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

Airbus SE

It benefits immensely from being in a duopoly with Boeing in the commercial aircraft manufacturing business for aircraft 130 seats and up; the pair of companies act as a funnel through which all commercial aircraft demand must flow. This allows both companies to actively manage their order backlogs to reduce cyclicality, despite the intense cyclicality of the customer base.

Airbus’ commercial aircraft segment can broadly be split into two parts: nimble narrow-bodied planes that are ideal for efficiently running high-frequency short-haul routes, and wide-bodied behemoths that are generally reserved for transcontinental flights. Recently, narrow-body volume has increased substantially due to the rise globally of low-cost carriers and improved technology that allows smaller airplanes to operate flight paths that were previously unprofitable. We think that Airbus’ A320 family has taken the advantage in the upper end of this market, with the introduction of the A321neo LR and the forthcoming A321neo XLR, which will have a capacity of 4,700 nautical miles and would enable single-aisle routes from India to Europe. We anticipate that further technology improvements will push low-cost carriers into routes that have been dominated by legacy carriers.

On the wide-body side of the market, we anticipate much slower growth, as we expect improving technology will allow airlines to substitute narrow bodies for wide bodies for an increasing number of routes. Airbus has a competitive wide-body offering, the A350, though backlogs suggest that Boeing’s comparable 777, 777X, and 787 offerings resonate more with customers. Airbus also has segments dedicated to the production of defense-specific products and helicopter manufacturing. These businesses are less material to Airbus as a whole, generating slightly over 10% of our midcycle EBIT. We anticipate modest growth from these segments, largely assuming that defense spending as a proportion of GDP remains constant in the European Union and that helicopter deliveries rebound over the medium term.

Bulls say

  • Airbus’ A320 family continues to have a substantial lead in the valuable narrow-body market, and the A321neo XLR has the potential to open new long range routes to low-cost carriers.
  • Airbus is well positioned to benefit from emerging market growth in revenue passenger kilometers and a robust developed-market replacement cycle.
  • We expect that commercial airframe manufacturing for aircraft 130 seats and up will remain a duopoly over the foreseeable future. We think customers will not have many options other than continuing to rely on incumbents.

Bears Say

  • Aerospace remains a highly regulated space, and regulatory burden could increase globally subsequent to the grounding of the Boeing 737 MAX.
  • It could take years for airlines to recover from the economic carnage caused by COVID-19, and the virus could lead to changed consumer behavior that would be unfavorable for the industry (for example, video conferences replace business trips).
  • Aircraft development is susceptible to development delays and cost overruns.

Profile

Airbus is a major aerospace and defense firm. The company designs, develops, and manufactures commercial and military aircraft, as well as space launch vehicles and satellites. The company operates its business through three divisions: commercial, defense and space, and helicopters. Commercial offers a full range of aircraft ranging from the narrow-body (130-200 seats) A320 series to the much larger A350-1000 wide body. The defense and space segment supplies governments with military hardware, including transport aircraft, aerial tankers, and fighter aircraft (Euro fighter). The helicopter division manufactures turbine helicopters for the civil and para public markets.

Source:Morningstar

Disclaimer

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

Burlington Stores Inc

As economic stimulus was likely the primary contributor to Burlington’s 20% comparable growth relative to prepandemic first-quarter fiscal 2019 levels, we still call for normalized mid-single-digit revenue growth and low double-digit adjusted operating margins long term. We have a favorable view of the chain’s improvement initiatives but believe the shares’ trading price assumes a best-case scenario.

Burlington’s $2.2 billion in first-quarter sales sailed past our $1.6 billion estimate (which was in line with the chain’s fiscal 2019 performance; we had been more cautious about the cadence of the pandemic-related recovery). Cost leverage led to a 10.8% adjusted EBIT margin, up nearly 370 basis points from the same period in fiscal 2019. Management did not offer guidance, but indicated it plans full-year sales to be around 20% higher than fiscal 2019’s $7.3 billion, and our prior $8.0 billion target should rise toward $8.7 billion, accelerating a recovery we had expected to extend into fiscal 2022. Leadership models a full-year adjusted EBIT margin decline of 20-30 basis points from fiscal 2019’s 9.2%, and our prior 8.7% mark should rise accordingly.

Although we caution against reading too much into a quarter borne of exceptional circumstances (easy comparisons due to 2020 store closures, stimulus, and pent-up demand), we believe the performance highlights Burlington’s greater agility as it executes management’s plans for more opportunistic inventory purchases. The chain was not spared the effects of global freight supply challenges, but we believe its work to use its reserve inventory and large roster of vendors protected its ability to flow product. We do not anticipate the freight issues will linger, with normalization as supply and demand dynamics stabilize alongside the economy.

Profile

The third-largest American off-price apparel and home fashion retail firm, with 761 stores as of the end of fiscal 2020, Burlington Stores offers an assortment of products from over 5,000 brands through an everyday low price approach that undercuts conventional retailers’ regular prices by up to 60%. The company focuses on providing a treasure hunt experience, with a quickly changing array of merchandise in a relatively low-frills shopping environment. In fiscal 2020, 21% of sales came from women’s ready-to-wear apparel, 21% from accessories and footwear, 19% from menswear, 19% from home décor, 15% from youth apparel and baby, and 5% from coats. All sales come from the United States.

Source:Morningstar

Disclaimer

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

Dollar Tree Inc

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Our planned change is primarily a result of a higher ongoing tax rate assumption (26% statutory rate from 2022 onward, from 21% prior), as a time value of money-related adjustment mostly offsets the impact of a softer near-term outlook amid heightened freight costs. Our long-term targets still call for mid-single-digit annual top line growth and high-single-digit adjusted operating margins. We do not see a buying opportunity at the shares’ current trading price, despite a mid-single-digit percentage pullback after the announcement.

Quarterly comparable sales rose 4.7% at the Dollar Tree banner (with about a 100-basis-point impact from adverse weather in February) and fell 2.8% at Family Dollar (after a 15.5% increase in the same period of fiscal 2020 as consumers stocked up in the early days of the pandemic). We had expected a 5.5% increase and a 4% decline, respectively. Management set full-year guidance of $5.80- $6.05 in adjusted diluted EPS, including a $0.70-$0.80 freight cost headwind on a per share basis. Our prior $6.28 mark (excluding forecast share buybacks) will likely fall toward the new range, considering Dollar Tree’s heightened dependence on spot freight markets in light of capacity constraints.

Management still expects Dollar Tree Plus (a format that includes a section with certain discretionary items that cost more than the traditional $1 Dollar Tree limit) and its combo stores (which combine elements from the Family Dollar and Dollar Tree assortments in rural areas) to drive growth long term. We view the concepts favorably and think they should allow the company to leverage the strengths of each banner and its purchasing power. Still, we do not anticipate the benefits will include the development of an economic moat, considering the intense competitive environment

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 price (CAD 1.25 in Canada). 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

Disclaimer

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

Fisher & Paykel Healthcare Corp Ltd

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However, unsurprisingly, management relayed that hardware and consumables demand began to normalise in fourth-quarter fiscal 2021 after peaking in the third. Critically, COVID-19 hospitalisation rates in North America and Europe have come down substantially as vaccines are administered, with the two regions contributing 74% of fiscal 2021 revenue. Accordingly, we still expect a material decline as strong COVID-19-induced sales are lapped and leave our fiscal 2022 revenue forecast of NZD 1.61 billion unchanged. Shares screen as overvalued, as we surmise the market is extrapolating elevated demand too far in the future.

Fisher’s short-term outlook is challenged. Further localised waves of COVID-19 are unlikely to sustain elevated hardware demand. Consumable volumes are also unlikely to repeat, as this requires an immediate shift in clinical practices to utilise nasal high flow therapy for general respiratory support. Our long-run outlook is broadly unchanged and factors in an ongoing transition. Our normalised revenue growth of 15% in the new applications consumables segment is the primary driver of our midcycle group revenue growth and operating margin forecasts of 10% and 30%, respectively, largely consistent with Fisher’s long-term targets of 12% and 30%, respectively  

Fisher declared a final dividend of NZD 0.22 per share, increasing total dividends for fiscal 2021 by 38% to NZD 0.38 per share, fully imputed. We forecast Fisher to maintain its net cash position over the forecast period, NZD 303 million at fiscal 2021 year-end, and to comfortably afford a 60% dividend payout ratio. We have increased our fiscal 2022 capital expenditure forecast to peak at NZD 245 million in line with guidance as Fisher builds a third manufacturing facility in Mexico.

Profile

Fisher & Paykel Healthcare is one of the three largest respiratory care device companies globally. It is the market leader in hospital use humidifiers, masks and related consumables and the number three player in the at-home treatment of sleep apnoea using respiratory devices. Both the hospital and homecare markets for respiratory devices are growing strongly in the developed markets in which Fisher & Paykel has a presence. The company earns almost 50% of revenue in the U.S., 30% in Europe with Asia Pacific the biggest contributor to the balance. Fisher & Paykel conduct their own R&D and hold over a thousand patents with another 1,200 pending. They manufacture in New Zealand and Mexico and have a multi-channel distribution model.

Source:Morningstar

Disclaimer

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

Vertex’s Narrow Moat Underpinned by Intangible Assets from Cystic Fibrosis Drugs; Shares Undervalued

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The company’s approved cystic fibrosis drugs are Kalydeco, Orkambi, Symdeko, and Trikafta, which will make Vertex eligible to treat about 90% of the CF population, assuming international and pediatric approvals. We expect Vertex to maintain its dominant position in CF, given the strong efficacy of its therapies, lengthy patents, and lack of competition, while developing pipeline candidates in other rare indications to spur growth.

Cystic fibrosis is a rare indication characterized by a progressive and deadly decline in lung function, affecting approximately 83,000 people worldwide. Since its 2012 launch, Kalydeco has captured most of its target patient population (less than 10% of CF patients with specific genetic mutations) and has become the backbone of combination therapies, including Orkambi, Symdeko, and Trikafta. Orkambi’s launch in 2015 expanded the eligible patient population by adding CF patients with homozygous F508del mutations, but its uptake was slower because of its safety profile. Symdeko’s 2018 launch didn’t come with any worries over safety and contributed over $700 million in revenue in its first year, targeting the same population as Orkambi plus some. Trikafta, a triple combination therapy, had a strong launch since its U.S. approval in 2019, significantly expanding the company’s addressable patient population to heterozygous patients.

Vertex’s comprehensive approach has already shaped the treatment of CF and earned it a dominant position worldwide. The chronic nature of therapy and limited competition on the horizon heighten the CF market’s attractiveness. Given these positive market dynamics, we think Vertex’s CF program could grow to over $11 billion within our forecast period. Vertex’s pipeline spans several rare diseases, including CTX001 for beta-thalassemia and sickle-cell disease, VX-864 for alpha-1 antitrypsin deficiency, and VX-147 for APOL1-mediated kidney disease. We think the CF franchise will provide ample cash for the development of these assets and others.

Fair Value and Profit Enhancers

We are maintaining our fair value estimate of $259 per share. Our valuation remains heavily dependent on the cystic fibrosis portfolio, including its latest drug, Trikafta. This new triple combination drug is poised to continue generating solid sales throughout our explicit forecast period. We model about $7 billion in cystic fibrosis sales in 2021, driven by Trikafta (in both F508del homozygous and heterozygous patients). Vertex’s complete portfolio of cystic fibrosis therapies allows it to target about 90% of cystic fibrosis patients globally, assuming international and pediatric approvals.

While we give the company’s pipeline candidates fairly low probabilities of approval due to their early stages in development, Vertex is targeting several blockbuster opportunities, which amount to over $1 billion in 2026 pipeline sales. Key opportunities include CTX001 (gene editing) for beta-thalassemia and sickle-cell disease as well as VX-864 for alpha-1 antitrypsin deficiency. Vertex is leading the global development and commercialization efforts of CTX001 in a 60/40 agreement with CRISPR Therapeutics. We believe the potential commercial success of this therapy will be a key indicator of the company’s ability to diversify, as management targets regulatory submissions within the next 18-24 months. We also expect the company to continue funding research in cystic fibrosis to develop next-generation therapies for CF, including small-molecule correctors and gene-editing technology.

Vertex’s Narrow Moat Underpinned by Intangible Assets From Cystic Fibrosis Drugs

Vertex has continued to be a leader in the treatment of cystic fibrosis worldwide. Its four approved drugs–Kalydeco, Orkambi, Symdeko, and Trikafta–are the only disease modifying CF drugs on the market. The company also holds significant patient share as nearly 50% of patients worldwide are currently treated for CF using its drugs. Vertex’s portfolio makes up the backbone of cystic fibrosis therapy and supports strong six-figure pricing power. After taking a fresh look at the company, we maintain our $259 fair value estimate and narrow moat rating. We view the shares as undervalued, trading in 4-star territory. Vertex is well supported by lengthy patent protection extending as far as 2037 and first-mover status in the lucrative cystic fibrosis market, which underpins our narrow moat rating. Our valuation remains heavily dependent on the cystic fibrosis portfolio, including the latest drug, Trikafta. This new triple combination drug is poised to continue generating significant sales throughout our explicit forecast period. Trikafta will make the company eligible to treat about 90% of the CF population globally, assuming international and pediatric approvals. We model about $7 billion in cystic fibrosis sales in 2021, largely driven by Trikafta.

Vertex Pharmaceuticals Inc’s Company Profile

Vertex Pharmaceuticals is a global biotechnology company that discovers and develops small-molecule drugs for the treatment of serious diseases. Its key drugs are Kalydeco, Orkambi, Symdeko, and Trikafta for cystic fibrosis, where Vertex therapies remain the standard of care globally. In addition to its focus on cystic fibrosis, Vertex’s pipeline includes gene-editing therapies such as CTX001 for beta-thalassemia and sickle-cell disease as well as small-molecule medicines targeting diseases associated with alpha-1 antitrypsin deficiency and APOL1-mediated kidney disease. Vertex also has an expanding research pipeline focused on inflammatory diseases, non-opioid treatments for pain, and genetic and cell therapies for type 1 diabetes and rare diseases.

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

Seagate’s Mass Capacity Drives Poised to Capture Demand Swell, but Shares Still Rich; FVE up to $70

We expect demand for Seagate’s mass capacity drives for cloud customers and enterprises to more than offset secular declines in consumer hard drives over the next five years, leading to our stable trend rating and revised forecast for 2% compound annual sales growth through fiscal 2025. Nonetheless, we think Seagate’s recent price appreciation (61% since Jan. 1) has been a case of multiple expansion not rooted in fundamentals, and we view shares as overvalued even at our new fair value estimate.

Seagate is a leading designer and manufacturer of hard disk drives used for data storage in consumer and enterprise applications. We think Seagate is successfully transitioning its portfolio to focus on mass capacity drives for cloud providers and enterprises as consumer applications for legacy HDDs switch to faster flash-based solid-state drives, or SSDs. We expect sustained demand for mass capacity drives over the next five years as enterprises look to capture more data and use a multi-tiered storage approach, implementing both mass capacity HDDs and smaller enterprise grade SSDs as complements in data centers. Seagate has consistently driven costs down for its mass capacity HDDs by advancing to larger capacities, and we think it will continue to do so by leveraging new technologies like heat-assisted magnetic recording.

We note that a potential contributor to recent price appreciation has been strong demand for HDDs related to a new cryptocurrency called Chia that uses data storage alongside computing power to generate new coins. While we think this has led to some tighter supply in the HDD market, we think this is short-term in nature, and pales in comparison to the levels of demand for data center HDDs. Crypto demand doesn’t alter our long-term thesis.

We expect mass capacity HDD demand to offset consumer declines and drive revenue growth over the next five years, but don’t think Seagate’s drives allow it to establish an economic moat. We think HDDs are commodity like even at the enterprise level, with Seagate and Western Digital matching each other’s technological roadmaps and competing with one another for volume—preventing both from earning pricing power. In periods of tight supply and favorable pricing, Seagate can earn excess returns on invested capital, but when the market hits oversupply, pricing falls, bringing Seagate’s economic profits with it.

Going forward, we think Seagate will focus on expanding to new capacities for its enterprise drives, while implementing new technologies like heat-assisted magnetic recording that will help it drive costs down and expand margins. Still, we think technological advancements like these will be matched by rivals, and won’t shield Seagate from cyclical market downturns. Longer-term, we expect demand for mass capacity drives to slow as the cost gap with enterprise SSDs narrows further.

We think Seagate will try to create new growth opportunities through its module-like Lyve platform, which layers software onto multiple drives, but don’t think this business is large enough to offset a secular decline in HDD sales.

Nvidia Corp’s Company Profile

Seagate is a leading supplier of hard disk drives for data storage to the enterprise and consumer markets. It forms a practical duopoly in the market with its chief rival, Western Digital, both of whom are vertically integrated.

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

Spark New Zealand Ltd

Vodafone New Zealand will have been under private equity ownership for close to three years by the time its fiscal 2022 ends in March 2022. During that time, its EBITDA is likely to have posted a CAGR of 2.3% to NZD 495 million, the midpoint of management’s fiscal 2022 guidance range. The lift has primarily been driven by cost-outs and efficiency gains, with revenue CAGR at just 0.3% but EBITDA margin lifting by 140 basis points to our estimated 24.7% in fiscal 2022. Over the same period (but with a June-end balance date), narrow-moat Spark could post EBITDAI CAGR of 1.7% based on our fiscal 2022 forecast. Margin has been consistent at just above 31%.

The stable competitive environment, with the two major players focused on margin optimisation against a stagnant revenue backdrop, has seen Spark grow its free cash flow to our forecast NZD 452 million in fiscal 2021. This represents a CAGR of 24.5% from fiscal 2019 (before Vodafone fell into private equity ownership), fortifying the NZD 0.25 annual dividend, come rain, hail, or COVID. The key issue for Spark is what Vodafone might do beyond fiscal 2022? Will Vodafone’s private equity owners be content to continue to chip away costs from the circa NZD 500 million EBITDA base (from NZD 463 million in fiscal 2019 before they took over)? Or will they take advantage of the recent heightened capital expenditure intensity to facilitate a step-up in Vodafone’s revenue which has remained static at NZD 2.0 billion since the takeover?

Our current intrinsic assessment for Spark largely assumes the status quo in competitive dynamics. But Vodafone owners’ actions from next year warrant close attention. For the record, Vodafone management is emphasising an intention to keep simplifying and digitising the business. It implies a continuation of the current cost-optimisation strategy, while lifting the utilisation of its network assets, including the 5G network being rolled out (for example, fixed wireless). That private equity 101 strategy has served Vodafone well to-date. In fiscal 2019 before the company fell under private equity ownership, its revenue was NZD 2.0 billion and EBITDA was NZD 463 million, at a margin of 23.3%. By fiscal 2022, we forecast stable revenue at around NZD 2.0 billion but EBITDA at NZD 495 million, equating to 24.7% margin.

Granted, fiscal 2022 may still have some remnant COVID impact, but the point remains that Vodafone’s earnings growth has been mostly cost-driven. Meanwhile, Vodafone’s capital expenditure/revenue averaged under 12% for four years before it was bought by private equity. Since then, its capital expenditure/revenue has steadily increased to over 13%. This is designed not only to address previous under-investment under Vodafone plc ownership, but also as an important prerequisite to realising management’s long-term aspiration to lift Vodafone’s EBITDA margin to Spark’s 30%-plus level. To achieve this, we believe cost-out can only go so far and revenue growth resuscitation must play a role. This is in part why we forecast Spark’s earnings before interest, tax, depreciation, amortisation, and investment income, or EBITDAI, margin to drift slightly towards the 30% level longer-term.

This would be below the 31.2% we project for fiscal 2022—a level Spark management is aspiring to maintain on a sustainable basis. Of course, Spark shareholders would prefer to see the current competitive stability continue. In fiscal 2019 before Vodafone’s ownership change, Spark’s EBITDAI was NZD 1,090 million at a margin of 31.0%, while producing free cash flow of NZD 292 million.

By fiscal 2021, we project Spark’s EBITDAI to have increased to NZD 1,120 million (inclusive of NZD 50 million of COVID-related hit), at a margin of 31.2%, while producing free cash flow of NZD 452 million. However, we suspect even Spark management will not expect this competitive stability to continue indefinitely. This may well be why the group is keen to showcase its non-telco businesses such as its IT and managed services division. It is a unit that accounts for a third of group revenue, 28% of group gross margin and with solid fundamentals to lift its share in an NZD 6.0 billion market that is growing at 4% to 6% per year.

Source:Morningstar

Disclaimer

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.