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Brown-Forman is also benefiting from growth abroad, buoyed by the broader resurgence in global demand for bourbon

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Business Strategy & Outlook

Brown-Forman has established itself as a stalwart in matured spirits, an enclave of the distillation industry that is particularly attractive. In addition to brand recognition and distribution, companies in this industry benefit from scarcity value, the result of the consumer perception surrounding the aging of this type of alcohol and the pricing power that this begets. Against this industry backdrop, it is believed Brown-Forman’s portfolio, anchored by the Jack Daniel’s brand, boasts some of the highest cachet globally. The firm made its bones in whiskey, with Jack Daniel’s Tennessee Whiskey being the best-selling American whiskey in the world, but it also has strong tequila brands like el Jimador and Herradura. The resonance of its trademarks is reflected in its ability to parlay them into numerous line extensions, such as Jack Daniel’s Tennessee Honey, Apple, and ready-to-drink beverages. These provide stimulus to its top line, not only by maintaining mind share among its core consumers, but by expanding the types of palates to which its drinks appeal. Brown-Forman is also benefiting from growth abroad, buoyed by the broader resurgence in global demand for bourbon. The developed markets like the United Kingdom as well as developing economies like Mexico to be increasingly pertinent to its overall trajectory.

Still, the company’s path will not be completely unencumbered. Tariff relief remains a near-term tailwind, but dollar strength figures to slow demand for (proportionately) more expensive U.S. exports. Go-to-market changes also add a degree of execution risk. Despite a successful transition to owned distribution in the U.K, where it previously partnered with Bacardi, future transitions (such as in Taiwan) may not yield similar results. Additionally, while COVID-19 accelerated secular trends in developed markets, developing markets face a more precarious outlook, particularly amid a backdrop of swelling inflation in non discretionary spending categories. Nevertheless, it is expected that Brown-Forman’s embedded advantages and experienced management team will help the company navigate these risks.

Financial Strengths

Brown-Forman is in solid financial health, and from the vantage point, the coronavirus pandemic has not altered this reality. The company has a manageable balance sheet and commendable cash flow generation. Net leverage currently sits well below 2 times EBITDA, with ample capacity to tilt the capital structure toward debt as financial opportunities dictate. Still, management has historically been quite conservative with mergers and acquisitions, and there’s no transformative transactions on the horizon. The stellar cash generation will continue supporting dividends and increases, as well as appreciable reductions in the share count. Moreover, the firm’s commitment to shareholder returns should not impinge on its liquidity, even amid COVID-19. In addition to $899 million in balance sheet cash as of the end of the first quarter of 2022, the company maintains consistent access to capital markets primarily through a commercial paper program (backed by its revolving credit facility) facilitating borrowings of up to $800 million. 

Bulls Say

  • Brown-Forman has a foothold in multiple matured spirits categories, where market structure and consumer perception spawn robust pricing and operating margins.
  • Flavored line extensions in the Jack Daniel’s family should foster brand resonance among a new generation of alcohol consumers.
  • COVID-19 impacts in important markets like the U.S. have proven muted, thanks to a confluence of portfolio and consumer demand dynamics.

Company Description

Brown-Forman is the largest U.S.-domiciled producer of distilled spirits. The firm reports only a single operating segment, and whiskey represents its primary business driver, generating roughly three quarters of sales, undergirded by the Jack Daniel’s brand as well as bourbons such as Woodford Reserve and Old Forrester. Notable non whiskey offerings include tequilas such as el Jimador and Herradura. The firm operates globally, with products sold in more than 170 countries, and adapts its route-to-consumer model depending on regulation as well as the prevailing competitive dynamics in a given market. For example, it sells through distributors in the U.S. but operates its own logistics apparatus in many other countries. The company remains under the control of the Brown family.

 (Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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J&J’s Well-Positioned Broad Portfolio Sets Up a Steady Long-Term Growth Outlook

Business Strategy & Outlook

Johnson & Johnson stands alone as a leader across the major healthcare industries. The company maintains a diverse revenue base, a developing research pipeline, and exceptional cash flow generation that together create a wide economic moat. J&J holds a leadership role in diverse healthcare segments, including medical devices, consumer healthcare products, and several pharmaceutical markets. Contributing close to 50% of total revenue, the pharmaceutical division boasts several industry-leading drugs, including immunology drugs Remicade, Stelara and Tremfya as well as cancer drugs Darzalex and Imbruvica. The medical device group brings in almost one third of sales, with the company holding controlling positions in many areas, including orthopaedics and Ethicon Endo-Surgery’s surgical devices. The consumer division largely rounds out the remaining business lines, but the firm is planning to divest its consumer healthcare group in early 2023, which will leave the remaining company more focused on drugs and devices. 

Research and development efforts are resulting in next-generation products. The pharmaceutical segment has recently launched several new blockbusters. However, relative to the company’s size, J&J needs to increase the number of meaningful drugs in late-stage development to support long-term growth. The company has also created new medical devices, including innovative contact lenses, minimally invasive surgical tools and robotic instruments. These multiple businesses generate substantial cash flow. J&J’s healthy free cash flow (operating cash flow fewer capital expenditures) is over 20% of sales. Strong cash generation has enabled the firm to increase its dividend for over the past half century, and this to continue. It also allows J&J to take advantage of acquisition opportunities that will augment growth. Diverse operating segments coupled with expected new products insulate the company more from patent losses relative to other Big Pharma firms. Further, in contrast to most of its peers, J&J faces the majority of its near-term patent losses on hard-to-make complex drugs, which should likely slow generic drug competition.

Financial Strengths

Johnson & Johnson holds one of the strongest financial positions in the healthcare sector with projected debt/ EBITDA of close to 0.9 for 2022. The acquisitions of Actelion and Momenta did put a dent in the company’s cash balance, but with annual free cash flow of close to $25 billion, J&J is in sound financial shape. Even with expected further bolt-on acquisitions and share repurchases, the company should remain on solid financial footing. From an operating standpoint, patent losses are mitigated by several diverse operating lines in medical devices and consumer products so cash flows should remain relatively stable. Additionally, the share repurchases over the next several years will drawdown the share count.

Bulls Say

  • The majority of J&J’s near-term patent losses are for products that are hard to manufacture, which should limit the intensity of generic competition. 
  • Diverse healthcare segments help insulate J&J from downturns in the economy, offering a defensive growth opportunity with a steady and likely growing dividend.
  • Several of J&J’s key drugs and pipeline drugs are specialty drugs that tend to carry strong pricing power as well as lower regulatory hurdles for approval.

Company Description

Johnson & Johnson is the world’s largest and most diverse healthcare firm. Three divisions make up the firm: pharmaceutical, medical devices and diagnostics, and consumer. The drug and device groups represent close to 80% of sales and drive the majority of cash flows for the firm. The drug division focuses on the following therapeutic areas: immunology, oncology, neurology, pulmonary, cardiology, and metabolic diseases. The device segment focuses on orthopaedics, surgery tools, vision care, and a few smaller areas. The last segment of consumer focuses on baby care, beauty, oral care, over-the-counter drugs, and women’s health. Geographically, just over half of total revenue is generated in the United States.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Bristol/J&J and Bayer Report Solid Safety Data on Cardiac Drugs but Need Phase 3 Efficacy Data

Business Strategy & Outlook

Adept at partnerships and acquisitions, Bristol-Myers Squibb has built a strong portfolio of drugs and a robust pipeline. This strategy is seen with its large acquisition of Celgene, which netted the firm an excellent pipeline and a strong entrenchment in blood cancer. The strong overall pipeline helps support its wide moat. Bristol has created a strong pipeline and brought in partners to share the development costs and diversify the risks of clinical and regulatory failure. The cardiovascular partnership with Pfizer represents one of the most important partnerships, managing the blockbuster potential of Eliquis in atrial fibrillation. While Bristol discovered the drug internally, its strategic partnering decisions, as the moves reduce risks and lower development and marketing costs. Within the pipeline, the astute acquisition of Medarex helps secure Bristol’s strong first-mover advantage in cancer immunotherapy, which should yield several major blockbuster compounds.

 Bristol’s PD-1 cancer drug Opdivo holds the potential to revolutionize cancer treatment and should drive multi-billion-dollar sales annually based on solid efficacy, combination potential with other drugs and strong pricing power. However, competition from Merck’s Keytruda will likely limit Opdivo in some segments of the market, including lung cancer. Bristol is aggressively repositioning itself to expand through challenging patent losses. The company has shed its diabetes business, medical imaging group, wound care division, and nutritional business in an effort to focus on the high-margin specialty drug group. The Celgene acquisition moves Bristol significantly further into the specialty pharmaceutical segment of the market. Celgene’s drugs largely target cancer, which tends to be an area with strong drug pricing power, which should help Bristol maintain its drug pricing ability in a time when both governments and private payers are pushing back on drug prices.

Financial Strengths

Following the Celgene acquisition, Bristol carries a fairly high debt load with close to $30 billion in net debt as of the end of 2021, but the debt/EBITDA to fall close to 1.3 times by 2023 based on the strong cash flows from several well-positioned cancer drugs. Bristol’s cash flows combined with Celgene’s cash flows should put the firm on solid financial footing before the worst of the patent losses, which begin in 2022-23. The firm continues to make small to midsize acquisitions, such as the recent $13 billion purchase of MyoKardia, as it needs to further build out its pipeline to drive long-term growth.

Bulls Say

  • Bristol’s growth prospects are focused on new cancer indications for Opdivo and cardiovascular drug Eliquis, which holds leading efficacy data in the atrial fibrillation class. 
  • Oncology drug Opdivo holds the potential to radically shift the treatment paradigm in several cancer indications, which should result in peak sales of more than $10 billion annually. 
  • The majority of Bristol’s late-stage pipeline focuses on immunology and cancer–indications where the FDA aggressively approves drugs and which typically hold strong pricing power.

Company Description

Bristol-Myers Squibb discovers, develops, and markets drugs for various therapeutic areas, such as cardiovascular, cancer, and immune disorders. A key focus for Bristol is immuno-oncology, where the firm is a leader in drug development. Unlike some of its more diversified peers, Bristol has exited several non pharmaceutical businesses to focus on branded specialty drugs, which tend to support strong pricing power.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Sanofi’s Discontinuation of Cancer Drug Amcenstrant Is Disappointing, but No Major FVE Impact

Business Strategy & Outlook

Sanofi’s wide line up of branded drugs and vaccines and robust pipeline create strong cash flows and a wide economic moat. Growth of existing products and new product launches should help offset upcoming patent losses. Sanofi’s existing product line boasts several top-tier drugs, including immunology drug Dupixent. Dupixent looks well positioned to reach peak sales over EUR 14 billion, with an initial focus on the moderate to severe atopic dermatitis market. The additional indications in areas such as the more recently added severe asthma indication will help the drug serve additional patients. 

While Sanofi shares profits on the drug with Regeneron, the very high sales expected for the drug should provide a strong tailwind to overall growth for the company. Additionally, Sanofi holds a strong position with several vaccines and rare disease drugs that should hold up well as pricing pressures and competition tend to be less severe in these areas. The company also harnesses its research and development group to bring new drugs to emerging markets. While pricing in emerging markets is not usually as strong as in developed markets, the company can still leverage its investment in developing new drugs for developed markets by bringing the drugs to emerging markets. The rapid economic growth in emerging markets has created new geographic markets for Sanofi’s drugs. A history of acquisitions and robust cash flow from operations means Sanofi could take advantage of further growth opportunities through external collaborations. Sanofi’s acquisition focus on immunology drugs and rare disease drugs will continue following several deals in this area.

Financial Strengths

Sanofi is to remain on solid financial footing, closing 2021 with a debt/EBITDA ratio of 2 times. Further, the company generates stable cash flows that should enable the firm to meet its dividend payments and still accumulate significant cash reserves. The company redeployed its cash through bolt-on acquisitions in the neighborhood of $2 billion-$5 billion each year to augment its internal research and development. The recent sale of Regeneron stock of close to $12 billion may open up the possibility of a larger acquisition.

Bulls Say

  • Sanofi is launching immunology drug Dupixent, which holds strong pricing power and major blockbuster potential across several indications.
  • Sanofi’s strong entrenchment in rare-disease drugs should translate into steady pricing power as payers tend not to push back on pricing in this area. 
  • With a wide product offering in vaccines, consumer health and insulins, Sanofi is well positioned for the fast-growing emerging markets.

Company Description

Sanofi develops and markets drugs with a concentration in oncology, immunology, cardiovascular disease, diabetes, and vaccines. However, the company’s decision in late 2019 to pull back from the cardiometabolic area will likely reduce the firm’s footprint in this large therapeutic area. The company offers a diverse array of drugs with its highest revenue generator, Dupixent, representing just over 10% of total sales, but profits are shared with Regeneron. About 30% of total revenue comes from the United States and 25% from Europe. Emerging markets represent the majority of the remainder of revenue.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Chubb Is Potentially the Most Attractive Long-Term Core Holding in Insurance

Business Strategy & Outlook

In January 2016, ACE acquired Chubb in a deal valued at about $28 billion and assumed its name. The deal looked fairly valued and there were meaningful cost benefits involved, with management eventually exceeding its initial targets. However, from a long-term perspective, the enthusiastic about the fact that the combination created a moaty international insurer with exposure across most insurance lines for the first time, marking Chubb as potentially the most attractive long-term core holding in the space from a fundamental point of view. In 2020, the coronavirus affected the industry’s and Chubb’s results, and the company’s COVID-19 losses were roughly in line with peers’ as a percentage of premiums. 

However, the impact at Chubb and peers was manageable and well within the range of events that the industry has successfully absorbed in the past. The future looks relatively bright. While the pricing environment had not been particularly favorable in recent years, pricing momentum picked up in primary lines in 2019, and this positive trend only accelerated in 2020. More recently, pricing has started to level off, but the industry has enjoyed the highest increases it has seen since 2003. While higher pricing is necessary to some extent to offset lower interest rates and a rise in social inflation, pricing increases appear to be more than sufficient to offset these factors.

Financial Strengths

One can remain comfortable with Chubb’s financial health. Equity/assets was 30% at the end of 2021, and while the company has a large amount of goodwill on its balance sheet, its balance sheet structure is reasonable and roughly in line with peers on a tangible basis. Like all property and casualty insurers, the company’s earnings and capital in any particular year could take a material hit due to catastrophes or securities market movements that affect its investment portfolio. However, the company’s insurance operations are well diversified, and it has a history of superior underwriting profits, so one wouldn’t expect a large catastrophe year to significantly degrade its capital position. The firm also retains a fairly conservative investment portfolio, which is concentrated in government debt, municipal bonds, and highly rated corporate securities.

Bulls Say

  • Chubb is one of the few companies with the global footprint that large corporate insurance customers demand. Its network has created a barrier to entry for potential competitors. 
  • Chubb is a large insurer with leading positions in the most moaty areas of the P&C insurance industry. 
  • Chubb’s international operations benefit from significant growth opportunities.

Company Description

ACE acquired Chubb in the first quarter of 2016 and assumed the Chubb name. The combination makes the new Chubb one of the largest domestic property and casualty insurers, with operations in 54 countries spanning commercial and personal P&C insurance, reinsurance, and life insurance.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Global stocks

BioMarin formed a 50/50 joint venture to market BioMarin’s first drug, Aldurazyme for mucopolysaccharidosis

Business Strategy & Outlook

BioMarin is amassing a portfolio of genetic-disease therapeutics, making historical comparisons with Genzyme (acquired by Sanofi) difficult to avoid. Commercialization and research and development expenses have kept BioMarin in the red, but in the profit-generating power of its rare-disease treatments, and BioMarin’s turn to profitability looks maintainable. With a deep in-house pipeline and the ability to supplement growth with strategic acquisitions, BioMarin is in a strong position.

BioMarin’s life-saving therapies may serve only a few thousand patients globally, but with six-figure price tags on most products and high barriers to entry, one can see this as a very attractive marketplace. Genzyme (now Sanofi) and BioMarin formed a 50/50 joint venture to market BioMarin’s first drug, Aldurazyme, for the treatment of mucopolysaccharidosis I, or MPS I. BioMarin’s MPS VI drug, Naglazyme, is maturing, but still seeing solid growth due to use in emerging markets like Brazil and higher (more expensive) dosing as young patients mature; the peak sales will surpass $400 million. BioMarin is also well positioned to treat the entire spectrum of patients with phenylketonuria, or PKU, one of the world’s most common metabolic disorders. While generic versions of Kuvan (mild to moderate PKU) launched in the U.S. in 2020, more potent drug Palynziq launched in 2018 in the U.S. to serve adult patients with PKU, including patients with more severe disease. PKU is well diagnosed thanks to state-mandated newborn screening programs, and no alternative drug therapies exist.

Financial Strengths

BioMarin ended 2021 with roughly $1.4 billion in cash, cash equivalents, and investments and $1.1 billion convertible debt. Given its recent turn to profitability, the firm will have plenty of cash on hand to pay down its convertible debt coming due in 2024 ($495 million) and 2027 ($600 million). The current free cash flow estimates suggest that BioMarin will not need external financing to fund its operations going forward.

Bulls Say

  • BioMarin’s approved drugs have been granted orphan-drug status in the U.S. and European Union, providing them with at least 7 and 10 years of market exclusivity, respectively.
  • BioMarin’s drugs target rare chronic conditions that often require treatment from a very young age, and while locating eligible patients on a global level is challenging, the firm has high patient retention rates. 
  • With a growing portfolio in an attractive rare-disease niche—and acceleration of profit growth beginning in 2022—BioMarin could be an acquisition target for pharmaceutical firms with pipelines to fill.

Company Description

BioMarin’s focus is on rare-disease therapies. Genzyme (now part of Sanofi) markets Aldurazyme through its joint venture with BioMarin, and BioMarin markets Naglazyme, Vimizim, and Brineura independently. BioMarin also markets Kuvan and Palynziq to treat the rare metabolic disorder PKU (in addition to long-standing U.S. rights, BioMarin has reacquired international rights for Kuvan and Palynziq from Merck KGaA). Voxzogo (vosoritide) was approved in achondroplasia in 2021. BioMarin’s Roctavian (hemophilia A gene therapy) is poised to potentially launch in the 2022-23 timeframe.

 (Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Change Healthcare’s revenue is generated by payers and providers with a split of roughly 40% and 60%, respectively

Business Strategy & Outlook

Change Healthcare offers variations of over a dozen financial and administrative services to support healthcare payers and providers improve administrative efficiency related to submitting and reimbursing medical and dental claims. The company’s revenue is generated by payers and providers with a split of roughly 40% and 60%, respectively. These processing services are focused on administrative accuracy with relatively low fee rates. As a result, there are no material customer concentration issues and no one customer represents more than 4% of revenue. As these various outsourced services address niche needs, there are no direct comparable peers. These services generally fit into three segments; Network Solutions, Software Analytics, and Technology-enabled Services. 

Most of the company’s services were likely born from its Network Solutions segment as it is a medical and dental claim clearinghouse that services both payers and providers. This highly commoditized service drives scale and reach within healthcare claims processing and enables the company to identify incremental tools and evolving needs across its broad customer base. The company’s clinical and healthcare network manages roughly one third of U.S. healthcare claims from 2,200 government and commercial payers, 900,000 physicians, 118,000 dentists, 33,000 pharmacies, 5,500 hospitals, and 600 laboratories. Having connectivity to all these payers and providers will be critical in creating value with incremental software tools bundled from the other two segments. There is some crossover of the provider and payer services within the two segments, Software & Analytics and Technology-Enabled Services. The Software & Analytics segment supports plans covering 100 million lives, provides payment accuracy solutions to 19 of the top 20 U.S. payers, 4,600 hospitals, and nine of the top 10 Medicare advantage plans. The Technology-Enabled Services segment is focused on providing outsourced revenue cycle support and covers $34 billion in annual charges and $9.2 billion in annual collections across 207 million annual cases/procedures.

Financial Strengths

As a spinoff from a larger entity, Change Healthcare was burdened with a significant debt balance of $5.8 billion, or 6 times fiscal 2020 adjusted EBITDA. The company was largely leveraged to fund the integration and investment in its more targeted strategy. The company has a strong revenue base of $3 billion and gross margins and operating margins in excess of 60% and 15%, respectively. Even with the necessary strategic investments, the company would try to pay down some of its debt with free cash flow, which is forecast to be in excess of $250 million annually. The subscription nature of the company’s business will provide stability in revenue and cash flows to expand its leading position in the niche medical claims market. The management may make small tuck-in acquisitions through available cash and cash flows. Even in this scenario, there’ll be an increasing liquidity, as the firm’s reserve of cash should continue to increase.

Bulls Say

  • Its medical claims data and IT focus should enable the company to become a meaningful contributor with the increased focused toward value-added reimbursement and interoperability policies.
  • The company’s focus on developing new tools and analytics should further entrench it into mission critical operations of customers, making it increasingly challenging for competitors to gain a foothold.
  • Change Healthcare’s broad claims network provides broad connectivity and significant amounts of data to captive customer audiences.

Company Description

Change Healthcare is a spin-off of various healthcare processing and consulting services acquired by McKesson over numerous years. Recently, these processing assets were contributed to a joint venture and in June 2019 public shares were issued with McKesson retaining the majority interest. As of the end of the March 2020 quarter, McKesson distributed all its interest in the public processor. Core services consist of insurance (healthcare) claim clearinghouse for healthcare payers in addition to administrative and consulting services to assist healthcare providers improve reimbursement coding, billing, and collections.

 (Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

AstraZeneca’s pipeline is emerging as one of the strongest in the drug group, and the company is developing several key products that holds blockbuster potential

Business Strategy & Outlook

AstraZeneca has built its leading presence in the pharma and biotech industry on patent-protected drugs and a developing pipeline that adds up to a wide moat. The replenishment of new drugs is offsetting the past patent losses on gastrointestinal drug Nexium and cholesterol reducer Crestor, and the company is well positioned for growth. AstraZeneca’s pipeline is emerging as one of the strongest in the drug group, and the company is developing several key products that hold blockbuster potential. In particular, the company’s recently launched cancer drugs Tagrisso and Imfinzi are well-positioned based on leading efficacy in hard-to-treat cancers. These drugs should also carry strong pricing power, driving the potential to expand Astra’s margins. Also, Astra is well-positioned in the respiratory and diabetes spaces, but these areas tend to have poor pricing power relative to cancer drugs.

In addition to internal development, AstraZeneca has aggressively pursued acquisitions, with mixed results. The ZS Pharma acquisition yielded an interesting hyperkalaemia drug, but delays in getting the drug to the market have been concerning. However, the partial stake in Acerta looks to be developing well with new blood cancer drug Calquence, and joint development with Daiichi Sankyo on cancer drug Enhertu looks promising. Also, the recent acquisition of Alexion looks like a solid strategic move done at a reasonable price. As Astra’s next generation of drugs launch, there are expected operating margins to improve based on the strong pricing power of the new drugs and the operating leverage the firm should attain as the new drugs reach critical mass. Also, as the new drugs launch, Astra is reducing the asset divestiture strategy it employed to help bridge the massive patent losses facing the firm over the past few years until the newer drugs were ready. While the asset sales helped prop up earnings and support the dividend during a challenging time, the strategy is not maintainable. As new drugs gain traction, Astra will likely continue to reduce the asset sales, which is strategically sound but will likely create a minor headwind to earnings growth.

Financial Strengths

Astra continues to generate robust cash flows, and the firm’s balance sheet is in solid shape, closing 2021 with debt/EBITDA of close to 4 times, a bit higher than normal due to the recent Alexion acquisition. While the acquisition added significant debt, it is expected the strong acquired drugs to produce robust cash flows to quickly pay down the acquisition-related debt. A projected debt/EBITDA ratio of 1.0 times by 2024 with the cash flow derived from acquired drugs and the robust sales growth of Astra’s other drugs.

Bulls Say

  • The company is expanding its oncology presence with several important pipeline products. In particular, the company’s EGFR drug Tagrisso holds major blockbuster potential in lung cancer.
  • The management team is focusing the pipeline toward unmet medical need, which should increase the odds of success and bring strong pricing power for the new drugs.
  • AstraZeneca has a large presence in emerging markets and should benefit from these markets’ fast growth prospects.

Company Description

A merger between Astra of Sweden and Zeneca Group of the United Kingdom formed AstraZeneca in 1999. The firm sells branded drugs across several major therapeutic classes, including gastrointestinal, diabetes, cardiovascular, respiratory, cancer, and immunology. The majority of sales come from international markets with the United States representing close to one third of its sales.

 (Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Despite Recent Litigation Headwinds on Zantac, GSK Remains Well Positioned for Earnings Growth

Business Strategy & Outlook

As one of the largest pharmaceutical and vaccine companies, GSK has used its vast resources to create the next generation of healthcare treatments. The company’s innovative new product lineup and expansive list of patents protected drugs create a wide economic moat. The magnitude of GSK’s reach is evidenced by a product portfolio that spans several therapeutic classes. The diverse platform insulates the company from problems with any single product. Additionally, the company has developed next-generation drugs in respiratory and HIV areas that should help mitigate both branded and generic competition. 

The GSK to be a major competitor in respiratory, HIV, and vaccines over the next decade. On the pipeline front, GSK has shifted from its historical strategy of targeting slight enhancements toward true innovation. Also, it is focusing more on oncology and the immune system, with genetic data to help develop the next generation of drugs. The benefits of these strategies are showing up in GSK’s early-stage drugs. This focus will improve approval rates and pricing power. In contrast to respiratory drugs, treatments for cancer indications carry much strong pricing power with payers. From a geographic standpoint, GSK is strategically branching out from developed markets into emerging markets. Its vaccine segment positions the firm well in these price-sensitive markets. While this strategy is likely to create some challenges, like the potential legal violations that arose in early 2013 in China, the fast-growing emerging markets will help support long-term growth and diversify cash flows beyond developed markets. GSK’s decision to divest its consumer business will likely unlock value over the long run. GSK divested its consumer group (called Haleon) in July 2022. Given the strong valuations of consumer healthcare companies, this unit will yield a stronger valuation than what is implied within the GSK structure before the divestment.

Financial Strengths

GSK remains on fairly stable financial footing, with debt/EBITDA at 2.8 as of the end of 2021 and with Haleon taking on close to GBP 10 billion of GSK’s debt, the remaining GSK balance sheet is improved. With the improving balance sheet and steady projections of cash flows, the GSK will increasingly make more acquisitions to augment its internal research and development pipeline. Additionally, with the divestment of the consumer division in July 2022, the new dividend of GSK to be secure and likely grow at a pace similar to earnings over the next five years.

Bulls Say

  • GSK’s next-generation respiratory drugs and HIV drugs look poised for strong growth over the next five years. 
  • GSK faces relatively minor near-term patent losses, setting up steady long-term growth.
  • The firm’s well-positioned Shingrix vaccine should support strong long-term growth based on excellent efficacy and limited competition.

Company Description

In the pharmaceutical industry, GSK ranks as one of the largest firms by total sales. The company wields its might across several therapeutic classes, including respiratory, cancer, and antiviral, as well as vaccines. GSK uses joint ventures to gain additional scale in certain markets like HIV.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Invesco Will See Market Losses and Outflows as Long as Equity and Credit Markets Are Declining

Business Strategy & Outlook

Invesco had for a long time been a top pick for us among the U.S.-based asset managers one can have generated solid organic AUM growth (of 1.7% annually on average during 2008-17) and having a broadly diversified platform (including a niche ETF product portfolio with Power Shares ETF operations, which were rebranded as Invesco ETFs in 2018), despite generating below-average levels of operating profitability (primarily because of the costs associated with its more retail-centric distribution platform). The confidence in the firm has started to waver, though, in early 2018 when management lowered expectations for its fee realization rate, which had a dampening effect on the company’s ability to lift its margins. The company also bungled the messaging on its late 2018 purchase of Oppenheimer Funds, which should have improved its organic growth, realization rate, and profitability profiles. None of which happened, though, as the firm’s organic growth profile deteriorated (with Invesco posting negative 4.5%, 3.2%, and 1.8% growth rates in 2018, 2019, and 2020, respectively), the firm’s realization rate fell from 0.416% in 2017 to 0.371% in 2020 (and 0.347% in 2021), and adjusted GAAP operating margins declined from 26.8% in 2017 to 20.4% in 2020 (and while margins did bounce back to 25.0% last year, they are expected to stay in a 20%-22% range during 2022-26). 

About the same time that management was lowering expectations for fees, price/earnings multiples for the group started to bifurcate between the haves—firms like BlackRock, T. Rowe Price, and Cohen & Steers that were capable of generating above-average organic AUM growth and maintaining above-average margins—and the have-nots—firms like Invesco, Franklin Resources, Affiliated Managers Group, and Janus Henderson Group—that were expected to struggle to do both or that had fallen into a pattern of poorer performance and positioning. While cautiously optimistic about Invesco over the past year, though, as the firm has put up a nice string of positive flows, the market downturn, ongoing fee compression, and rising costs are going to keep a lid on margin gains in the near to medium term.

Financial Strengths

Invesco entered 2022 with $2.1 billion of debt on its books, composed of $600 million of 3.125% notes due November 2022, $600 million of 4.000% notes due January 2024, $500 million of 3.75% notes due January 2026, and $400 million of 5.375% notes due November 2043. The company also has a $1.25 billion floating-rate credit facility (maturing in April 2026) at its disposal. During the second quarter, the firm paid down its debt due in November 2022, closing out the period with $185 million outstanding on its credit facility. Should the firm close out the year with results, it would enter 2023 with a debt/total capital ratio of 9%, a debt/EBITDA ratio of 1.2 times, and an EBITDA interest coverage ratio of just over 15 times. While Invesco has traditionally dedicated much of its excess cash to seed investments, dividends, and share repurchases, the issuance of $4.0 billion of 5.9% perpetual noncumulative preferred stock as part of its financing of the 2018-19 Oppenheimer Funds acquisition is eating up cash, as the firm pays out $236 million annually to service the interest obligation. The suspect that the size and scope of the Oppenheimer Funds deal means that future deals are likely to be smaller, bolt-on acquisitions aimed at plugging holes in the firm’s product mix and/or geographic reach. After cutting the company’s quarterly dividend by 50% to $0.155 per share at the start of the second quarter of 2020, the firm raised it 10% to $0.17 per share during 2021 and then by another 10% in early 2022 to $0.1875 per share. Even so, one doesn’t expect the dividend to return to pre-pandemic levels for some time, with the firm likely to maintain a payout ratio of 30%-35% longer term. One also does not expect much in the way of share repurchases in the near term unless the shares are trading at a significant discount to intrinsic value.

Bulls Say

  • The Oppenheimer Funds deal lifted AUM closer to the $1.5 trillion mark, putting Invesco on a slightly better footing with industry giants like BlackRock and Vanguard, each of which oversees more than $5 trillion. 
  • Invesco’s organic AUM growth had turned positive for more than a few quarters, with the firm picking up $12.8 billion in net inflows on average quarterly from the third quarter of 2020 to the first quarter of 2022. 
  • Oppenheimer Funds’ slightly higher AUM realization rate should help offset some of the impact of industry wide fee compression on Invesco’s top line.

Company Description

Invesco provides investment-management services to retail (65% of managed assets) and institutional (35%) clients. At the end of July 2022, the firm had $1.449 trillion in assets under management spread among its equity (48% of AUM), balanced (5%), fixed income (22%), alternative investment (14%), and money market (11%) operations. Passive products account for 32% of Invesco’s total AUM, including 57% of the company’s equity operations and 13% of its fixed-income platform. Invesco’s U.S. retail business is one of the 10 largest non-proprietary fund complexes in the country. The firm also has a meaningful presence outside the U.S., with close to one third of its AUM sourced from Canada (2%), the U.K. (4%), continental Europe (11%), and Asia (15%).

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.