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

HALMA Plc: Private Equity with a Purpose

Investment Thesis:

  • High quality company with a history of earnings and dividend growth.
  • Management is looking to double EPS every five years. HLMA’s group earnings growth model is driven by organic and acquired growth. 
  • HLMA earnings are defensive as HLMA is exposed to attractive end markets which are niche and regulated in some shape or form – such as safety, medical and infrastructure.
  • HLMA consists of a strong diversified portfolio of companies (currently 45 companies). 
  • Strong management team with strong corporate culture. 
  • “Private Equity firm with a purpose” – the Company is not limited by a timeframe to exit positions. 
  • HLMA operates a decentralized operating structure with operating companies and management teams left to run their businesses. 
  • Scores well on ESG metrics – targeting a science-based emission target (1.5 degree-aligned 2030 target for Scope 1 & 2 emissions), a net zero target (scope 1 & 2 by 2040) and transitioning towards a circular economy. 

Key Risks:

  • Execution risk – specifically around acquired growth or the inability to source enough deals as the group grows larger.
  • Deterioration in global growth or consumption.
  • Turnover in senior management team. 

Key highlights:

HLMA can be thought of as a private equity company with a purpose, having a highly sustainable financial model, which focuses on maintaining portfolio companies’ growth and returns over the longer term (management aspires to double the size of the Group every 5-6 years), while delivering performance in the shorter term, through a combination of acquisition, venture partnerships and organic growth.

  • Strong top and bottom-line growth – Management prefers to be in markets delivering +3-5% year on year growth and invests in business that are typically one of top 3 players in their respective niches (market share can vary between 10-80% but on average market share across the group is 20%) which leads to strong top line growth, which combined with differentiated products leads to high gross margins (>60%) and strong EBIT margins (>20%). 
  • High return on capital – The Company remains capital light given it’s a final fixed assembler (don’t have huge production facilities with on average a production facility of 100-200 people) thus providing very high return on average capital across the group (70-75% return on average capital across the group and after intangibles and taxes its ~15% return on total capital in group). 
  • Strong cash flows making it self-funded – The Company has a self-funded model (doesn’t go to market for dilutive capital raise) and uses its strong cashflow (targets cash conversion of >90%) to first invest organically, and then to make further acquisitions to expand the addressable market and pay shareholder returns via dividends (+5-7% growth year on year. 

Company Description: 

Halma Plc (HLMA), listed on the London Stock Exchange, looks to acquire, and grow businesses in niche markets with a global reach. The Company focuses on markets such as medical, safety and environment. Management believes the earnings profile of these markets have a high degree of defensibility and long-term growth drivers. The Company is not like a Private Equity firm which looks to acquire businesses, reduce costs (to improve earnings profile) and then sell within a 5-year timeframe. HLMA looks to buy and hold companies over the long-term. They manage the mix of businesses in group portfolio to drive sustainable growth and returns over the long term. HLMA looks to acquire businesses to accelerate penetration of more markets, merge businesses where it markets sense, and exit markets if they become less attractive from a long-term growth and returns perspective.  

(Source: Banyantree)

General Advice Warning

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

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Global stocks

Continental benefits from Auto Industry Trends in Connectivity, Electronics and Safety

Business Strategy and Outlook

Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental’s revenue growth, healthy return on invested capital, and a narrow economic moat rating. After an acquisition binge that culminated in 2007 with the purchase of Siemens VDO, Continental has grown from being predominantly a European tiremaker to a global supplier of automotive components, systems, and modules. In 2008, Continental became an acquisition target as Schaeffler unsuccessfully bid for the company (it still holds 46% of the voting interest). Continental should benefit from automotive industry trends, including advanced driver-assist systems, autonomous driving features, V2X connectivity, and increased vehicular electronics. 

The company invests in and successfully cultivates innovative technologies. Management’s long-term targets are to annually increase revenue in excess of 5% and generate adjusted EBIT margins in the 8% to 11% range. Management spun off its powertrain division in September 2021 into a new company called Vitesco that trades under the ticker VTSC. Since 2008, powertrain segment revenue has grown at an average annual rate of 6%. In 2019, pro forma Vitesco had EUR 9.1 billion in prepandemic revenue and an adjusted EBITDA margin of 9.5%.

Continental sees Q3 Chip Crunch Hit to Results, Maintains Adjusted Guidance; EUR 143 FVE Unchanged 

Narrow-moat-rated Continental reported third-quarter earnings per share from continuing operations of EUR 1.27, handily beating the EUR 0.81 FactSet consensus by EUR 0.46 and jumping EUR 4.54 from the EUR 3.26 loss reported in the COVID-19-affected year-ago period. Consolidated revenue missed consensus by nearly 1%, declining 7% to EUR 8.0 billion from EUR 8.7 billion last year. However, excluding currency effect, organic revenue declined 9%. Our EUR 143 Fair Value Estimate remains unchanged. 

Third-quarter adjusted EBIT was EUR 419 million for 5.2% margin, down from a EUR 727 million with an 8.4% margin last year as the chip crunch made customer production sporadic during the quarter. Consolidated revenue is expected to be in a range of EUR 32.5 billion-EUR 33.5 billion with adjusted EBIT margin forecast in a range of 5.2%-5.6% and free cash flow in the range of EUR 0.8 billion – EUR 1.2 billion. However, management lowered its tax rate assumption to 23% from 27% due to the lower profitability guidance, which had minimal effect on our fair value.   

Financial Strength 

Continental’s financial health appears to be in good shape. Management targets investment-grade credit ratings and a gearing ratio (net debt/equity) range of 40% to 60%. At the end of 2020, the company’s liquidity was EUR 10.8 billion, the gearing ratio was 44%, and total adjusted debt/EBITDAR, which treats operating leases as debt and rent expense as interest, was 2.6 times. Since 2010, Continental has averaged 1.8 times total adjusted debt/EBITDAR, while netting cash against debt results in about a 1.4 times ratio. 

Maturities appear well laddered with the exception of roughly EUR 2.2 billion in short-term debt. The company syndicated a new 365-day EUR 3.0 billion line of credit in 2020 due to the pandemic, which was unused at year-end. While Continental’s EUR 4.0 billion revolving bank line of credit due in 2025 had not been utilized, short-term debt includes EUR 1.5 billion outstanding on other lines of credit. The large short-term debt balance has typically been rolled to the next year.

Bulls Say’s 

  • Continental is well positioned to capitalize on auto industry trends like safety, electronics, fuel economy, and emissions reduction. As a result, we expect the company’s revenue to average growth in excess of average annual growth in global vehicle production. 
  • The ability to continuously innovate new process and product technologies should enable Continental to maintain a narrow economic moat. 
  • A global manufacturing footprint enables participation in global vehicle platforms and provides penetration in developing markets.

Company Profile 

Continental is a global auto supplier and tiremaker. Operating segments include the autonomous mobility and safety segment and the vehicle networking and information segment in the automotive group, plus tires and ContiTech, which uses rubber in industrial and automotive components and systems, in the rubber group. Last year, pro forma for the spin-off of the powertrain segment, automotive group revenue was around 50% of the total with AM&S and VN&I each accounting for about 25%. Rubber group revenue, also at around 50% of the total, includes tires at about 32% and CT at around 18%. The company’s top five customers are Daimler, Stellantis, Ford, the Renault-Nissan-Mitsubishi alliance, and Volkswagen, representing about 37% of total revenue (as reported, before the Vitesco spin-off).

(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

Recovery Plan of Qantas is constructive and is ahead of target

Investment Thesis:

  • Attractive way to play the Covid reopen trade for investors  
  • All segments delivering return on invested capital > weighted average cost of capital 
  • Strong position in the domestic market (Qantas Domestic and Jetstar continue to remain the two highest margin earning airlines in the domestic market)
  • Jetstar is well positioned for growth and rising demand in Asia 
  • Partnership with Woolworths for Loyalty bodes well for membership and earnings 
  • Oil price hedging in FY20 could contribute to performance 
  • Increased competition in the international segment
  • Relative to peers, strong balance sheet strength
  • Investment grade credit rating  

Key Risks:

  • Disasters that could hurt the QAN brand
  • Ongoing price led competition forcing QAN to cut prices affecting margins
  • Leveraged to the price of oil
  • Adverse currency movements result in less travel 
  • Labour strikes
  • Depressed economic conditions leading to less discretionary income to spend on travel

Key highlights:

  • QAN’s FY21 revenue declined 58% over pcp as the decline in international operations was partially offset by record performance by Qantas Freight, which combined with 49% fall in operating expenses and 71% decline in fuel expenses saw the Company deliver underlying EBIT loss of $1.5bn vs $395m profit in pcp
  • Covid levels in 2H21 while state borders were open generated enough cash from $6.4bn in 3Q21, with management forecasting net debt to be in target range of $4.5- 5.6bn by end of FY22
  • The Company’s cost-cutting program remained ahead of schedule, with $650m taken out of its cost base during FY21, remaining on track to deliver $850m by the end of FY22 and $1bn in FY23
  • Recent outbreaks and associated domestic and trans-Tasman border closures to have an impact in the order of $1.4bn on the Group’s Underlying EBITDA in 1H22
  • Group Domestic capacity to increase from 38% in 1Q to 53% of pre-Covid capacity in 2Q and rise to ~110% in 2H22
  • Recovery plan progress remains ahead of schedule: The Recovery Plan delivered $650m in savings in FY21, ahead of its $600m target and remains on track to deliver $850m by the end of FY22 and greater than $1bn in ongoing savings by the end of FY23
  • Liquidity boosted by securing a further $0.6bn
  • Balance sheet repair commenced, reducing net debt to $5.9bn by end of FY21 from $6.4bn in 3Q21, with further debt reduction remaining a priority
  • Investment grade credit rating of Baa2 from Moody’s maintained
  • Shareholder distributions scrapped until the Group’s earnings and balance sheet have fully recovered in accordance with the Financial Framework

Company Description: 

Qantas Airways Ltd (QAN) provides passenger and freight air transportation services in Australia and internationally. QAN also operates a frequent flyer loyalty program. QAN was founded in 1920 and is headquartered in Mascot, Australia support. 

(Source: Banyantree)

General Advice Warning

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

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Global stocks Shares

Marriott’s Demand Set to Rebound Further in 2022, Aided by Global Leisure and Corporate Pick-Up

that Marriott to expand room and revenue share in the hotel industry over the next decade, driven by a favorable next-generation traveler position supported by renovated and newer brands, as well as its industry-leading loyalty program. Additionally, the acquisition of Starwood has strengthened Marriott’s long-term brand advantage, as Starwood’s global luxury portfolio complemented Marriott’s dominant upper-scale position in North America.

Marriott’s intangible brand asset and switching cost advantages are set to strengthen. Marriott has added several new brands since 2007, renovated a meaningful percentage of core Marriott and Courtyard hotels in the past few years, and expanded technology integration and loyalty-member presence; these actions have led to share gains and a strong positioning with millennial travelers. Starwood’s loyalty member presence and iconic brands should further strengthen Marriott’s advantages.

Future Outlook

It is expected that room growth for Marriott averaging midsingle digits over the next decade  supported by the company having around 20% of all global industry rooms under construction, well above its high-single-digit existing unit share, as of the end of 2020.

With 97% of the combined rooms managed or franchised, Marriott has an attractive recurring-fee business model with high returns on invested capital and significant switching costs for property owners. Managed and franchised hotels have low fixed costs and capital requirements, along with contracts lasting 20 years that have meaningful cancelation costs for owners.

Marriott’s Demand Set to Rebound Further in 2022

Marriott’s third-quarter revenue per available room, or revPAR, improved to 74% of 2019 levels ,up from 56% last quarter ,driven by rate recovering to 96% of prepandemic marks. 

Meanwhile, Marriott’s brand advantage remains intact. Marriott’s EBITDA margins improved to 17.3% from 14.5% a year ago. It is observed that high-teens operating margins in 2030, compared with the low-double-digit prepandemic average, aided by cost efficiency offsetting wage inflation.

It is expected that leisure travel to remain robust, but we expect business travel to recover in 2022. In this vein, Marriott noted that business travel bookings have recently picked up, and that group 2022 revenue on books is down about 20% from 2019, with rooms down 23% and rate up 4%.

Financial Strength

 Marriott’s financial health remains in good shape, despite COVID-19 challenges. Marriott entered 2020 with debt/adjusted EBITDA of 3.1 times, as its asset-light business model allows the company to operate with low fixed costs and stable unit growth, but reduced demand due to COVID-19 caused the ratio to end the year at 9.1 times. During 2020, Marriott did not sit still; rather, it took action to increase its liquidity profile, including suspending dividends and share repurchases, deferring discretionary capital expenditures, raising debt, and receiving credit card fees from partners up front. As a result, Marriott has enough liquidity to operate at zero revenue through 2022, and at second half of 2020 demand levels the company was around cash flow neutral. 

 Bulls Say  

  • Marriott is positioned to benefit from the increasing presence of the next-generation traveler through emerging lifestyle brands Autograph, Tribute, Moxy, Aloft, and Element. 
  • Marriott stands to benefit from worker flexibility driving higher long-term travel demand. Our constructive stance is formed by higher income occupations being the most likely industries to sustainably work from remote locations. 
  • Marriott has a high exposure to recurring managed and franchised fees (97% of total 2019 units), which have high switching costs and generate strong ROICs.

Company Profile

Marriott operates nearly 1.5 million rooms across roughly 30 brands. Luxury represents around 9% of total rooms, while full service, limited service, and time-shares are 43%, 46%, and 2% of all units, respectively. Marriott, Courtyard, and Sheraton are the largest brands, while Autograph, Tribute, Moxy, Aloft, and Element are newer lifestyle brands. Managed and franchised represent 97% of total rooms. North America makes up two thirds of total rooms. Managed, franchise, and incentive fees represent the vast majority of revenue and profitability for the company.

 (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

Nexstar Well Positioned to Capitalize on Political Ad Spending Growth

Though it’s slightly declining in importance, advertising remains an important source of revenue for Nexstar. Just under 44% of total 2019 revenue came from nonpolitical advertising. Over 70% of non-political advertising revenue is generated at the local level by selling ad time to area businesses, including restaurants, auto dealerships, and retailers, which have suffered during the pandemic. Because of its size and geographic reach, Nexstar also sells advertising nationally to auto manufacturers, telecom firms, fast-food restaurants, and retailers via their ad agencies. The larger scale of the firm, along with increased political ad spending, has increased the importance of elections. Hence it is expected that Nexstar will continue to benefit from political ad spending growth offsetting slower local and national ad growth.

Over the past decade, retransmission revenue has grown rapidly as a source of revenue for local television stations. For Nexstar, retrans revenue was 45% of total 2019 revenue, up from 25% in 2014. While the growth in retrans revenue has been and will continue to be a growth driver for local station owners, and it is projected that national network owners will continue to raise both network affiliation fees and reverse compensation fees, decreasing the bottom-line benefit to Nexstar.

Financial Strength 

Nexstar is more highly leveraged than it has been traditionally, it is in decent financial shape. Overall debt increased as a result of the Tribune Media acquisition. The firm had $7.5 billion in debt as of September 2021, up sharply from $3.9 billion at the end of 2018. Nexstar continues to use its free cash flow to lower its debt load. It spent over $425 million in the first nine month of 2021 to reduce its debt load, lowering its first-line net leverage to 2.14times at the end of the quarter from 3.52 times at the end of 2019. The new level is well below the covenant level of 4.25 times. Total net leverage is at 3.4 times, well below the management’s target of 4.0 times. The firm had no bond maturities due until 2024, though some of its $4.7 billion first-lien loans will come due over the next three years.

Bulls Say  

  • Nexstar can drive local ad revenue growth via its duopoly markets. 
  • The increased reach provided by the Tribune merger will help attract more national advertisers and grow political ad spending. 
  • Nexstar has the heft and reach to strike more advantageous retransmission agreements with pay television distributors. 

Company Profile

Nexstar is the largest television station owner/operator in the United States, with 197 stations in 115 markets. Of its 197 full-power stations, 158 are affiliated with the four national broadcasters: CBS (50), Fox (43), NBC (35), and ABC (30). The 2019 merger with Tribune made Nexstar the top broadcast affiliate for both Fox and CBS as well as the number-two partner for NBC and number three for ABC. The firm now has networks in 15 of the top 20 television markets and reaches 69 million television households. Nexstar also owns WGN, a nationwide pay-television network, and a 31% stake in Food Network and Cooking Channel.

 (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

Bed Bath carves out new revenue opportunities to boost performance; shares skyrocket

Narrow moat Kroger is the leading American grocer, with 2,742 supermarkets (at the end of 2020) across multiple banners. While the entry into boxes is set to be “small-scale,” a more meaningful long-term opportunity exists if the initial efforts are well-executed. Not only does this partnership offer Bed Bath an incremental distribution network for its products, but it also provides visibility to customers who want a one stop omnichannel option tied into their grocery transactions.

Second, Bed Bath is launching a digital marketplace for the home and baby categories that will offer curated third-party brand products that fit into the firm’s digital platform. While the economics of these projects were not offered, a benefit should fall to both the top line and the bottom line (as scale helps absorb costs).

Financial Strength:

The dividend yield by the company during the year 2020 was a whopping 6.3% and PE ratio was 23.5.

Bed Bath now plans to complete its $1 billion share buyback in 2021, two years ahead of schedule. Depending on the acquisition prices, Bed Bath could purchase its equity at premiums to the analyst’s fair value estimate, which would not be viewed as prudent. However, this move is appreciated by the analysts as it signals management’s long-term belief surrounding the stability of the business, and that the turnaround is well underway.

Company Profile:

Bed Bath & Beyond is a home furnishings retailer, operating around 1,000 stores in all 50 states, Puerto Rico, Canada, and Mexico. Stores carry an assortment of branded bed and bath accessories, kitchen textiles, and cooking supplies. In addition to 813 Bed Bath & Beyond stores, the company operates 132 Buy Buy Baby stores and 54 Harmon Face Values stores (health/beauty care). In an effort to refocus on its core businesses, the firm has divested the online retailer Personalizationmall.com, the One Kings Lane business and Christmas Tree Shops and That (gifts/housewares), Linen Holdings, and Cost Plus World Market.

(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

UPS’ Ground Volumes Face Tough Comps, but Yields Excellent and U.S. Margin Outlook Positive

FedEx and UPS are the major U.S. incumbents.UPS has also boosted its exposure to the asset-light third-party freight brokerage market, especially with its 2016 acquisition of truckload broker Coyote Logistics. 

Despite its unionized workforce and asset intensity, UPS produces operating margins well above competitors’, thanks in large part to its leading package density. In the United States, FedEx’s express and ground units together handled 14.4 million average parcels daily in its four fiscal quarters ended in November 2020, while UPS moved 21.1 million in calendar 2020. The disparity is greater in the U.S. ground market, where UPS moved on average 17.4 million parcels per day and FedEx ground averaged 11.4 million.  

Favorable e-commerce trends should remain a longer-term top-line tailwind for UPS’ U.S. ground and express package business. That said, growth won’t be costless; UPS is amid an operational transformation initiative aimed at mitigating the challenges of a rising mix of lower-margin business-to-consumer deliveries.

Amazon has been insourcing more of its own last-mile delivery needs at a rapid pace to supplement capacity access amid robust growth. This removes some incremental growth opportunities for UPS while creating risk that Amazon decides to take in house the shipments it currently sends though UPS–the retailer now makes up approximately 13% of UPS’ total revenue.

Financial Strength 

UPS’ balance sheet is reasonable and mostly healthy. It held $6.9 billion in cash and marketable securities compared with roughly $24.7 billion of total debt at year-end 2020. Debt/EBITDA leverage came in around 2.4 times in 2020, ignoring underfunded pensions, though the firm plans to pay off more than $2 billion in 2021, with help from cash generation and the $800 million UPS Freight sale. Leverage will likely finish 2021 at comfortably less than 2 times EBITDA. EBITDA/interest coverage for 2020 was a healthy 15 times.Share repurchases slowed modestly in 2018 and 2019 on account of heavy capital investment and were suspended in 2020 (into 2021) due to pandemic risk-mitigation efforts (including debt reduction).

Bulls Say 

  • UPS’ U.S. ground and express package delivery operations should enjoy healthy medium-term growth tailwinds rooted in highly favorable e-commerce trends. 
  • UPS’ massive package sortation footprint, immense air and delivery fleet, and global operations knit together a presence that’s extraordinarily difficult to replicate. 
  • On top of superior parcel density, UPS uses many of the same assets to handle both express and ground shipments, driving industry-leading operating margins.

Company Profile

As the world’s largest parcel delivery company, UPS manages a massive fleet of more than 500 planes and 100,000 vehicles, along with many hundreds of sorting facilities, to deliver an average of about 22 million packages per day to residences and businesses across the globe. UPS’ domestic U.S. package operations generate 61% of total revenue while international package makes up 20%. Less-than-truckload shipping, air and ocean freight forwarding, truckload brokerage, and contract logistics make up the remaining 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.

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Global stocks Shares

Wyndham’s Brands Continue to See Industry Leading Travel Recovery in the U.S.

a brand intangible asset and switching cost advantage. This view is supported by the company’s roughly 40% share of all U.S. economy and midscale branded hotels and the industry’s fourth-largest loyalty program by which encourages third-party hotel owners to join the platform. 

With essentially all of its nearly 9,000-plus hotels managed or franchised, Wyndham has an attractive recurring-fee business model with healthy returns on invested capital, as these asset-light relationships have low fixed costs and capital requirements. This asset-light model creates switching costs, given 10- to 20-year contracts that have meaningful cancellation costs for owners.

The 2018 acquisition of La Quinta as a strategically strong fit that supports Wyndham’s intangible-asset-driven narrow moat while enhancing long-term growth Cyclicality, illnesses like COVID-19, and overbuilding are the main risks for shareholders.

Wyndham Continues to Lead the Global Travel Rebound; More Demand Recovery Expected in 2022

Wyndham’s leisure, continued to lead the global travel recovery in the third quarter, with total revenue per available room reaching 98% of 2019 levels. U.S. and international revPAR increased to 107% and 75% of 2019 levels, respectively, up from 95% and 56% in the three months prior. Wyndham expects demand to sustain in the fourth quarter and now sees its 2021 revPAR growth at 43% versus 40% prior and compared with our forecast of 41%. 

Looking to 2022, we expect strong U.S. leisure demand to continue, aided by remote work flexibility, while international markets should experience a strong revPAR recovery because vaccination rates now allow for reduced travel restrictions. This view is supported by Wyndham’s Canadian revPAR improving to 90% of 2019 levels in the quarter, up from around 60%, as the country reduced its pandemic-related restrictions.

Financial Strength

Wyndham’s financial health remains in good shape, despite COVID-19 challenges. Wyndham exited 2020 with debt/adjusted EBITDA of 7.9 times, up from 3.5 times in 2019, as its asset-light business model allows the company to operate with low fixed costs and stable unit growth . But Wyndham did not sit still during the depths of the pandemic; rather, it took action to increase its liquidity profile, tapping its $750 million credit facility (which was repaid in full by Nov. 2020), cutting discretionary expenses, suspending buybacks, and reducing its quarterly dividend from $0.32 to $0.08 (which was increased back to $0.32 per share in Oct. 2021).Further, Wyndham saw positive cash flow generation in 2020, despite COVID-19 significantly reducing global travel demand in that year. While Wyndham’s adjusted EBIT/interest expense was negative 0.4 times in 2020.The company has only $64 million in debt maturing over the next three years. 

Bull Says

  • The La Quinta brand offers long-term growth opportunity to 2,000 units from 937 at the end of 2020, as it is not in 30% of the regions monitored by Smith Travel Research, despite strong third-party hotel operator renewal rates and strong revPAR share in existing market.
  • Wyndham’s economy/midscale select service presence operates at low operating costs, allowing its U.S. hotels to break even at 30% occupancy levels. 
  • The vast majority of Wyndham Hotels’ EBITDA is generated by service-for-fee operations, which are less capital-intensive than owned assets, leading to healthy ROICs.

Company Profile

As of Sept. 30, 2021, Wyndham Hotels & Resorts operates 803,000 rooms across 22 brands in the economy (around 51% of total U.S. rooms) and midscale (45%) segments. Super 8 is the largest brand, representing around 30% of all hotels, with Days Inn (18%) and La Quinta (10%) the next two largest brands. During the past several years, the company has expanded its extended stay/lifestyle brands (2% of total properties), which appeal to travelers seeking to experience the local culture of a given location. The United States represents 61% of total rooms. The company closed its La Quinta acquisition in the second quarter of 2018, adding around 90,000 rooms at the time the deal closed.

(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

Lockdowns Cause Transurban’s Traffic Volumes To Slump in Key Markets

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.

Concessions grant the right to operate the roads and collect tolls for predetermined amounts of time. The roads benefit from strong competitive advantages, and the assets generate attractive returns on initial investment, warranting a wide economic moat rating.

Operating cash flow should increase strongly during concession lives, as solid revenue growth, driven by rising tolls and traffic volumes, is leveraged over a mostly fixed cost base. Cash flow stops when concessions end. Concessions on the Australian roads are set to end between 2026 and 2065. Including the long-life U.S. assets, the weighted average is 30 years. To extend its existence, Transurban will look to build new roads or undertake road upgrades which may require new equity issues or increased financial leverage, given that the firm currently pays out all free cash flow as distributions to investors. 

Typically, cash flow is defensive and grows strongly, but returns are lower than they appear at first blush, given that the roads are handed over to the government for no consideration when concessions end.

Lockdowns Causes Transurban’s Traffic Volumes To Slump in Key Markets

Sydney and Melbourne–51% and 25% of fiscal 2021 revenue, respectively–have suffered through prolonged lockdowns to slow the spread of the delta variant while rolling out vaccinations. September quarter traffic volumes in Sydney and Melbourne were down 43% and 46% in the same quarter in 2019, prior to the COVID-19 outbreak. Lockdowns are ending and traffic volumes are now recovering, with Sydney leading the way.  A rapid recovery is expected consistent with the experience in other markets as they exit lockdowns. 

Financial Strength 

Transurban is in sound financial health after selling 50% of U.S. assets. As of June 2021, Transurban had a proportional gearing ratio (defined as debt/enterprise value) of 34.3%, a corporate senior debt interest cover ratio of 2.8 times and funds from operations/debt of 8.9%. While financial leverage is high compared with other infrastructure firms, it should quickly improve on strong earnings growth. There is also comfort from relatively defensive revenue and immaterial maintenance capital expenditure requirements. Almost all debt is hedged, and the average maturity (which is currently 7.7 years) has been lengthening. Typically, debt associated with each road is repaid progressively during the last 10 years of concession lives.

Bull Says

  • Core Australian roads generate defensive revenue that grows with traffic volumes and toll price increases, which are at a minimum pegged to inflation. Solid revenue growth and a high fixed-cost base translate to strong cash flow and distribution growth. 
  • Transurban owns high-quality infrastructure assets with limited regulatory risk. 
  • There are attractive organic growth opportunities, such as potential widening of roads.

Company Profile

Transurban Group is an owner/operator of toll roads in Melbourne, Sydney, and Brisbane. It also owns toll roads in Virginia, USA and Montreal, Canada. The weighted average concession life across the portfolio is close to 30 years. Australian assets contribute around 90% of proportional revenue

(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

Raising Tesla FVE to $680 on Increased Vehicle Sales From Fleet Opportunity

In addition to luxury autos, the company competes in the midsize car and crossover SUV market with its platform that is used for Model 3 and Model Y vehicles. 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 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.

Financial Strength

Rental Car company Hertz announced plans to purchase 100,000 Tesla Model 3 vehicles by the end of 2022. While rental car companies typically get a discount for purchasing vehicles, it is expected that Tesla offered no discount to Hertz, given the company’s growing vehicle backlog. Tesla raised fair value estimate to $680 per share from $650. Our narrow moat rating is unchanged. The market responded positively to the news, sending Tesla shares up 12% at the time of writing. At that point, for consumers who are interested in electric vehicles but hesitant to buy one, renting an EV is an opportunity for an extended test drive to alleviate road trip anxiety. This drives our above-consensus forecast for 30% EV adoption by 2030.

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. 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, Tesla could maintain its current levels.

Bulls Say’s

  • 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.