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PIMCO Global Bond Fund attracts well – resource to the investment team

Well established and methodical investment Process

PIMCO’s investment process entails three main buckets: (1) the economic forum (top down analysis), which meets four times a year to debate the state of play on short and long – term basis. (2) the investment committee develops the strategic parameters for portfolios and set the risk parameters such as interest rate exposure, yield curve positioning and sector positioning. (3) Portfolio management (bottom-up analysis) consists of PIMCO’s rigorous analysis and research of securities.

Downside Risk

  • Interest rate risk – (bond price and yields are inversely related)
  • Credit risk (the risk of downgrade and default) & Inflation risk
  • Personnel risk – significant turnover among the 3 lead PMs

Fund Performance 

(%)Fund (net)BenchmarkOut-performance
1-month -0.15-0.22+0.07
3-months1.081.53-0.45
FYTD0.871.03-0.16
1-year1.690.55+1.14
2-years (p.a.) 2.541.53+1.01
3-years (p.a.)4.384.28+0.10
Since inception (%p.a.)3.863.84+0.02

Source: PIMCO

Sector Exposure

Source: PIMCO

About the fund

The ESG Global Bond Fund is an actively managed portfolio of global fixed-interest investment which incorporates PIMCO’s ESG screening. The portfolio predominantly invests in governments, corporate, mortgage and other global fixed interest securities.

  • The ESGGlobal

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

Solid economic growth via its active and passive platform lifts BlackRock’s AUM

The biggest differentiators for the firm are its scale, ability to offer both passive and active products, greater focus on institutional investors, strong brands, and reasonable fees. The iShares ETF platform as well as technology that provides risk management and product/portfolio construction tools directly to end users, which makes them stickier in the long run, should allow BlackRock to generate higher and more stable levels of organic growth than its publicly traded peers the next five years.

Although the secular and cyclical headwinds to make AUM growth difficult for the U.S.-based asset managers over the next five to 10 years, still BlackRock will generate 3%-5% average annual organic AUM growth, driven by its commitment to passive investing, ESG strategies, and geographic expansion, with slightly higher levels of revenue growth on average and stable adjusted operating margins during 2021-25.

Solid Organic Growth From Both its Active and Passive Platforms Continue to Lift BlackRock’s AUM

With $9.464 trillion in total assets under management, or AUM, at the end of September 2021, BlackRock is the largest asset manager in the world. Unlike many of its competitors, the firm is currently generating solid organic growth with its operations, with its iShares platform, which is the leading domestic and global provider of ETFs, riding a secular trend toward passively managed products that began more than two decades ago. This has helped the company maintain above average levels of annual organic growth despite the increased size and scale of its operations.

Financial Strength 

BlackRock has been prudent with its use of debt, with debt/total capital averaging just over 15% annually the past 10 calendar years. The company entered 2021 with $7.3 billion in long-term debt, The company also has a $4.4 billion revolving credit facility (which expires in March 2026) but had no outstanding balances at the end of June 2021.BlackRock has historically returned the bulk of its free cash flow to shareholders via share repurchases and dividends.The firm did spend $693 million on two acquisitions in 2018, $1.3 billion on eFront in 2020, and $1.1 billion for Aperio Group in early 2021, so bolt-on deals look to be part of the mix in the near term. As for share repurchases, BlackRock expects to spend $300 million per quarter on share repurchases but will increase its allocation to buybacks if shares trade at a significant discount to intrinsic value. The company spent close to $1.8 billion on share repurchases during 2020.BlackRock increased its quarterly dividend 14% to $4.13 per share early in 2021. We expect the dividend to increase at a mid- to high-single-digit rate the next five years, leaving the payout ratio (based on our forward earnings estimates) at around 45% on average annually.

Bulls Say 

  • BlackRock is the largest asset manager in the world, with $9.464 trillion in AUM at the end of September 2021 and clients in more than 100 countries. 
  • Product diversity and a heavier concentration in the institutional channel have traditionally provided BlackRock with a much more stable set of assets than its peers. 
  • BlackRock’s well-diversified product mix makes it fairly agnostic to shifts among asset classes and investment strategies, limiting the impact that market swings or withdrawals from individual asset classes or investment styles can have on its AUM.

Company Profile

BlackRock is the largest asset manager in the world, with $9.464 trillion in AUM at the end of September 2021. Product mix is fairly diverse, with 53% of the firm’s managed assets in equity strategies, 29% in fixed income, 8% in multi-asset class, 7% in money market funds, and 3% in alternatives. Passive strategies account for around two thirds of long-term AUM, with the company’s iShares ETF platform maintaining a leading market share domestically and on a global basis. Product distribution is weighted more toward institutional clients, which by our calculations account for around 80% of AUM. BlackRock is also geographically diverse, with clients in more than 100 countries and more than one third of managed assets coming from investors domiciled outside the U.S. and Canada.

 (Source: Morningstar)

General Advice Warning

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

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Technology Stocks

HubSpot Narrow Moat Carves Out Rapid Growth for Marketing Automation in Midmarket

We see small/medium businesses and the midmarket as being underserved by enterprise software providers, as the smaller deal sizes make it harder to serve efficiently. Therefore, we believe that HubSpot’s robust and expanding suite has helped carve out a meaningful niche.

HubSpot provides a suite of software solutions that helps companies grow better. The five hubs (marketing, sales, service, operations, and CMS) combine to create the growth platform. HubSpot operates a “freemium” model that has allowed it to gather hundreds of thousands of free users, with approximately 15% of these moving into paid solutions. From the free version, a three-tier system emerges: starter, professional, and enterprise. HubSpot’s goal is to create as wide a funnel as possible for customer gathering, and then move users up the pricing tier as they evolve, upselling them to additional hubs as their needs change.

Company’s Future Outlook

We believe HubSpot is a financially sound company with a solid balance sheet, improving margins, and rapidly growing revenue. Capital is generally allocated to growth efforts, strategic investments, and acquisitions, with no dividends or buybacks on the horizon.As of 2020, HubSpot had $1.3 billion in cash, marketable securities, and restricted cash compared with $479 million in debt. The debt is a convertible bond issue that we believe will be converted rather than repaid. HubSpot generated a 6% free cash flow margin in 2020 and in the low double digits in 2018 and 2019, which improve steadily over the next five years. We are confident that HubSpot can satisfy its obligations while continuing to fund normal operations. HubSpot does not pay a dividend and has not repurchased shares, nor do we expect it to do so within the next several years. The company regularly makes small acquisitions and strategic investments.

Bulls Say’s

  • HubSpot has made a splash in the SMB market with its freemium model, easier implementation, and simple and feature-rich software.
  • HubSpot does not have to beat out Salesforce or Microsoft, but by offering a credible solution to the midmarket, we think it can grow rapidly in an underserved niche.
  • HubSpot’s record of introducing new solutions in adjacent areas, upselling existing customers, and moving customers up the stack as they grow has driven strong revenue growth thus far and seems likely to continue over the next several years.

Company Profile 

HubSpot provides a cloud-based marketing, sales, and customer service software platform referred to as the growth platform. The applications are available ala carte or packaged together. HubSpot’s mission is to help companies grow better and has expanded from its initial focus on inbound marketing to embrace marketing, sales, and service more broadly. The company was founded in 2006, completed its initial public offering in 2014, and is headquartered in Cambridge, Massachusetts.

(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

Boral Limited shares screen as undervalued at current market price

Hot on the heels of the USD 2.15 billion (AUD 2.9 billion) sale of its North American building products division, Boral has offloaded its Australian timber business for AUD 65 million and anticipates further proceeds of USD 125 million (AUD 170 million) for the Meridian Brick divestment.

The surviving Australia segment, which accounted for approximately 60% of group earnings prior to sell-downs, consists of construction materials and cement, and the building products business units. The construction materials and cement business unit comprise quarries, asphalt, transport, landfill, property, cement and concrete placing activities. This business unit represents around 90% of Australia earnings and has the greater competitive strengths, though not sufficient to drive a moat overall. Building products, meanwhile, includes West Coast bricks, roofing, masonry and timber products and represents the remaining 10% of segment EBIT. These businesses are the less moaty.

Financial Strength:

The fair value of Boral Ltd has been maintained by the analysts at AUD 7.40. 

Since Seven Group (which holds 59.2% stakes in Boral) closed its AUD 7.40 takeover offer in July 2021, Boral shares drifted off to a low of AUD 5.80 in September, before staging a modest recovery to the current circa AUD 6.20. The fair value estimate of the analysts equates to a 2026 EV/EBITDA multiple of 6.7, a P/E of 14.5, and dividend yield of 4.8%.

Boral’s balance sheet is now flush with cash and a return of capital a near certainty in fiscal 2022. Prior to asset sale receipts, the company ended fiscal 2021 with AUD 900 million in net debt, excluding operating leases. But with cash from asset sales it expects to be in a position to return up to AUD 3 billion or AUD 2.70 per share of surplus capital by way of an equal capital reduction, subject to shareholder approval at the AGM on Oct. 28, 2021 and subject to an appropriate class ruling from the Australian Tax Office.

Company Profile:

Boral is Australia’s largest construction materials and building supplier, with an expanding footprint in U.S. fly ash and building products markets, and exposure to Asian construction materials markets via a joint venture with USG Corp. Previously operating as a conglomerate, Boral now exists as a pure-play, construction materials and building products group following the demerger of the group’s energy business, Origin Energy, in 2000. In Australia, the company is an integrated construction materials player, while operating fly ash and building products businesses in the U.S. The company’s joint venture, USG Boral, is a gypsum-based building product manufacturer and distributor in Australia, Asia and the Middle East. Boral formed the JV with USG Corp in 2014.

(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

Adbri Strategize its focus on operational efficiency via vertical integration

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Successive acquisitions have seen the company become Australia’s fourth largest concrete and aggregates player. However, Adbri currently lacks full vertical integration in key Victorian and Queensland construction materials markets. This has left the group with an inability to fully benefit from demand from major infrastructure projects in these markets, and left Adbri’s earnings susceptible to falling demand from residential construction through the current Australian housing construction downturn, which began in late 2018. 

Acquisitions within these markets are therefore viewed positively, and with an improved ability to supply infrastructure projects in all major metro markets, the resilience of Adbri’s earnings in the next cycle will be strengthened.

There are concerns regarding the recent loss of the Alcoa lime supply contract highlights Adbri’s intention to allocate growth capital to its lime business. Competition from lime imports has proved too strong with Alcoa-the largest lime buyer in the Western Australia, or WA, market–to source lime offshore from 2021. A reassessment of the lime growth strategy is required, in our view.

Financial Strength 

The balance sheet remains in decent shape. It is anticipated that pressure on Adbri’s balance sheet will build near-term, owing to the AUD 200 million of capital expenditure over the 2021–2022 period associated with the previously announced Kwinana upgrade project. We expect leverage(defined as net debt including lease liabilities/EBITDA)to peak at 2.4 times in 2022, remaining below Adbri’s leverage covenant of 3.0 times. We anticipate balance sheet metrics will improve from 2023 onward as the cyclical recovery in new home construction and Adbri’s earnings gathers pace. An AUD 5.5 cent interim dividend was announced. We continue to forecast full-year 2021 dividends of AUD 0.12 per share reflecting an approximate 75% payout of net income. Adbri’s has ample liquidity to support operations through the medium term. 

Bulls Say 

  • Infrastructure spending will offset declining residential construction activity and provide top-line growth. 
  • A conservative balance sheet provides capacity for continued downstream acquisitions promising better returns. 
  • The eventual turning of the housing cycle will support price increases in coming years.

Company Profile

Formed by the merger of S.A. Portland Cement and Adelaide Cement in 1971, Adbri is an integrated cement, lime, concrete and aggregates, and concrete products business. Adbri currently sells about 3 million metric tons of cement and 1 million metric tons of lime per year, making it Australia’s largest lime and second-largest cement supplier. Key geographic regions include Western Australia and South Australia with a focus on residential construction, infrastructure, and industrial markets including mining.

 (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

Accor Brand Advantage Positioned Well for Upcoming Recovery in European Travel

Accor’s growing room share is being driven by an increased presence in higher-end luxury/upscale rooms, which were 29% of its total in 2020. This higher luxury presence diversifies Accor from its core economy/midscale exposure, which more directly competes against Airbnb and other alternative accommodations.

Accor sold a meaningful portion of its owned assets in 2018-19, leaving the remaining company with 96% of its rooms tied to asset-light franchisee and managed business as of the end of 2020, up from 58% of the mix in 2014. These asset-light rooms offer high returns on invested capital and contract lengths of 30 years that are costly to terminate, resulting in a switching cost advantage for the company. Additionally, recent asset sales have infused Accor’s balance sheet with several billion euros in cash, which provides the company enough liquidity to operate into 2022 at near zero revenue demand levels, even before tapping upon its remaining EUR 1.76 billion revolver or needing to raise financing.

Financial Strength

While the pandemic makes near-term industry travel demand uncertain, Accor’s financial health is far clearer. We calculate that since 2018, Accor’s disposal of owned assets and investments has provided between EUR 6 billion-EUR 7 billion in cash, which provides the company with enough liquidity into 2022 at near zero revenue generation, even before tapping the remaining availability on its EUR 1.76 billion under its revolver. Accor’s 2020 debt/adjusted EBITDA turned negative in 2020, as the pandemic stalled demand. This compares with 2019’s 4.5 times level. As demand fully recovers by 2023, we see Accor’s debt/adjusted EBITDA reaching 2.9 times in that year. Accor has suspended dividends and share repurchases until demand visibility improves, which we believe is being done out of extreme caution–not out of necessity.

Bulls Say’s

  • Accor’s mid-single-digit share of hotel industry rooms is set to increase, as the company controls about 10% of the rooms in the global hotel industry pipeline.
  • Accor’s recent investments (Fairmont and Raffles, Mantra, Mantis, Movenpick, and Atton) have diversified it in the attractive growth segment of international luxury brands.
  • Accor has sold its the vast majority of its HotelInvest (owned assets) portfolio in 2018-19 and Orbis and Movenpick owned portfolio in 2020, which leaves a more asset-light company with higher margins.

Company Profile 

Accor operates 762,000 rooms across over 30 brands addressing the economy through luxury segments, as of June 30, 2021. Ibis (economy scale) is the largest brand (38% of total rooms at the end of 2020), followed by Novotel (14%) and Mercure (15%). FRHI offers additional luxury and North American exposure. After the sale of the majority of HotelInvest (owned assets) in 2018-19, the majority of total EBITDA comes from HotelServices (asset-light). Northern Europe represents 23% of rooms, Southern Europe 21%, Asia-Pacific region 32%, Americas 13%, and India, Middle East, and Africa 12%. Economy and midscale are 74% of rooms.

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

FactSet Performing Well Amid Bull Equity Market and Strong Investment Banking Activity

FactSet is best known for its research solutions, which include its core desktop offering geared toward buy-side asset managers and sell-side investment bankers. Research makes up about 41% of the firm’s annual subscription value, or ASV, but is FactSet’s slowest growing segment due to its maturity and pressures on asset managers. 

FactSet’s fastest-growing segments are its data feed business, known as content and technology solutions, or CTS (13% of ASV), and its wealth management offerings (11% of ASV). Rather than through an interface, users of CTS access data through feeds or application programming interfaces, or APIs. FactSet’s adjusted operating margins have been range bound (31%-36%) over the last 10 years as it continues to invest in new content and occasionally brings in new acquisitions at lower margins.

Financial Strength

FactSet has no net debt ($682 million in cash compared with $575 million in debt). FactSet’s balance sheet is arguably under-leveraged, and the firm has capacity for larger acquisitions. Before COVID-19, FactSet has not been shy about share repurchases and returning cash to shareholders. FactSet’s revenue is almost all recurring in nature and as a result it’s weathered the uncertainties of COVID-19 fairly well. FactSet’s client retention is typically over 90% as a percent of clients and 95% as a percent of ASV. FactSet also has low client concentration (largest client is less than 3% of revenue and the top 10 clients are less than 15%). In addition, compared with the financial crisis, FactSet has diversified its ASV from research desktops to analytics software, wealth management solutions, and data feeds.

Bull Say’s

  • FactSet has done a good job of growing organic annual subscription value, or ASV, and incrementally gaining market share.
  • FactSet’s data feeds business, known as content technology solutions, or CTS, and wealth management business represent a strong growth opportunity for the firm.
  • There’s been a flurry of large deals in the financial technology industry and FactSet’s recurring revenue would make it an attractive acquisition candidate.

Company Profile 

FactSet provides financial data and portfolio analytics to the global investment community. The company aggregates data from third-party data suppliers, news sources, exchanges, brokerages, and contributors into its workstations. In addition, it provides essential portfolio analytics that companies use to monitor portfolios and address reporting requirements. Buy-side clients account for 84% of FactSet’s annual subscription value. In 2015, the company acquired Portware, a provider of trade execution software and in 2017 the company acquired BISAM, a risk management and performance measurement provider.

(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

Aptiv Lowers 2021 Guidance on Chip Shortage and Lingering COVID-19 Effect; Maintaining $105 FVE

Aptiv’s high-growth technologies include advanced driver-assist systems, autonomous driving, connectivity, data services, and high-voltage electrical distribution systems for hybrids and battery electric vehicles. 

Aptiv’s ability to regularly innovate and commercialize new technologies bolsters sales growth, margin, and return on investment. A global manufacturing presence enables Aptiv to serve customers around the globe, capitalizing on the economies of scale inherent in automakers’ plans to use more global vehicle platforms. Lean manufacturing discipline and a low-cost country footprint enable more favorable operating leverage as volume increases. 

Aptiv enjoys relatively sticky market share, supported by integral customer relationships and long-term contracts. Engineering and design for the types of products that Aptiv provides necessitate highly integrated, long-term customer relationships that are not easily broken by competitors’ attempts at market penetration. New Car Assessment Programs are used by governments around the world to provide an independent vehicle safety rating that require the addition of ADAS features as standard equipment through the end of this decade. If automakers intend certain models to achieve a 4- or 5-star safety rating, some ADAS features must be part of that vehicle’s standard equipment to even qualify for certain rating levels.

Aptiv Lowers 2021 Guidance on Chip Shortage and Lingering COVID-19 Effect; Maintaining $105 FVE 11 Oct 2021 

On Oct. 11, Aptiv reduced 2021 guidance. Due to the microchip shortage and lingering effects of COVID-19, the company sees second-half 2021 global light-vehicle production at 38 million units, down 14% from its prior guidance that had assumed 44 million units

Management’s reduced 2021 guidance includes revenue in a range of $15.1 billion-$15.5 billion, down 6% at the midpoint from $16.1 billion-$16.4 billion prior guidance. The adjusted EBIT margin guidance range was lowered to 7.6%-8.4%, contracting 205 basis points at the midpoint from the 9.9%-10.2% prior guidance range. 

Aptiv could reach its previous revenue target given the firm’s substantial backlog but had anticipated sporadic customer production resulting in our margin assumption at the low end of Aptiv’s prior guidance. 

We maintain our $105 fair value estimate on the shares of Aptiv after reviewing management’s reduced 2021 guidance.

Company Profile

Aptiv’s signal and power solutions segment supplies components and systems that make up a vehicle’s electrical system backbone, including wiring assemblies and harnesses, connectors, electrical centers, and hybrid electrical systems. The advanced safety and user experience segment provides body controls, infotainment and connectivity systems, passive and active safety electronics, advanced driver-assist technologies, and displays, as well as the development of software for these systems. Aptiv’s largest customer is General Motors at roughly 13% of revenue, including sales to GM’s Shanghai joint venture. North America and Europe represented approximately 38% and 33% of total 2019 revenue, respectively.

 (Source: Morningstar)

General Advice Warning

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

Categories
Technology Stocks

Mandiant Focusing on Cybersecurity Services and Threat Intelligence

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

security assessments and updates, managed security, and training. Its software-as-a-service solutions include continuous security validation, managed defense, threat intelligence and automated defense. We expect robust demand for Mandiant’s services and subscriptions due to a persistent cybersecurity talent dearth and cybercriminals continually evolving their threats, causing organizations to look for assistance from experts.

By selling off its products division in October 2021, we believe Mandiant is making the prudent decision to focus on its world-class incident response, threat intelligence, and security validation offerings, as we think strong competition from other leading cybersecurity players’ holistic security platforms and spry best-of-breed upstarts hindered its legacy products’ success. In our view, being independent of its former product division could enhance its technology partner relationships and improve threat intelligence and enhanced customer engagements.

Financial Strength 

Mandiant is in mediocre financial shape, with an improving free cash flow profile and its cash balance outweighing its convertible note obligations. Mandiant sold its FireEye products division for $1.2 billion in October 2021, the sale was helpful to fuel internal investments and potential shareholder returns. The company has never paid, nor has any intention to pay, a dividend. Its share count rose from 142 million shares in 2014 to 229 million in 2020, but we expect share dilution to temper in the next few years. As part of selling its products division, Mandiant announced a $500 million share repurchase program. Besides the acquisitions of Verodin for $250 million in 2019, iSight Partners for $275 million in 2016, and Mandiant (when the company was FireEye) for over $1 billion in 2013, which were partly funded with cash, most of FireEye’s funds have been used for operating expenses. FireEy has made some small acquisitions, which we presume will continue. We expect cash deployment to remain focused on operating costs, but for the firm to drive operating leverage as it matures.

Bulls Say

  • With a skills gap in cybersecurity, customers may prefer to outsource security to Mandiant’s managed services. 
  • Mandiant’s security experts provide a unique selling proposition for breach response and security posture assessments, and the expertise could become relied upon by customers.
  • Heightened threat environments and digital transformations may make organizations uneasy regarding security, driving up demand for Mandiant’s security posture validation.

Company Profile

Mandiant (formally FireEye,) is a pure-play cybersecurity firm that focuses on incident response, threat intelligence, automated response, and managed security. Mandiant’s security experts can be used on demand or customers can outsource their security to Mandiant. The California-based company sells security solutions worldwide, and sold its FireEye products division in October 2021.

 (Source: Morningstar)

General Advice Warning

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

Categories
Technology Stocks

Best Buy Co possess sound long-term strategy in spite of the fact that the future of retail is in flux

quick fulfillment across channels, and tech solutions to more problems than ever before. As a result, Best Buy’s “Building the New Blue” strategy continues to resonate, with the firm leveraging its physical footprint for fulfillment and post-sale services, emphasizing its differentiated service offering, and experimenting with newer store formats, as the “one size fits all” retail model across trade areas appears antiquated. 

With more than 40% of sales coming through digital channels in calendar 2020, the firm’s recent supply chain and e-commerce investments look prescient. Next-day delivery now covers 99% of U.S. zip codes, allowing the firm to compete on more level ground against e-commerce competitors, like wide-moat Amazon-as buy-online-pick-up-in-store (BOPIS) volumes, at 40% of e-commerce sales, remain challenging for online-only stores to replicate.

Best Buy Health remains intriguing, with lower price elasticity and auspicious tailwinds from an insurer pay model. However, competition in the space remains rife, as a number of moaty firms with extensive healthcare aspirations (Google, Microsoft, Amazon, Apple, Facebook) have invested heavily in the segment, as well.

Financial Strength:

The fair value of Best Buy has been increased by the analysts from $101 to $116 reflecting a longer horizon for excess returns, the time value of money, and the impact of high-single-digit anticipated comparable store sales growth through 2021. It also implies forward price/earnings of 12.1 times and an EV/2022 EBITDA of 5.4 times.

Best Buy’s financial strength is sound, with the firm maintaining a net cash position at the end of the second quarter of fiscal 2022 and an investment-grade credit rating. With leverage well under 1 turn (0.4 debt/EBITDA at fiscal 2021 year-end), strong interest coverage (46 times at year-end 2021), and no meaningful maturities until 2028, very little financial risk is seen for the firm in the near to medium term. Access to a $1.25 billion credit facility adds a further degree of insulation.

Best Buy pays an attractive dividend, with a 2.6% yield at current market prices, and we anticipate 12.8% average growth over the next five years as the firm returns to its historical dividend payout ratio target (35%-45% of earnings).

Bulls Say:

  • With digital sales volumes projected to remain roughly double pre-COVID-19 levels, Best Buy should better compete for online volumes that it historically ceded to online-only competitors. 
  • Improving route densities should improve the margin profile of small parcel e-commerce sales, with 35% of store “hubs” now handling 70% of ship-from-store volume. 
  • The Best Buy Beta program should increase touchpoints with the firm’s best customers, increasing spending relative to pre-program behavior.

Company Profile:

With $47 billion in 2020 sales, Best Buy is the largest pure-play consumer electronics retailer in the U.S., with roughly 10% share of the aggregate market and nearly 40% share of offline sales, per our calculations, CTA industry, and Euromonitor data. The firm generates the bulk of its sales in-store, with mobile phones and tablets, computers, and appliances representing its three largest categories. Recent investments in e-commerce fulfillment, accelerated by the COVID-19 pandemic, have seen the U.S. e-commerce channel roughly double from prepandemic levels, with management estimating that it will represent a mid-30% mix of sales moving forward.

(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.