed may improve margins and share. Membership growth in its digital channel has exceeded expectations. 
  • Nike’s gross margins may expand by a couple dozen basis points per year through automation, ecommerce, and higher prices. Nike is actively shifting sales to differentiated retail in North America to increase full-priced sales

Company Profile

Nike is the largest athletic footwear and apparel brand in the world. It designs, develops, and markets athletic apparel, footwear, equipment, and accessories in six major categories: running, basketball, soccer, training, sportswear, and Jordan. Footwear generates about two thirds of its sales. Nike’s brands include Nike, Jordan, and Converse (casual footwear). Nike sells products worldwide and outsources its production to more than 300 factories in more than 30 countries. Nike was founded in 1964 and is based in Beaverton, Oregon

 (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

Wesfarmers’ Bid for API Stands After Woolworths Withdraws

Business Strategy and Outlook

To diversify from regulated PBS revenue, API acquired the Priceline chain of health and beauty stores in 2004.Priceline contributes around one quarter of API’s revenue but over 40% of gross profit. Priceline’s key growth strategies are increasing its contribution from online sales and leveraging its loyalty scheme, the Sister Club. However, Morningstar analyst have concerns regarding these endeavours. Market statistics suggest the Australian health and beauty retail market is growing at a mid-single-digit pace, which provides an attractive opportunity for API at first blush. However, Morningstar analyst believe the market growth opportunity is skewed to the premium end rather than Priceline’s mass-middle positioning and consequently forecast below-market average revenue growth for the retail business. This is despite its loyalty program that differentiates Priceline from key competitors .

Similarly, Priceline’s growing online sales will likely lead to a subdued outlook for in-store sales. Morningstar analyst forecast same-store sales climbing at just 1% per year, less than inflation. Moreover, the shift of sales from physical stores to online places pressure on margins due to challenges in evolving the cost base at the same rate.

Offsetting these challenges, API’s acquisition of the Clear Skincare clinics in fiscal 2018 offers significantly higher profitability. With gross margins above 80%, Morningstar analyst expect the rollout of Clear Skincare clinics to help API’s earnings recover in the short term and permanently reduce its exposure to the PBS.

Woolworths’ Offer for API Has Been Withdrawn but Wesfarmers’ Offer Still Stands

In yet another unexpected turn, Woolworths has withdrawn its non-binding proposal to acquire no-moat Australian Pharmaceutical Industries, or API, for AUD 1.75 per share made on Dec. 2, 2021. Following completion of due diligence, Woolworths was not convinced it could achieve the financial returns it requires. However, the takeover offer from Wesfarmers remains in place and is not subject to due diligence, which completed in October 2021. Accordingly, Morningstar analyst have decreased  API fair value estimate by 13% to AUD 1.53, back in line with  standalone assessment of API and Wesfarmers’ takeover offer.

Financial Strength

API is in a sound financial position with net debt/adjusted EBITDA of 0.6 times at fiscal 2021. We forecast leverage to remain under 1.0 over our forecast period, with API comfortably able to afford a 70% dividend payout ratio and continue to expand its retail footprint. We forecast a total of AUD 250 million in capital expenditures over the next five years, and also factor in the final AUD 32.9 million payment for Clear Skincare still outstanding.Working capital management has improved over a number of years, almost halving the net investment in working capital to 5.6% of sales over the 10 years to fiscal 2021. We forecast investment to be roughly maintained at an average of 6.2% of sales.

Bull Says

  • The Priceline and Clear Skincare offerings are relatively high-margin segments and pitched in the beauty and personal-care market which is growing at a mid-single-digit pace. 
  • API’s corporate Priceline stores offers higher margin and more product opportunity than the purely franchise business model of peers Sigma and EBOS. 
  • Management has demonstrated that it is opportunistic and having deleveraged the balance sheet, is looking to invest for growth. Value-additive acquisitions could present upside to our fair value estimate.

Company Profile

Australian Pharmaceutical Industries, or API, is a major Australian pharmaceutical wholesaler and distributor. In addition, it is the franchisor of the Priceline Pharmacy network and directly owns and operates stand-alone Priceline stores which sell personal care and beauty products. In an effort to diversify away from the highly regulated low growth and low margin pharma distribution business which contributes 74% of revenue, API is actively growing a consumer brands portfolio and also acquired Clear Skincare, a skin treatment chain. These two emerging businesses each contribute approximately 1% of revenue but are higher margin than the core distribution segment.

 (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

Corporate Action: Subscribe to Corporate Travel’s Share Purchase Plan

Morningstar analysts recommend eligible shareholders subscribe to Corporate Travel’s Share Purchase Plan, or SPP. It is the AUD 25 million component of a total AUD 100 million underwritten capital raising to fund the AUD 175 million acquisition of Hello World Travel’s corporate and entertainment travel business in Australia and New Zealand. An institutional placement has already raised AUD 75 million (at AUD 21.00 per share) and the remaining AUD 75 million of the purchase price will be funded by an issue of new shares (also at AUD 21.00) to the vendor when the deal completes in the March quarter of 2022.

Morningstar analysts support the SPP which will be priced at least 11% below our fair value estimate as well as  lifted  fair value estimate on Corporate Travel by 7% to AUD 23.50 per share on Dec. 15, 2021 when the deal was first announced. The SPP offer price will be the lower of AUD 21.00 and the five-day average price of Corporate Travel shares during the five trading days up to the SPP closing date (likely Jan. 20, 2022). As this SPP price will be lower than morningstar intrinsic assessment (and the current stock price), Morningstar analyst see value in subscribing to the offer.

Further, Morningstar analysts see the acquisition as opportunistic, struck amid a pandemic. It is a playbook that was used by no-moat-rated Corporate Travel with the October 2020 AUD 275 million buy of Travel & Transport in North America. The Helloworld unit is bite-size (6% of Corporate Travel’s enterprise value), operates in the group’s home market of Australia and New Zealand (with two thirds of business in domestic travel), and synergies are likely to be easier to extract than from the Travel & Transport purchase. As such, management’s projected AUD 8 million synergy is conservative, at just 36% of Helloworld’s pre pandemic EBITDA. This compares with Travel & Transport where the projected AUD 25 million synergy is 61% of the unit’s prepandemic EBITDA, with its extraction making good progress to-date.

Company Profile

Corporate Travel Management provides travel services mainly for corporate customers across the Americas, Australia and New Zealand, Europe, and Asia. The company has built scale and breadth through both organic growth and acquisitions. As of 2021, Corporate Travel is the world’s fourth-largest corporate travel management company based with pro forma, pre-COVID-19 total transaction volumes of AUD 11 billion, but it remains a relative minnow in the highly fragmented USD 1.5 trillion global market. The company offers expertise and personalized service to corporate clients spanning several industries such as government, healthcare, mining, energy, infrastructure, and construction. Before the pandemic, more than 60% of the group’s client travel was domestic (within the country) in nature.

(Source: Morning Star)

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

BioNTech growth is projected following additional COVID-19 contracts and Shingles collaboration

Business Strategy and Outlook:

BioNTech, founded in 2008 in Germany, has become a key player in the development of personalized mRNA cancer treatments. The emerging biotech’s first commercial vaccine, for COVID-19, received its first authorization in December 2020, and its early-stage pipeline and mRNA technology platforms have caught the eye of several large pharmaceutical companies, resulting in collaborations and partnerships.

BioNTech’s internal discovery platform is focused on mRNA, including off-the-shelf and personalized mRNA drugs, but opportunistic acquisitions have brought in targeted antibodies and cell therapies as well. As such, BioNTech is not overly reliant on any one key drug candidate or drug class at this point, and it is poised to tackle cancer via many different mechanisms. Further, the company has a burgeoning vaccine pipeline for infectious diseases. In partnership with the Bill & Melinda Gates Foundation, BioNTech is developing vaccines for HIV and tuberculosis, and the company’s COVID-19 program in partnership with Pfizer and Fosun Pharma was built off an existing partnership with Pfizer for an influenza vaccine.

Financial Strength:

The fair value estimate of the stock is USD 200.00 per ADR from $177, after incorporating Europe’s recent COVID-19 vaccine option exercise for 2022, Pfizer’s latest update on contracted COVID-19 vaccine sales for 2023, and a small placeholder for potential profit share on an mRNA-based shingles vaccine.

Like most of its emerging biotech peers, BioNTech has historically burned through cash to fund research and development of its pipeline. The company has minimal debt on its balance sheet, as it has funded discovery and development with equity issues and collaboration payments from partnerships with large pharmaceutical firms.

The company is expected to continue to rely on these two avenues for cash for the next several years as well as a large inflow of cash from Comirnaty gross profits in 2021 and 2022. Outside of BioNTech’s COVID-19 vaccine candidates, we think the earliest approval could arrive in 2023, which would put the company on a path toward steady profitability. Management has taken advantage of a couple of opportunities to acquire early-stage assets and expand its geographic footprint to establish a U.S. research hub at low prices.

Bulls Say:

  • BioNTech’s pipeline, which relies on expertise in mRNA and bioinformatics, will be difficult to replicate by competitors. 
  • BioNTech will be able to command a premium price with its personalized cancer therapies, if successful. 
  • The rapid development of COVID-19 vaccine Comirnaty bodes well for the rest of BioNTech’s pipeline and the future of its mRNA research platform.

Company Profile:

BioNTech is a Germany-based biotechnology company that focuses on developing cancer therapeutics, including individualized immunotherapy, as well as vaccines for infectious diseases, including COVID-19. The company’s oncology pipeline contains several classes of drugs, including mRNA-based drugs to encode antigens, neoantigens, cytokines, and antibodies; cell therapies; bispecific antibodies; and small-molecule immunomodulators. BioNTech is partnered with several large pharmaceutical companies, including Roche, Eli Lilly, Pfizer, Sanofi, and Genmab. Comirnaty (COVID-19 vaccine) is its first commercialized product.

(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

Raising Tesla FVE to $700 on Higher Near-Term Vehicle Volumes; Shares Remain Overvalued

Business Strategy and Outlook

Tesla is the largest battery electric vehicle automaker in the world. In less than a decade, the company went from a startup to a globally recognized luxury .Tesla also plans to sell multiple new vehicles over the next several years. These include a platform that will be used to make an affordable sedan and SUV, a light truck, a semi truck, and a sports car.

Tesla’s strategy is to maintain its market leader status as EVs grow from a niche auto market to reaching mass consumer adoption. To do so, the company is undergoing a massive capacity expansion to increase the number of vehicles it can produce. Tesla also invests around 5% of its sales in research and development, focusing on improving its market-leading technology and reducing its manufacturing costs. For EVs to see mass adoption, they need to reach cost and function parity with internal combustion engines. To reduce costs, Tesla focuses on automation and efficiency in its manufacturing process.To reach functional parity, EV will need to have adequate range, reduced charging times, and availability of charging infrastructure.Tesla continues to grow its supercharging network, which consists of fast chargers built along highways and in cities throughout the U.S., EU, and China. The company is attempting to take a larger share of its customers’ auto-related spending, which includes selling insurance and offering paid services such as autonomous driving functions.

Tesla also sells solar panels and batteries used for energy storage to consumers and utilities. As the solar generation and battery storage market expands, Tesla is well positioned to grow.

Raising Tesla FVE to $700 on Higher Near-Term Vehicle Volumes; Shares Remain Overvalued

On Jan. 2, Tesla reported strong fourth-quarter and full-year vehicle delivery numbers. On the year, Tesla reported 936,172 vehicles delivered, which is up over 87% year on year versus 2020. Morningstar analyst have updated our model to incorporate higher 2021 sales volumes and have raised our outlook for 2022 as well as forecasted that Telsa will deliver a little over 1.5 million vehicles in 2022, which represents over 60% year-on-year growth. Separately, Morningstar analyst have decreased  2022 gross margin forecast for Tesla as they increased production costs associated with the opening of the two new production plants in Austin, Texas, (U.S.) and in Berlin, Germany. Our long-term outlook is largely unchanged as we continue to expect Tesla’s sales growth will slow. Having updated model to reflect these changes, Morningstar analyst have increased Tesla fair value estimate to $700 per share from $680.

Financial Strength

Tesla is in solid financial health as cash and cash equivalents exceeded total debt as of Sept. 30. Total debt was roughly $8.2 billion; however, total debt excluding vehicle and energy product financing (nonrecourse debt) was around $2.1 billion. Cash and cash equivalents stood at $16.1 billion as of Sept. 30.To fund its growth plans, Tesla has used credit lines, convertible debt financing, and equity offerings to raise capital. In 2020, the company raised $12.3 billion in three equity issuances. Morningstar analyst thinks this makes sense as funding massive growth solely through debt adds near-term risk in a cyclical industry.Management has stated a preference to pay down all debt over time and continues to make progress on this goal. Regardless, with positive free cash flow generation and a clean balance sheet, we think Tesla could maintain its current levels

Bull Says

  • Tesla has the potential to disrupt the automotive and power generation industries with its technology for EVs, AVs, batteries, and solar generation systems. 
  • Tesla will see higher profit margins as it achieves its plan to reduce battery costs by 56% over the next several years. 
  • Through the combination of its industry-leading technology and unique supercharger network, Tesla offers the best function of any EV on the market, which should result in its maintaining its market leader status as EV adoption increases.

Company Profile

Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. The company sells solar panels and solar roofs for energy generation plus batteries for stationary storage for residential and commercial properties including utilities. Tesla has multiple vehicles in its fleet, which include luxury and midsize sedans and crossover SUVs. The company also plans to begin selling more affordable sedans and small SUVs, a light truck, a semi truck, and a sports car. Global deliveries in 2020 were roughly 500,000 units.

 (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

Erkan resigns as co-CEO of First Republic Bank; however, future is projected to be strong

Business Strategy and Outlook:

First Republic Bank is one of the more unusual banks. It has a uniquely focused business model, with a high service offering aimed at wealthy clients concentrated in costal urban areas. The bank is still led by its founder, Jim Herbert, and has been able to churn out remarkably high organic growth year after year, resulting in compounded asset growth of roughly 20% over the past 10 years compared with an industry growth rate of closer to 5%.

The great strength of First Republic Bank’s approach is the strict adherence to its strategy of retaining and attracting high-net-worth clients through uniquely personal service. This strategy requires retaining talent, which the bank accomplishes through its culture and compensation structure. As such, the bank’s efficiency levels tend to be middling compared with peers. However, this model has worked, and the bank is able to generate substantially lower client attrition rates and higher client satisfaction levels as measured through Net Promoter Score. The bank is also a conservative underwriter, with losses consistently coming in below peers through the cycle.

Financial Strength:

The fair value of this stock is $195 per share, which equates to 2.9 times tangible book value as of September.

First Republic Bank is in sound financial health. The bank reported a common equity Tier 1 capital ratio of 9.8% as of September 2021 and given its low appetite for risk and excellent underwriting record. The bank has consistently delivered superior performance in past recessions with very low credit costs and has also performed admirably through the pandemic-driven downturn. The banks loan book is conservatively positioned with more than 50% of mortgages and approximately 80% of loans collateralized by real estate. The bank has a favorable liability mix with total deposits making up approximately 90% of total liabilities with the remainder of liabilities made up of FHLB advances and long-term debt. The bank also had roughly $2.1 billion in preferred stock outstanding. The capital-allocation plan for First Republic Bank is quite atypical in our banking coverage as it regularly raises additional capital through share issuances to fund its aggressive growth. The bank does not engage in share buybacks and maintains a relatively low dividend pay-out ratio.

Bulls Say:

  • First Republic is a rare, high-growth bank in a mature industry that tends to see GDP-like asset growth levels. The bank is also a conservative underwriter. This is a valuable and powerful combination that should drive peer-beating earnings growth for years. 
  • First Republic’s wealth management business is growing assets at a solid double-digit percentage rate, further cementing switching costs and revenue growth. 
  • First Republic’s culture and structure are difficult to replicate, meaning, its business model should continue to take share and see success for years to come.

Company Profile:

First Republic offers private banking and wealth management services to high-net-worth clients. Services are primarily offered in the San Francisco, New York City, and Los Angeles markets. The bank was founded in 1985.

(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

Nordson Crop Is Poised to Deliver Strong Organic Growth Fueled by Advanced Technology Solutions

Business Strategy and Outlook

Nordson is a leading manufacturer of equipment used for dispensing adhesives, coatings, sealants, and other materials. The company enjoys strong market share across its business lines, and its products are often used in niche applications where competition is limited. Nordson differentiates itself by offering highly engineered and customizable solutions which perform a mission-critical role in a customer’s manufacturing process. Nordson thrives in times of change, as innovation in its end markets drives demand for new and improved solutions. In the long run, Nordson is poised to capitalize on favorable secular trends such as increasing adoption of 5G and autonomous vehicles, which we expect to create new opportunities for its dispensing business.

Financial Strength

Nordson’s financial health is satisfactory, which should help the firm navigate uncertainty due to the coronavirus outbreak. As of Oct. 31, 2021, the company owed $782 million in long-term debt while holding $300 million in cash and equivalents. Additionally, Nordson can tap into its $850 million revolving credit facility, which remains undrawn. It is estimated that Nordson will have a debt/adjusted EBITDA ratio of roughly 1.0 times in fiscal 2022, which is roughly in line with many of its industrial peers. Its generate that average annual cash flow of around $750 million over the next five years, sufficient to meet its debt obligations and maintain its dividend. After updating our model following Nordson’s 10-K release, its increase fair value estimate to $231 from $224. 

Bulls Say’s 

  • Nordson is poised to benefit from innovation in its end markets, including autonomous vehicles, 5G, and 3D wafer stacking, as new technologies drive demand for the firm’s dispensing solutions. 
  • Over half of Nordson’s revenue is recurring, which helps mitigate the firm’s exposure to cyclical end markets. 
  • Nordson has a large installed base of equipment and strong market share across a number of niche end markets.

Company Profile 

Nordson is a manufacturer of equipment (including pumps, valves, dispensers, applicators, filters, and pelletizers, among other equipment) used for dispensing adhesives, coatings, sealants, and other materials. The firm serves a diverse range of end markets including packaging, medical, electronics, and industrial. Nordson’s business is organized into two segments: industrial precision solutions (53% of sales in fiscal 2021) and advanced technology solutions (47% of sales in fiscal 2021). The company generated approximately $2.4 billion in revenue and $615 million in operating income in its fiscal 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.

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Global stocks Shares

Unpredictability strikes Flight Centre Shares keeping Intrinsic Value secure

Business Strategy and Outlook

A wave of COVID-19-induced damages has been inflicted on Flight Centre since late March 2020. Government restrictions on travel and border control (international, domestic), grounding of airline capacity and strict lockdown measures on consumers have created a 

unique squeeze on the group. It is considered that the measures to execute a severe reduction in costs (cuts to store network/leases, staff, marketing), combined with the AUD 700 million equity capital raising in April 2020, is enough for the no moat-rated group to weather the malaise.

Flight Centre is one of the world’s largest travel agents, but it still generates significant earnings in Australia and New Zealand. Unparalleled scale and brand strength in the domestic travel market has provided buying power and pricing flexibility that resulted in high returns on capital. Flight Centre has a strong network of services that has driven solid end-user traffic and bookings over the past 20 years, but it is rarely assumed that this is sufficient to protect the company against online competitors over the next 10 years.

Because of the discretionary nature of travel and high levels of operating leverage, earnings can be very volatile. During the financial crisis, net profit after tax fell to AUD 38 million in fiscal 2009 from AUD 143 million in fiscal 2008. The company is heavily loss-making during the current 2020 pandemic also. This inherent volatility means fair value uncertainty is high.

Flight Centre’s considerable scale and extensive store network have made the firm a key distribution channel for travel suppliers and generated cost advantages that enable it to offer competitive prices. However, with the warning from online competitors increasing, we believe physical stores are likely to increasingly lose relevance longer term.

From about 2005, facing a maturing domestic market, the company increased its focus on offshore markets, particularly the United Kingdom and United States. The group made several offshore acquisitions during this period. The company is also increasingly focused on corporate travel, which is more structurally resilient than leisure.

Financial Strength

As at the end of September 2021, there was AUD 969 million of available liquidity, thanks to the AUD 700 million injected by shareholders in April/May 2020 and two convertible bond issues totalling AUD 800 million. It is believed, this is sufficient liquidity for Flight Centre to see through until mid-2023, even if total transaction volume remains at around 30% of pre-COVID-19 TTV levels.

Bulls Say’s

  • A strong balance sheet allows Flight Centre to take benefit of weakness in the economic cycle via opportunistic acquisitions or increasing market share via investment in marketing initiatives. It also enables the development of new products to address specific market segments more effectively. 
  • Brand strength provides a powerful foundation for the blended online/physical store offering. 
  • Travel agents are customer aggregators. As it is the largest agent in Australia, scale enables Flight Centre to negotiate favourable deals with travel providers.

Company Profile 

Flight Centre Travel is one of the largest travel agencies in the world. It operates an extensive network of shops globally, most of them located in Australia, the United States, and Europe. The group participates across the whole spectrum of the travel services market, including leisure travel retailing, in-destination experiences, corporate travel arrangement, and youth travel retailing. The services are facilitated via some 40 brands, with Flight Centre being the flagship brand in the leisure segment and FCM Travel the key brand in the corporate.

(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.