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Global stocks

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

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

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

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

Criteo’s Future Outlook

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

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

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

Company profile

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

(Source: Morningstar)

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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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Dividend Stocks Philosophy

Bank on the Australian Majors Buying Back Shares

The remainder of surplus capital returned via an annual dividend top-up between fiscal 2021 and 2024, and on-market buybacks once franking balances deplete. Off-market buybacks can provide an attractive opportunity for Australian-based shareholders to sell depending on their tax circumstances. Given a large component of the buyback is treated as a dividend, and franked, the total return to the shareholder can be 20% higher than selling on market.

We think the Commonwealth Bank could kick things off in August 2021 with an approximate AUD 5.5 billion off-market buyback. However, the bank’s conservatism around loan loss provisioning and dividends during 2020 and 2021 suggests shareholders may need to wait until 2022.

Based on a target common equity Tier 1 ratio of 11%, we assume AUD 30 billion is returned to shareholders. We estimate Commonwealth Bank returns around AUD 5.50 per share, ANZ and National Australia Bank around AUD 2.20 each, and Westpac AUD 1.90. Only Westpac has enough franking credits to fully frank all returns.

Shares of the major banks trade around our fair value estimates (except for Commonwealth Bank). But we think the strong wide-moat franchises and prospects for material capital management initiatives, still make the banks attractive holdings in a fairly overvalued Australian market. Our fair value estimates assume the banks have returned excess capital to shareholders by 2025. This may occur sooner, but timing is not material to our fair value estimates. We have not included dividend top-ups in our forecasts given uncertainty around timing.

Company Profile

ANZ Bank is Australia’s third-largest bank by market value and provides retail, business, and institutional banking services to customers in Australia, New Zealand, and Asia-Pacific. The super-regional Asian strategy is being de-emphasised, with management focusing on the higher-returning businesses in Australia and New Zealand. Fine-tuning strategy and bank-wide restructuring results in a differentiated bank compared with domestic peers. ANZ Bank still retains a tilt to its Asia-centric strategy, but is now more balanced, better capitalised and a simpler bank.

(Source: Morningstar)

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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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Dividend Stocks Expert Insights

Federal Realty’s Portfolio of High-Quality Retail Thrive in Recovery

As a result, Federal Realty has been able to drive strong same-store net operating income growth and average double-digit re-leasing spreads over the past two decades.

Its portfolio should continue to attract shoppers and tenants and produce solid internal growth even in a challenging retail environment.

E-commerce continues to pressure brick-and-mortar retail as consumers increasingly move their shopping habits online. While many of Federal’s tenants must directly compete with the growth of e-commerce, much of the portfolio is insulated from online competition. Segments like grocery stores, restaurants, fitness centers, and other service-based businesses still drive traffic to physical retail centers. Regardless of the competition from e-commerce, location is still paramount for retailers. Retailers are becoming more selective with their physical locations, opting to locate storefronts in the highest-quality assets while closing stores in low-productivity sites. Thus, we expect Federal’s portfolio to remain in demand despite the changing retail environment.

However, Federal must deal with the fallout of the current corona virus pandemic. Many retailers were forced to close for a period of time and shopping at brick-and-mortar locations has fallen. While Federal’s revenue is somewhat protected by long-term leases, retailer bankruptcies have caused a drop in occupancy and Federal has been forced to offer rent concessions to keep others afloat. We believe that high-quality retail locations will rebound and will eventually return to their prior occupancy and rent levels, but the short-term impact to Federal’s cash flow has been significant.

Financial strength:

Federal is in good financial shape from a liquidity and a solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which we believe will serve stakeholders well. Federal has an A-/A3 credit rating, so it should be able to easily access low-rated debt to service financial obligations. Debt maturities in the near term should be manageable through a combination of refinancing and the company’s significant free cash flow. Additionally, the company should be able to access the capital markets when development and redevelopment opportunities arise. We expect 2021 net debt/EBITDA and EBITDA/interest to be roughly 6.9 and 4.2 times, respectively, both of which are slightly outside of Federal’s targeted range but we believe the company will return to historical norms within a few years .As a REIT, Federal is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow.

Company Profile:

Federal Realty Investment Trust is a shopping center-focused retail real estate investment trust that owns high-quality properties in eight of the largest metropolitan markets. Its portfolio includes an interest in 101 properties, which includes 23.4 million square feet of retail space and over 2,600 multifamily units. Federal’s retail portfolio includes grocery-anchored centers, superregional centers, power centers, and mixed-use urban centers. Federal Realty has focused on owning assets in highly desirable areas with significant growth, and as a result, the average population density and average median household income are higher for its portfolio than for any other retail REIT.

(Source: Morningstar)

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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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Dividend Stocks

Woolworths’ Solely Adjusting for the Demerger of Endeavour

Following the demerger of wide-moat Endeavour Group, we maintain our narrow economic moat rating for Woolworths which is underpinned by cost advantages related to the core Australian food segment. Our low uncertainty and Exemplary capital allocation ratings are also unchanged.

Post-demerger of its liquor retailing and hospitality, Woolworths is essentially a pure-play food retailer with significant competitive advantages over its Australian competitors, Coles, Aldi, and independent operators.

Our investment thesis on Woolworths stands. We expect Australian supermarkets to compete by passing on efficiency gains or cost savings to consumers through price cuts, rather than expanding operating margins and potentially losing share.

As a result, we think Woolworths will successfully defend its market share in food retailing at around 37% in the long term, while EBT margins are capped at around 4.5%.

The demerger of Endeavour Group separates perceived environmental, social, and governance, or ESG, risks associated with liquor retailing and gaming operations from Woolworths’ supermarkets business. We consider the now lessened ESG risks for Woolworths’ supermarket and department store businesses as immaterial to our fair value estimate and well mitigated by the company’s existing

Processes and procedures.

Financial Position of the company

Woolworths’ balance sheet improved with the demerger, including a pro forma net cash position of AUD 75 million as of Jan. 3, 2021. This has prompted management to consider capital management options and potential for capital returns of between AUD 1.6 billion and AUD 2.0 billion is flagged—subject to Board approval. We anticipate capital returns of AUD 1.8 billion to shareholders in fiscal 2022, and we expect Woolworths to comfortably pay out around 75% of earnings in dividends going forward. At our revised fair value estimate, Woolworths offers a fully franked dividend yield of 4%.

Company Profile

Woolworths is Australia’s largest retailer. Operations include supermarkets in Australia and New Zealand, and the Big W discount department stores. The Australian food division constitutes the majority of group EBIT, followed by New Zealand supermarkets, while Big W is a minor contributor.

(Source: Morningstar)

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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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Shares Small Cap Technical Picks

Vornado Should Benefit From New York’s Office Recovery

The company now generates about 90% of its net operating income from New York City. While the focus is certainly on premier office properties, Vornado continues to invest in high-quality retail. Around 60% of companywide NOI comes from New York office properties, with New York retail generating around one fifth of total NOI.

In contrast with its New York office REIT peers, Vornado has made a concentrated bet on developments in the Penn District submarket just east of the Hudson Yards megaproject. The new development should have positive knock-on effects by increasing foot traffic and rents, as the project adds activity to a once-drab slice of Manhattan. Despite investor concern about oversupply in the region and the spectre of a massive rise in remote work due to the coronavirus pandemic, New York will remain a hub for global talent in the long run. With its enviable roster of blue-chip office and retail tenants, Vornado should benefit from healthy rent collections despite the coronavirus crisis.

Vornado only owns two non-New York properties in well-located central business districts in Chicago and San Francisco. In San Francisco, 555 California Street has benefited from healthy tech office demand in a supply-constrained region. In Chicago, the Merchandise Mart has likewise performed well, emerging as a hub for tech office users in the Midwest. With the completion of the Art on the Mart digital exhibition in 2018, the building is set to continue to benefit from its great location and iconic status within the Chicago office market.

Financial Strength

We view Vornado’s balance sheet as a slight concern, with the firm carrying more debt than many of its already bloated office REIT peers. We forecast 2021 debt/adjusted EBITDA to be around 11 times, with adjusted EBITDA/interest of 3.4 times. We forecast debt/EBITDA to decline gradually over the next 10 years. As a real estate investment trust, Vornado Realty is required to pay out at least 90% of its income as dividends to shareholders. Vornado’s 2020 dividend payout represented an elevated 110% of its funds from operations figure, although this is slightly obscured by acute COVID-related cyclicality.

Company’s Megaproject

Vornado’s well-located portfolio of office and retail assets attracts the highest-quality tenants. Developments near the Hudson Yards megaproject should pay off as the company benefits from increased property values in that region. Vornado’s Chicago and San Francisco properties represent some of the best assets in those markets.

Company Profile

Vornado owns and has ownership interest in Class A office and retail properties highly concentrated in Manhattan, with additional properties in San Francisco and Chicago. It operates as a real estate investment trust.

(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

Burlington Should benefit by apparel Sales as Pandemic Ebbs and American Life Normalizes

). Although the present environment poses unique challenges, the off-price sector has performed well in such situations historically (Ross and TJX saw low- to mid-single-digit percentage comparable growth in 2008-09), and we expect Burlington to exit the crisis in better shape than full-price retailers.

Burlington’s strong inventory management operations hold inventory turnover above that of full-price stores, driving traffic with a fast-changing assortment. We believe off-price chains are valuable to manufacturers looking to sell excess product, as they offer flexibility, prompt payment, and discretion by avoiding advertising the brands they carry (important to producers looking to protect conventional channel pricing power). Product availability should stay high, as vendors’ production forecasting is complicated by factors such as mercurial customer preferences, channel diffusion, and unpredictable weather.

We believe off-price retailers such as Burlington are better positioned than other physical sellers to fend off digital rivals. The treasure hunt experience and low-frills environment enable steep discounts relative to the full-price channel (up to 60% for Burlington), limiting price gaps. Shipping and return costs (in addition to vendors’ restrictions) also limit the discounts digital sellers can offer.

Financial Strength

Burlington had reduced leverage meaningfully since its 2013 initial public offering (fiscal 2013 net debt was around 3.3 times EBITDA, versus a 0.7 mark in fiscal 2019, before the pandemic), and we expect growth and ample cash flows to keep the balance sheet strong despite ambitious expansion plans. We expect Burlington will take more than a decade to reach its 2,000-unit footprint target, in addition to relocations of existing stores. Considering Burlington’s store network is mostly leased and its payback period averages less than three years, we expect the firm to dedicate around 4% of sales to capital expenditures over the next decade (roughly $500 million on average annually). We expect the firm will continue to return excess capital to shareholders via buybacks after a pandemic-related pause; however, we expect this to eventually be augmented by a dividend approaching 40% of earnings (which we forecast the firm to initiate in fiscal 2023). We assume roughly 45% of long-term annual operating cash flow is returned to shareholders via repurchases. Burlington could pursue acquisitions of regional chains or other concepts (including operations outside the United States) to accelerate its growth, though we do not incorporate any such purchases into our forecasts because of the uncertain timing and nature of any deal.

Bulls Say

-With low prices spurred by efficiency, relatively high inventory turnover, and a differentiated value proposition to customers, Burlington should be relatively well protected from digital rivals.

– As Burlington’s assortment shifts toward more advantaged categories for the off-price channel (such as ladies’ apparel and home), performance should continue to improve.

– Burlington should be able to downsize its locations’ average square footage as it adds new, smaller stores and relocates existing inefficient units, boosting margins and the customer experience.

Company profile

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

(Source: Morningstar)

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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Dividend Stocks Shares

Costco’s Sales Growth Remains Strong Even as Comparisons Become Harder, but the Shares Seem Rich

Its 21% revenue growth impressed considering the chain lapped the early days of the pandemic (which included significant customer stock-up activity), but we mostly attribute the results to transitory factors. So, our long-term forecast still calls for mid-single-digit percentage sales growth and 3%-4% adjusted operating margins. We suggest investors seek a more attractive entry price, particularly considering elevated uncertainty as the customer habits normalize.

Costco posted 15% comparable growth excluding fuel and foreign exchange, well ahead of our 8% target, with the outperformance likely a result of greater-than-expected demand for discretionary items and recovering warehouse traffic (stimulus likely also played a role). Costco’s 3.7% operating margin was about 50 basis points higher than its prior-year mark and our estimate, reflecting cost leverage and reduced pandemic-related expenditures.

We are encouraged that around 70% of orders of big, bulky items (generally higher-value items like furniture, exercise equipment, and electronics) are being fulfilled by Costco Logistics, which the company purchased in early 2020. We believe the shift to in-house fulfilment will lift the profitability of orders of such goods as well as delivery times and customer service levels. We also believe these larger items remain an opportunity for Costco to benefit from rising e-commerce penetration, allowing for a broader assortment than what is available in-warehouse. While we continue to expect that the core of the value proposition will remain instore (as much of Costco’s assortment skews toward bulky, low-priced consumer goods that are difficult to ship economically), we support the company’s targeted investments in expanding its digital capabilities, which also include its growing online grocery offering.

Costco Wholesale Corp Company Profile

The leading warehouse club, Costco has 795 stores worldwide (at the end of fiscal 2020), with most sales derived in the United States (73%) and Canada (13%). It sells memberships that allow customers to shop in its warehouses, which feature low prices on a limited product assortment. Costco mainly caters to individual shoppers, but roughly 20% of paid members carry business memberships. Food and sundries accounted for 42% of fiscal 2020 sales, with hardlines 17%, ancillary businesses (such as fuel and pharmacy) nearly 17%, fresh food 14%, and softlines 10%. Costco’s warehouses average around 146,000 square feet; over 75% of its locations offer fuel. About 6% of Costco’s global sales come from e-commerce (excluding same-day grocery and various other services).

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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Fixed Income Fixed Income

Fidelity® Emerging Markets Z FZEMX

He joined Fidelity in 2006 as an analyst, and then built strong track records at Fidelity Pacific Basin FPBFX from 2013 and Fidelity Emerging Asia FSEAX from 2017 until he became the successor to this fund’s previous manager in February 2019. Since taking over the following October, Dance has leaned on Fidelity’s deep emerging- markets analyst team for support, a strong group that continues to play a role here as Dance learns more about the emerging markets he didn’t invest in at his previous charges.

Dance, a successful regional strategy manager, still must show he can consistently apply his process to a broader universe. He’s a growth-oriented investor who buys four kinds of stocks–sustainable growers, niche companies, firms with macroeconomic tailwinds, and special situations–and holds them for three to five years.

Dance considers regional economics and macro views more than many of his peers, looking to accumulate exposure in regions or sectors in which he sees high growth potential. He turned defensive in February 2020 after learning of the coronavirus outbreak in China, selling expensive stocks like Brazilian investment manager XP while buying consumer staples stocks like Angel Yeast and healthcare stocks like Shenzhen Mindray.

The portfolio reflects Dance’s preferences. Its average holding has better profitability metrics and competitive advantages than those of its MSCI Emerging Markets Index benchmark and diversified emerging markets Morningstar Category. Such stocks often come at a cost: The portfolio’s average valuation measures like price/earnings, price/book value, price/sales, and price/cash flow are higher than those of its benchmark and typical peer. Despite some price risk, Dance has succeeded at his previous charges with this approach, so there’s reason for optimism.

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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Funds Funds

Invesco Main Street Mid Cap Y OPMYX

Anello had been a lead manager of this fund since 2012 and had worked with Main Street team founder Mani Govil since 2006, but the fund had been a mediocre performer under his watch, so his departure was not really a shock. Now the fund’s sole lead manager is Belinda Cavazos, who was hired in February 2020 to manage this fund and Invesco Rising Dividends OARDX. She previously spent three years at Boston Trust managing small and mid-cap funds with some success. But this fund is much larger than any of her previous charges, and turning it around will be no easy task.

This fund is a mid-cap counterpart to Invesco Main Street MSIGX, which tries to identify profitable, well-run companies trading at reasonable valuations. Cavazos has not made any major changes to the process, but she has tried to put her own stamp on the fund, especially since Anello left. She reduced the portfolio’s exposure to some interest-rate-sensitive sectors, notably real estate and utilities, and added to some cyclical names such as Vulcan Materials VMC and homebuilder

D.R. Horton DHI. She also reduced the overweighting in energy that the fund typically had under Anello and sold some large-cap names that didn’t really fit with the fund’s mid-cap mandate. The effect has been to make the fund less reliant on sector bets and more driven by stock-picking. So far, the results haven’t been great. In 2020, the fund trailed about two thirds of its midcap blend Morningstar Category peers, similar to its performance over the past three, five, and 10 years. Results were similarly disappointing in the first five months of 2021. It is hard to come to any firm conclusions based on such a short time period, but Cavazos will definitely need to achieve better results than this before concluding that the fund is on the right track.

This fund’s strategy is straightforward in most respects. It is similar to the approach used by Invesco Main Street MSIGX, but less tested. It earns an Average Process rating. Lead manager Belinda Cavazos and her six co-managers employ a version of the strategy developed over the years by Main Street team leader Mani Govil. They seek companies with strong management teams and a fundamental catalyst for future value creation over the next two to five years, such as pricing power, market share gains, or improving profitability.

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

L Brands Post Strong Margins

Bath & Body Works continued to impress with a 26% operating margin, a figure in line with luxury retailers. While some expense leverage probably came from sales that rose to $3 billion (up 83%, lapping roughly six weeks of COVID-related closures last year), we think some gross margin gains could stay, given their attribution to better merchandising. However, we also expect some gains to recede, as the promotional cadence is likely to pick up over time. For reference, sales in the first quarter of 2020 were just $1.65 billion, since locations were closed for half of the fiscal quarter due to COVID-related restrictions.

L Brands’ second-quarter outlook also provides a lift to our fair value estimate, with 10%-15% sales growth and $0.80- $1.00 in EPS anticipated; these marks are ahead of the $2.9 billion in sales and $0.53 in EPS we projected for the period. As such, we plan to lift our full-year sales and EPS estimates to more closely reflect probable first-half performance, though the firm did not provide full-year guidance. We plan to stand firm on our long-term projections, which include 2% sales and mid-single-digit EPS growth along with midteens operating margins. As the division of the VS and BBW segments approaches, we expect to have more clarity on the capital structures of the separate businesses, which will allow us to value the stand-alone brands properly. Until then, we will continue to model the two businesses under the same umbrella, rendering an outcome based on current capabilities.

L Brands is still targeting August as the official separation date for its two brands, though it provided few additional details. For VS, the company will aim for midteens operating margins, an objective that feels increasingly attainable, given the brand’s latest success. VS will maintain its recent focus on inclusivity in both the VS and Pink labels, with the hope of regaining consumer confidence and demand. For BBW, the firm intends to stay the course, considering the success it has achieved with its current strategy, though it has expressed interest in expanding into whitespace categories such as sustainable hair and skincare, a move we commend given the recent focus on “green” consumption. Both brands will be expanding buy online/pick up in store capabilities, especially as they transition to more off-mall locations, which should improve throughput and profitability.

In anticipation of the spin-off, the firm named new CFOs for the two independent companies. Bath & Body Works’ CFO will be Wendy Arlin, current senior vice president and controller for L Brands, who previously was an audit partner at KPMG. Victoria’s Secret’s CFO will be Tim Johnson, former CFO of Big Lots. We believe both individuals will bring important knowledge and expertise to the two new standalone entities. In particular, Johnson’s retail industry experience will be useful as VS attempts to maintain its current trajectory.

 (Source: Morningstar)

Disclaimer

General Advice Warning

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