Category: Global stocks

Global Stock refer to share that are traded on multiple exchanges with different currencies. For example, if a publicly-traded company issues shares in dollars on the New York Stock Exchange and in pounds on the London Stock Exchange, it is issuing global registered shares. Global stock to a portfolio offers diversification and may provide higher returns. Global stock markets may experience higher levels of volatility than other domestic markets with bigger swings to both the upside and downside.

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Global stocks Shares

Admiral Benefits from a Pricing Flaw in Motor Insurance

Admiral tends to aggressively increase its customer numbers in times of pricing flux by undercutting the competition in terms of pricing. We have seen this at least once before, and we believe that much more recently, such as last year, we saw this happen again. As Admiral grows these customer numbers, it increases not only its profit from underwriting but also these ancillary sources.

There are three factors causing flux in U.K. motor insurance prices: emerging from lockdown, regulatory pricing review, and regulatory restructuring of claims. These are all affecting motor insurance prices and giving Admiral Opportunities to undercut the competition and expand its customer base.

We believe consensus completely ignores this dynamic of customer growth at Admiral, and on this

Element we are very different. Our estimates for customer numbers are only three fourths of the numbers that investors witnessed during the last global financial crisis, but we are still well over double the 590-basis-point average annual customer growth as per Visible Alpha consensus.

Company Profile

Admiral is a personal lines insurer that writes most of its business in the United Kingdom. The company operates three business divisions: U.K. insurance, international car insurance, and other. This is a reduction from four since April 2021, when new CEO Milena Mondini de Focatiis announced the sale of Admiral’s price comparison businesses within Penguin Portals. This included www.confused.com, www.rastreator.com, www.lelynx.fr, and the group’s technology division, Admiral Technologies. The sale excluded Admiral’s U.S. price comparison business, www.compare.com. The total net transaction value was GBP 460 million, which Admiral intends to return to shareholders.

(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

PetroChina and Sinopec Guides Significant Improvement in 1H Earnings; Positive Readthrough for CNOOC

Overall, the sector is still undervalued but our preferred pick is CNOOC, given its upstream focus and cost efficiency with all-in cost of below USD 30 per barrel. Higher oil prices should be positive for oil producers, this could be negative for PetroChina’s and Sinopec’s downstream operations, especially if the government decides to delay price hikes for refined products to prevent inflation. The better earnings are widely expected by the market, given that the weak results in 2020 were due to lower oil prices and COVID-19 disruptions. PetroChina and Sinopec attributed the improvement to recovery in prices and demand for oil and gas products, as well as stringent cost controls.

Oil prices are likely to remain elevated (above midcycle price of USD 60 per barrel for Brent) for at least another 6-12 months, in our view, as supply/demand dynamics support current price levels. All is going according to plan with a continued vaccine rollout, decline in infections, and recovery in demand. On the supply side, an accelerated return of Iran volumes continues to pose a risk, but we still see the situation as manageable.

Company Profile

China Petroleum & Chemical, or Sinopec, is one of China’s national oil companies and one of Asian’s largest integrated oil companies in terms of revenue. Its income is derived primarily from refining and marketing of oil products and petrochemical production. Sinopec has China’s largest petrol station network with over 30,000 stations and enjoys significant market share in petrochemicals. Established in 2000 by China Petrochemical Corporation, a state-owned enterprise and majority shareholder, the company also owns oil and gas assets in Shandong and Sichuan provinces. It has a smaller global upstream presence than peers PetroChina and CNOOC.

(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

Sparkling Finish to Fiscal 2021 for National Beverage, But Shares Fairly Valued

Nevertheless, while not capable of sustaining the frothy valuation of yesteryear, the firm produced record results (largely in line with our expectations on both the top and bottom lines) that continue to inspire confidence in the sustenance of its growth profile and brand equity. We don’t plan to materially change our $48.50 fair value estimate, as time value and better-than-expected commercial execution should be offset by higher taxes, as we incorporate Morningstar’s probability-weighted house expectation of an increase in the U.S. statutory rate to 26%. Despite being well off their highs, we don’t see a sufficiently compelling margin of safety in the shares at current levels, and suggest prospective investors remain on the sidelines.

Revenue for the fiscal year came in at $1.1 billion, up 7% year over year. Anchor brand La Croix remained the preeminent driver of growth, though we suspect the firm’s energy and carbonated soft drinks brands also grew nicely. As pandemic-besieged sales channels where LaCroix is underindexed–like food-service and vending–continue to rebound, we don’t see much adverse impact manifesting on the top line; if anything, there could be incremental upside given management’s ambition to broaden the aperture of its sales and consumption occasions. These efforts, together with attractive sparkling water category dynamics, should facilitate mid-single-digit growth longer term, supported by ongoing reinvestment in innovation

Operating margins were stellar, up 460 basis points to 21.2%. While operating leverage always plays a role in quarters with top-line strength (given that it owns most of its production/distribution apparatus), lower advertising and corporate expenses remain anomalous contributors that should become headwinds longer term as the competitive landscape re-intensifies post-pandemic.

Company Profile

National Beverage is one of the top 10 non-alcoholic beverage companies in the U.S. Its portfolio skews toward functional drinks (i.e. those purporting to offer health benefits) and is anchored by the popular LaCroix sparkling water trademark. Other offerings include Rip It energy drinks, Ever fresh juices, and soda brands like Shasta and Faygo. The firm controls most of its production and distribution apparatus, with very little outsourcing. In terms of go-to-market, it uses warehouse distribution for big-box retailers, direct-store-delivery for convenience stores and other small outlets, and food-service distributors for the food-service channel (schools, hospitals, restaurants). It is controlled by chairman and CEO Nick Caporella, who owns over 73% of the common stock.

(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

Celanese’s Low Acetic Acid Production Should Support Growing Specialty Polymer Demand

Digital tablet display the stock market data

Celanese produces the chemical in its core acetyl chain segment (roughly 50% of EBITDA), which primarily serves the automotive, cigarette, coatings, building and construction, and medical end markets. It produces acetic acid from carbon monoxide and methanol, a natural gas derivative. Celanese produces its own methanol at its Clear Lake, Texas, plant, which benefits from access to low-cost U.S. natural gas. The company recently announced that it will expand acetic acid production capacity at Clear Lake by roughly 50%, which should benefit segment margins thanks to lower average unit production costs.

The engineered materials segment (around 40% of EBITDA) produces specialty polymers for a wide variety of end markets. This segment uses acetic acid, methanol, and ethylene to produce specialty polymers. Celanese and other specialty polymer producers have benefited in recent years from automakers lighweighting vehicles, or replacing small metal pieces with lighter plastic pieces. Celanese should also benefit from increasing electric vehicle and hybrid adoption, as then company makes battery separator components. By 2030, we forecast two thirds of all new global auto sales will be EVs or hybrids. Additionally, Celanese sells products used in electronics and “Internet of Things” technologies, which provides another area of growth for the company.

With growing EV adoption and increased sales of Internet of things technologies, Celanese is well positioned for outsize engineered materials’ volume growth over the next several years. Acetate tow, which is Celanese’s smallest segment, produces acetate tow primarily for cigarette filters. Cigarette sales are in secular decline across most countries, and so we expect Celanese’s acetate tow sales will slightly decline over the long term.

Financial Strength

Celanese is in good financial health. As of March 31, 2021, the company had $3.6 billion in debt and around $0.8 billion in cash. A net debt/operating EBITDA ratio of 1.8 times. Celanese is undergoing a portfolio transformation, exiting legacy joint venture deals and acquiring new assets to increase the company’s engineered materials portfolio, such as the Santoprene business from ExxonMobil. The company will increase its debt as a part of this acquisition. However, we generally expect the company’s balance sheet and leverage ratios to remain healthy as Celanese should generate enough free cash flow to meet its financial obligations. The cyclical nature of the chemicals business could cause coverage ratios to fluctuate from year to year. However, Celanese should still generate positive free cash flow well in excess of dividends in 2021.

Core Acetic Acid Production

  • Celanese built out its core acetic acid production facilities at significantly lower capital cost per ton than its competitors thanks to the scale of its facilities (1.8 million tons versus average 0.5 million tons).
  • Celanese should benefit from producing an increasing proportion of its acetic acid in the U.S. to take advantage of low-cost natural gas.
  • The engineered materials’ auto business should grow more quickly than global auto production because of greater use of these products in each vehicle.

Company Profile

Celanese is one of the world’s largest producers of acetic acid and its downstream derivative chemicals, which are used in various end markets, including coatings and adhesives. The company also produces specialty polymers used in the automotive, electronics, medical, and consumer end markets as well as cellulose derivatives used in cigarette filters.

(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

Mettler-Toledo Returning to Sales and Earnings Growth

While the competitive nature of these markets makes incremental share gain somewhat difficult, we see opportunity for organic growth and share gains in product inspection, industrial, and food retail. Mettler places an intense focus on sales and marketing and has leveraged its Spinnaker and Stern Drive programs to operate with high efficiency and maintain strong customer retention.

Despite relatively slow market growth in weighing instrumentation, Mettler has achieved steady above-market share gains and has established a niche in high-end laboratory balances. Impressively, the firm has posted consistent pricing and margin gains over the past decade, even during the great financial crisis, 2015-16 industrial downturn and COVID-19 pandemic. Tepid industry growth holds potential competitors at bay, given that new entrants would find it difficult to take meaningful share, and the reward for doing so would be relatively small.

Higher inflation could limit earnings growth because Mettler may find it difficult to pass on pricing increases to clients that are more than the customary 2 percent to 3 percent range. Nonetheless, because the company works in established, stable markets, the long-term picture for the company appears positive.

Despite shareholder pressure on financial allocation, Mettler has taken a methodical approach to acquisitions.

Financial Strength

Mettler-Toledo has good financial strength and has consistently maintained solid levels of free cash flow and reasonable debt, which stood at 1.5 times EBITDA in December 2020. Mettler has generated increasing levels of free cash flow in each of the past four years, with $240 million of cash flow in 2016 increasing to nearly $650 million in 2020. Mettler has typically used much of this cash flow on share buybacks, which have totaled nearly $2.8 billion over the last five years. Apart from repurchases, Mettler has occasionally made moderately sized acquisitions, such as the $105 million purchase of pipette consumable vendor Biotix in 2017, and the $96 million acquisition of lab equipment company Henry Troemner in 2016.

Bulls Say

  • Despite the slow market growth of balances, Mettler has consistently exceeded analyst expectations, and the company has unmatched operating efficiency.
  • Mettler has shown impressive cost discipline during the COVID-19 pandemic. With a flexible cost structure and healthy balance sheet, Mettler is poised to benefit from a post-crisis economic rebound.
  • Though details of the programs remain somewhat opaque, the Spinnaker and Stern Drive initiatives appear to be significant contributors to the firm’s consistent market-beating results, and these programs are set to continue.

Company Profile

Mettler-Toledo supplies weighing and precision instruments to customers in the life sciences (54% of 2020 sales), industrial (40%), and food retail industries (6%). Its products include laboratory and retail scales, pipettes, pH meters, thermal analysis equipment, titrators, metal detectors, and X-ray analyzers. Mettler leads the market for weighing instrumentation and controls more than 50% of the market for lab balances. The business is geographically diversified, with sales distribution roughly as follows: the United States around 30% of sales, Europe around 30%, China around 20%, and the rest of the world around 20%.

(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 Our Tesla FVE to $550 on Improved Profitability Outlook; Shares Slightly Overvalued

Tesla also invests around 6% of its sales into R&D, focusing on improving its market-leading technology and reducing its manufacturing costs. The company will also move upstream into battery production, with a goal to reduce costs by over 50%. Tesla also sells solar panels and batteries used for energy storage to consumers and utilities.

After taking a fresh look at Tesla, we are raising our fair value estimate to $550 per share from $354. The increased fair value estimate comes from our outlook for higher long-term profitability in the automotive segment. We maintain our narrow moat rating but downgrade our moat trend rating to stable from positive. At current prices, shares as slightly overvalued, with the stock trading above our fair value estimate but within 25% of our fair value estimate, which is the upper end of the range for 3-star territory based on our uncertainty rating. A little over 5.1 million vehicles sold in 2030, up from 4.3 million, due to a greater number of affordable vehicles, which Tesla nicknamed the $25,000 car.

Management’s cost reduction initiatives driving long-term gross margin expansion. In its September Battery Day event, Tesla unveiled plans to reduce battery costs by 56%. Tesla will be able to achieve these cost reductions, without reducing prices, which will reduce vehicle unit costs and increase gross profit per vehicle. In addition to cost reductions, the mix shift to the Model Y will also increase automotive gross profit margins. The Model Y is built on the Model 3 platform, and management says the cost of production for a Model Y is not that much more than the Model 3. Given that the Model Y’s entry level price is $12,500, or roughly 30%, more expensive than the Model 3, we see gross profit margins expanding as a greater proportion of Model Y vehicles are sold.

Tesla’s EV prices will remain at or above the price of a comparable internal combustion engine or hybrid vehicle. This should lead to Tesla’s cost reduction efforts driving profit margin expansion. Tesla’s second largest vehicle platform over the next decade, with the two platforms generating nearly 90% of total volumes. Similar to Tesla starting with the Model 3 and then transitioning to sell more Model Ys, we expect Tesla will start with a $25,000 car and then transition to produce a greater proportion of SUVs from the platform.

Financial Strength

Tesla is in solid financial health as cash and cash equivalents exceeded total debt as of March 31, 2021. Total debt was roughly $10.9 billion, with about $5.1 billion of that amount nonrecourse debt mostly backed by asset-backed security issuances for the auto and energy businesses, China debt, and a warehouse line secured by cash flows from vehicle leasing contracts. To fund its growth plans, Tesla has used convertible debt financing as well as equity offerings and credit lines to raise capital. As of March 31, 2021, the company has $2.15 billion in unused committed amounts under credit lines and financing funds. In 2020, the company raised $12.3 billion in three equity issuances.

 Tesla‘s Unique Supercharger Network

  • 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 the company 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 will result in the company 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 mid-size sedans and crossover SUVs. The company also plans to begin selling more affordable sedans and small SUVs, a light-truck, 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

TJX’s Long-Term Strength Remains, but International Exposure Elongates it’s Recovery

Near-term sales face headwinds outside the United States, with ongoing store closures in Europe and Canada (roughly 300 units as of May 1). However, we still believe TJX and its peers benefit from durable advantages over full-price apparel and home décor sellers, with strong brands, store experiences, and scale working to keep returns on invested capital high (high-20s average over the next decade).

TJX’s value proposition should resonate even as retail competition intensifies. While digital retailers are a factor (particularly if the pandemic durably increases e-commerce adoption), we see the off-price channel as relatively well protected, as the low-frills buying experience and 20%-60% discounts relative to the full-price channel result in competitive prices and superior economics after considering shipping and return costs. Vendors’ desire for discretion also favors physical stores that can discreetly sell merchandise without diluting top brands’ cachet.

With a global presence, TJX leverages an extensive merchandising operation and proprietary inventory management system to maintain a fast-changing assortment at significant discounts. We believe TJX’s ability to deliver a high-value lineup while maintaining strong returns is driven by its difficult-to-replicate sourcing and distribution agility. By accepting incomplete assortments without return privileges, paying promptly, and stocking brands discreetly (preserving labels’ conventional-channel pricing power by avoiding the stigma of a consistent discount presence), TJX is a valued partner for its more than 21,000 vendors, in our view. As a result, TJX can opportunistically offer a fast-changing, high-value assortment in a treasure-hunt format that is hard to replicate digitally.         

Financial Strength

TJX’s financial health is sound, and we expect it to weather the COVID-19 crisis. The firm drew $1 billion from its revolver and subsequently issued $4 billion in long-dated notes to bridge the crisis, and, with the worst of the pandemic seemingly passed, has since repaid the revolver and nearly $3 billion of other indebtedness. The firm has a historically conservative approach to debt that we do not expect to change. Management states that its maximum store count potential is 3,000 units at Marmaxx (from 2,450 at the end of fiscal 2021), 1,500 at HomeGoods (from 855), 650 in Canada (from 525), and 1,125 in its existing other international markets (from 742).

Bulls Say

  • With an agile merchandising and distribution network, TJX keeps store inventory fresh, spurring traffic while minimizing risks associated with fashion trends and freeing capital.
  • We believe digital retailers will have a more difficult time in encroaching on the off-price channel, particularly given the sector’s already-low prices and vendors’ demand for discretion.
  • TJX’s international operations should offer ample runway for growth and associated incremental cost leverage, with the store banners and off-price concept translating well abroad.

Company Profile

TJX is a leading off-price retailer of apparel, home fashions, and other merchandise. It sells a variety of branded goods, opportunistically buying inventory from a network of over 21,000 vendors worldwide. TJX targets undercutting conventional retailers’ regular prices by 20%-60%, capitalizing on a flexible merchandising network, relatively low-frills stores, and a treasure-hunt shopping experience to drive margins and inventory turnover. TJX derived 79% of fiscal 2021 revenue from the United States, with 11% from Europe (mostly the United Kingdom and Germany), 9% from Canada, and the remainder from Australia. The company operated 4,572 stores at the end of fiscal 2021 under the T.J. Maxx, T.K. Maxx, Marshalls, HomeGoods, Winners, Homesense, Winners, and Sierra banners.

(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

Nestle’s Stellar Performance During Coronavirus Pandemic Is a Reflection of Its Wide Moat

With sales from premium products across categories estimated at around 26% of group sales and accounting for more than 50% of Nestle’s organic growth in fiscal 2019 in our calculations, we see heightened downside risks from recession-driven downtrading to cheaper private-label alternatives. The emergence of hard discounters selling private-label products and the threat of the online channel lowering barriers to entry for smaller, nimbler manufacturers that have proved to be more adept at identifying the niche opportunities are headwinds for large-scale consumer packaged goods firms.

Aside from structural cost-cutting efforts, the management team has put a lot of weight on reinvigorating growth through active portfolio management, resetting legacy businesses, and further investment in high-growth categories (coffee, pet care, water, and nutrition). Further, population growth, urbanisation, and economic growth are secular drivers in emerging markets, where the company sources a sizable and growing share of its sales, which should support medium-term volumes, though at a lower level than historical averages.

Financial Strength

Nestle has one of the strongest balance sheets in packaged food, and we regard it as having a low liquidity and refinancing risk profile. Nestle’s net debt/EBITDA of 1.4 times at the end of 2019 is well below its peer group average of around 3.0 times, and EBITDA covered interest expense by a very comfortable 16 times in 2019. Nestle faces maturities of around CHF 2 billion in 2020, CHF 4 billion in 2021, and CHF 2.7 billion in 2022, which we see as manageable, given the firm’s prodigious cash generation (10% average free cash flow to the firm as a percentage of sales over the past decade) and access to refinancing debt.

Leveraging the balance sheet to a level in line with peers could raise more than CHF 20 billion in additional capital. Further, Nestle owns 23% of wide-moat L’Oreal, a stake that could raise close to CHF 20 billion at our fair value estimate. With approximately CHF 2 billion more in excess cash on the balance sheet, Nestle has a potential pool of capital of more than CHF 40 billion, which would allow it to execute a transformative acquisition of a large-cap name. Nestle has historically spent CHF 1 billion-3 billion of its roughly CHF 10 billion in annual free cash flow on bolt-on deals. Nestle generates around CHF 4 billion per year in free cash flow after the dividend has been paid. Nestle could still deleverage to less than 1 time net debt/EBITDA by fiscal 2024 due to its improved profitability, leaving ample room for large acquisitions.

Nestle’s Geographic Reach

  • The breadth and diversity of Nestle’s portfolio and its geographic reach allow for easier absorption of brand and operational shocks.
  • Nestle’s global distribution network and entrenched supply chain relationships render the company one of the most effective platforms to develop and expand brands on a global scale (as seen in its latest partnership deal with Starbucks).
  • With margins lagging some of its large-cap peers, there should be plenty of low-hanging fruit with which Nestle could improve its financial performance.

Company Profile

With a 150-year-plus history, Nestle is the largest food and beverage manufacturer in the world by sales, generating more than CHF 90 billion in annual revenue. Its diverse product portfolio includes brands such as Nestle, Nescafe, Perrier, Pure Life, and Purina. Nestle also owns just over 23% of French cosmetics firm L’Oreal. The company has a vast portfolio of global products, with 34 brands each achieving more than CHF 1 billion in sales annually and a geographic presence that spans 189 countries.

(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

Endeavour’s Leadership: Encouragement in Sustainable Cost Advantages of liquor market

Woolworths’ divestment of Endeavour separated the ESG risk of alcohol retailing and gaming machine operation from the broader supermarkets business and provided investors with the ability to tailor their risk exposures to each business. The impetus for divestment had risen in the years leading up to the separation of Endeavour as a standalone company along with the emergence of social oriented investment.

Endeavour’s business is divided into two segments. Its retail segment is Australia’s leading vertically integrated omnichannel liquor retailer, while Endeavour’s hotels segment provides hospitality services and gambling operations.

Company’s Future Outlook

We expect consumer demand for alcohol to be relatively steady through the economic cycle, exhibiting attributes of consumer defensives. For instance, like in food, liquor spending grew at around or above the 30-year average growth rate of 7% in fiscal years 2008 and 2009, respectively. However, data stretching back to the last Australian recession suggests liquor demand isn’t always recession-proof. According to the Australian Bureau of Statistics, Australian consumers significantly cut back on drinking in fiscal 1991 and liquor retailing took over two years to recover to its fiscal 1990 levels.

We estimate the Australian hotels market will predominantly be driven by the same factors as the off premises retail liquor market, namely population growth and inflation. We estimate a total market size at AUD 15 billion in fiscal 2020 and anticipate this to grow at a CAGR of 6% from lockdown-affected calendar 2020 to AUD 27 billion by fiscal 2030

Bulls Say

– Endeavour’s dominant retail market share of 47% is multiples of its closest competitors and provides a source of long-term sustainable cost advantage.

– Endeavour’s partnership agreements with Woolworths allow the business to leverage the scale and capabilities of Australia’s largest supermarket.

– Endeavour’s wide economic moat, strong competitive positioning and strong balance sheet will underpin a sustainable and steadily growing dividend.

Company Profile

Endeavour Group Ltd is an Australian drinks retailer of products such as liquor and operator of various licensed hospitality venues. Its portfolio of brands include Dan Murphy’s, BWS, Pinnacle Drinks, ALH Hotels, Jimmy Brings, Langton’s, among others.

(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 Criteo FVE to $35: Delay in decision by Google

Closeup of a stock market broker working with graphs on digital tablet at office. Rear view of stock agent reading bad report and graph. Back view of multiethnic businessman analyzing fall sales.

With third-party cookies not blocked on Google’s Chrome browser, targeted advertising, which has used cookies for more than two decades, will remain effective longer than anticipated. The use of cookies allows for more effective targeting, increasing the return on ad spending and thus resulting in higher demand by advertisers. This type of targeting allows for an increasing role and revenue for adtech Criteo. Plus, Criteo, other ad-tech firms, and Google will have more time to develop and test replacements for cookies. We increased our projections and now expect Criteo’s top-line growth to average 9.5% annually through 2025 (higher than our previous assumption of 8%), which will also create operating leverage and expand average operating margin to 13.3% (compared with 15% prior to the pandemic, and higher than our previous 12.6% assumption).

In reaction to Google’s decision, Criteo stock jumped more than 12% and is trading at 1.3 times our fair value estimate. The firm’s current market capitalization of $2.7 billion is not far off from the $2.8 billion it hit in the second half of 2017, when the market expected 5-year average net revenue growth in the mid-teens off a higher base.

Criteo’s Future Outlook

We think today’s reaction clearly displays the firm’s dependency on Google’s digital advertising platform and supports our no-moat and very high uncertainty ratings for Criteo. In our view, uncertainties surrounding possible alternatives and their effectiveness remain, and they could force advertisers to allocate less toward targeting and retargeting as we approach the second half of 2023.

While we think Criteo is overvalued, we remain pleased with the firm’s efforts to minimize impact of cookie-less browsers. We are skeptical about the adoption and possible success of the Unified ID solution, but we do see possibly attractive ROIs generated from campaigns that combine first-party data (data from Criteo’s clients) with contextual marketing. We think with access to a large amount of its client’s first-party data, Criteo is well-positioned to leverage nearly any new solution. In addition, we applaud what appears to be the firm’s main strategy–to not invest in designing and creating another version of third-party cookies. Criteo continues to invest in solutions based on contextual advertising which we think will be welcomed by Google, publishers, and ad buyers now and in two years.

Lastly, we remain pleased with the firm’s efforts to diversify its revenue with the retail media segment, which represented 10% of total net revenue in the most recent quarter. The retail media business not only helps retailers market their products and services on other sites or apps (demand for ad inventory), but it also allows them to further monetize their own online properties by selling more ad inventory (supply of ad inventory).

Company profile

Headquartered in Paris, Criteo is one of the leading ad-tech companies in the growing digital ad market. Its technology, mainly the Criteo Engine, allows advertisers to launch multichannel and cross-device marketing campaigns in real time using retarget digital display ads. With real-time return on investment analysis of the ads, the firm’s clients can adjust their marketing strategies dynamically.

(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.