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Global stocks

Burlington Stores Inc

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

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

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

Profile

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

Source:Morningstar

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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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Shares Technology Stocks

Change Healthcare Inc

UnitedHealth still plans to purchase Change for $25.75 per share, which is our fair value estimate. However, in March, U.S. antitrust regulators announced an extension of that merger’s review period, and if the deal doesn’t close because of regulatory concerns, we would reduce the value of Change to our stand-alone fair value estimate of $16.50.

In the quarter, Change beat consensus on both the top and bottom lines. Revenue grew 1% to $855 million, above FactSet consensus of $846 million. With cost controls likely due to rightsizing before the pending acquisition, Change turned that slight revenue beat into a bigger profit beat. The company turned in adjusted EBITDA of $272 million (above consensus of $254 million) and adjusted EPS of $0.42 (above consensus of $0.36).

On the pending merger with UnitedHealth, both the acquirer and the target look committed to the deal, but regulators have thrown a wrench into the process. Based on recent commentary from UnitedHealth, there appears to be no major financing concerns or red flags from the perspective of the potential acquirer, and Change shareholders voted to approve the merger in April, as well. However, the Department of Justice announced an extended antitrust review on the combination in March after receiving a letter from the American Hospital Association about the combination, citing concerns about sensitive healthcare data shifting hands from Change (a neutral third party) to UnitedHealth’s Optum segment (a subsidiary of the largest U.S. health insurer and a large caregiver, too). The AHA suggested that the shift could give UnitedHealth an unfair advantage in its legacy businesses by seeing competitive claims processed in Change’s clearinghouse business. Concerns like that add uncertainty about whether the deal will close.

Profile

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

General Advice Warning

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

Categories
Global stocks Shares

Dollar Tree Inc

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

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

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

Profile

Dollar Tree operates discount stores in the U.S. and Canada, including over 7,800 shops under both its namesake and Family Dollar units (nearly 15,700 in total). The eponymous chain features branded and private-label goods, generally at a $1 price (CAD 1.25 in Canada). Nearly 50% of Dollar Tree stores’ fiscal 2020 sales came from consumables (including food, health and beauty, and household paper and cleaning products), just over 45% from variety items (including toys and housewares), and 5% from seasonal goods. Family Dollar features branded and private-label goods at prices generally ranging from $1 to $10, with over 76% of fiscal 2020 sales from consumables, 9% from seasonal/electronic items (including prepaid phones and toys), 9% from home products, and 6% from apparel and accessories.

Source:Morningstar

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

Categories
Global stocks

Fisher & Paykel Healthcare Corp Ltd

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

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

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

Profile

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

Source:Morningstar

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General Advice Warning

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

Categories
Global stocks

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

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

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

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

Fair Value and Profit Enhancers

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

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

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

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

Vertex Pharmaceuticals Inc’s Company Profile

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

Source: Morningstar

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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.

Categories
Dividend Stocks

No-Moat ALS’ Coronavirus-Resistant Fiscal 2021 Earnings as Expected; No Change to AUD 5.50 FVE

We expect consolidation to further strengthen this position, leveraging brand and knowledge across various testing and inspection markets. However capital outlays in establishing a global network of operations and laboratories during the resources boom mean ALS is barely earning its cost of capital on an adjusted basis, and if goodwill is included, returns do not currently meet the cost of capital. This precludes the company from having a moat. Historically, about 60% of earnings were tied to volatile commodity markets, but the end of the resources booms and expansion into segments including environmental, pharmaceutical and food testing reduces this to less than 50%.

Key Investment Factors

Investors should be aware of the inherent volatility around commodity-tied earnings. The mining and energy downturn has demonstrated the vulnerability of businesses tied to resource activity. Although ALS previously benefited from exposure to a robust mining sector, management has astutely grown other parts of the business that are less cyclical. Environmental, pharmaceutical, and asset-care services should remain relatively more resilient. A growing global network reduces region reliance and gives ALS the capability to leverage experience across borders and serve an international client base.

No-Moat ALS’ Coronavirus-Resistant Fiscal 2021 Earnings as Expected; No Change to AUD 5.50 FVE

Our AUD 5.50 fair value estimate for no-moat ALS Limited is unchanged. The materials testing specialist reported a 1.5% decline in underlying fiscal 2021 net profit after tax to AUD 186 million, marginally ahead of our AUD 178 million expectations. We make no material changes to our outlook, including for a 12% increase in underlying fiscal 2022 NPAT to AUD 209 million. ALS paid a higher-than-anticipated fiscal second-half dividend of AUD 14.6 cents against our AUD 12.5 cents target. It brings the full fiscal year to AUD 23.1 cents for a modest 1.9% yield at the current AUD 12.30 share price, franked to 81%. Our fiscal 2022 DPS forecast is little changed at AUD 26 cents, a prospective partially franked yield of 2.1%, again modest.

 That said, ALS remains a prospective growth story, not a yield one. Although in this light we remain perplexed by the level of market excitement, the shares are trading at more than double our assessed fair value, at a fiscal 2021 P/E of 32. We determine the current share price implies a whopping five-year EBITDA CAGR of 16.5% to AUD 817 million by fiscal 2026. Underlying fiscal 2021 EBITDA actually fell 1.6% to AUD 373 million. This wasn’t a bad result in lieu of the coronavirus pandemic, but ALS’ business model was always expected to be resilient given its essential service status.

We think we’re being generous enough forecasting five-year EBITDA CAGR of 5.0% to AUD 487 million by fiscal 2026, including a midcycle EBITDA margin of 21.3%, in line with fiscal 2021’s 21.2% actual. This includes strong 8% growth for life sciences, but essentially flat earnings for commodities and industrial including tribology. Our fair value equates to a fiscal 2026 EV/EBITDA of 8.1, P/E of 14.3 and dividend yield of 4.2%, assuming a 60% payout ratio. Life sciences generated just under half of fiscal 2021 EBITDA and comprises approximately 55% of our fair value estimate, followed by minerals at 40%. Industrial comprises the modest 5% balance of fair value.

With respect to fiscal 2021, life sciences and industrial EBITDAs somewhat undershot our forecast, the former steady at AUD 222 million and the latter falling 13% to AUD 33 million. However, the minerals segment shone, EBITDA up 4.5% to AUD 210 million, considerably ahead of our expectations. This speaks to the quality of fiscal 2021 earnings outperformance given innate volatility in minerals’ earnings in contrast to the comparative stability from life sciences. Fiscal 2021 net operating cash flow increased 4% to AUD 270 million as expected. Free cash flow grew 57% but to a lower-than-expected AUD 145 million, due to higher-than anticipated capital expenditure. This leaves net debt at AUD 614 million, higher than expected but creditably down on the previous corresponding period’s AUD 803 million and September 2020’s AUD 675 million print.

ALS Ltd Company Profile

Founded in the 1880s and listing on the ASX in 1952, ALS operates three divisions: commodities, life sciences, and industrial. ALS commodities traditionally generated the majority of underlying earnings, providing geochemistry, metallurgy, inspection and mine site services for the global mining industry. Expansion into environmental, pharmaceutical and food testing areas and commodity price weakness have lessened earnings exposure to commodities.

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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Funds Funds

Avantis® U.S. Equity Institutional

The fund offers broad exposure to stocks of all sizes listed in the U.S. and tilts toward those with lower price/book multiples and higher profitability. To accomplish this, the managers assign weights based on a stock’s market cap and a market-cap multiplier. They apply larger multipliers to stocks with lower valuations and higher profitability, while those with opposite characteristics receive smaller multipliers. This technique has two advantages. It effectively leans toward factors that have historically been associated with superior long-term returns, which should give the fund an edge when those styles are in favour. It also cuts back on turnover and trading costs because a stock’s market cap is incorporated into the weighting scheme. Overall, this is one of the best diversified and lowest turnover funds in the large-blend Morningstar Category.

The portfolio’s emphasis on stocks with lower valuations has been persistent. But its preference for profitable firms was less obvious because cheaper stocks tend to be less profitable than their larger and faster-growing counterparts. However, the fund’s profitability tilt is still at work, even if its holdings, on average, generate lower returns on invested capital than the market. Incorporating profitability paints a more complete picture about each stock’s expected return and should steer the portfolio away from lower-quality names. Leaning toward stocks trading at lower valuations has paid off over this fund’s short live track record. It modestly outperformed the Russell 1000 Index, beating the bogy by 1.1 percentage points per year from its launch in December 2019 through April 2021. The fund’s 0.15% expense ratio lands within the cheapest decile of the category and should provide a long-term edge over many of its peers.

The Fund’s Approach

The fund’s managers start with a broad universe that includes U.S. stocks of all sizes. They use market-cap multipliers to emphasize those trading at low price/book ratios (adjusted to remove goodwill) and high profitability (using a cash-based measure of operating income that removes accruals). Names with lower price/book ratios and higher profitability receive larger multipliers than those with opposite characteristics. This effectively tilts the portfolio toward profitable names trading at lower valuations without incurring a lot of turnovers because each stock’s weight remains linked to its market cap, so weights will change proportionally with price changes.

The strategy takes measures to reducing trading costs. Some turnover is required when a stock’s book value or profitability changes, but the mangers will allow stocks to float within predetermined tolerances to avoid unnecessary trading. Traders can help further cut back on transaction costs.

The Fund’s Portfolio

The strategy’s broad reach and emphasis on stocks trading at lower multiples pushes it away from the largest and most expensive names in the market and improves diversification relative to the Russell 1000 Index. Its average market capitalization has been less than half that of the index. As of April 30, 2021, the fund’s 10 largest names represented 16% of assets, while the same ten firms represented about one fourth of the Russell 1000 Index.

Including small caps expands the fund’s reach and makes it one of the broadest in the large-blend category. It holds more than twice the number of stocks in the Russell 1000 Index. The benchmark does not include small-cap companies, which represent about 15% of this fund. The fund’s emphasis on stocks with low price/book ratios has been evident. Its average price/book ratio has consistently landed below that of the Russell 1000 Index, though it still lands in the large-blend segment of the Morningstar Style Box. Its value orientation also steers it toward cyclical sectors. The fund has larger stakes in the consumer cyclical and financial-services sectors, with comparably smaller positions in names from the technology and communications sectors. The portfolio’s average return on invested capital has also been lower than the index because companies trading at lower multiplies tend to be smaller and less profitable, on average.

The Fund’s Performance

This fund has a short live track record, but it managed to outperform the Russell 1000 Index by 1.1 percentage points from its launch in December 2019 through April 2021. On balance, its value orientation contributed to that mild advantage. Overweighting stocks trading at lower multiples hurt performance during the coronavirus sell-off in the first quarter of 2020, when it lagged the Russell 1000 Index by 3.7 percentage points. But value stocks aided performance during the ensuing rebound. The fund outperformed the index by 7.2 percentage points between October 2020 and April 2021. So far, this strategy has been more volatile than the Russell 1000 Index. Its standard deviation since its December 2019 inception has been about 6% higher than the benchmark, so it slightly underperformed the index on a risk-adjusted basis.

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

DWS Global High-Income Inst

Gary Russell has led this strategy since August 2006 and previously ran DWS’ high-yield team in Europe. Thomas Bouchard and Lonnie Fox have comanaged the strategy since 2016 and 2018, respectively, after joining as credit analysts in 2006 and 2008. The trio is supported by European counterpart Per Wehrmann and 14 analysts split between the United States and Europe. The support team is sizable, but with 19 departures since 2016, turnover has been an issue.

The managers leverage the firm’s macro-outlook to shape risk budgeting and industry allocation. Analysts assign a recovery value and probability of default to each bond and loan and look at standard fundamental metrics to assess attractiveness relative to the constituents of the strategy’s BofAML Non-Financial Developed Markets High Yield Index benchmark. High-conviction names are typically sized up to 3%, while names perceived as riskier are scaled down accordingly.

The strategy’s higher-quality and global approach sets it apart from peers. The allocation to riskier bonds rated CCC and below stood at 5% as of March 31, 2021, well under the high-yield bond Morningstar Category’s 13% median. The managers pursue opportunities across the globe, and while allocation to the U.S. represents the bulk of assets (60% as of March 31), the portfolio includes sizable exposures to Europe (19%) and Canada (7%). Low-single-digit stakes in emerging markets round out the portfolio.

Over Russell’s tenure from Aug. 1, 2006, through April 31, 2021, the 6.5% annualized gain of the strategy’s institutional share class slightly edged out the category median (comparing distinct funds) peer, landing it in the top half of the category, while the strategy’s volatility-adjusted performance beat over two thirds of rivals.

The Bond Fund’s Approach

The strategy’s disciplined and conservative credit-driven process has demonstrated its value through time, but the analyst churn casts a shadow on its execution and puts a lid on our confidence level, supporting an Average Process Pillar rating. The team takes a conservative and straightforward approach to credit investing. Lead manager Gary Russell and six other high-yield managers focus on portfolio construction, translating the firm’s macro view into investment decisions. Analysts assign each company a recovery value and probability of default, which helps the managers appropriately size positions. All positions are typically capped at 3% and riskier names are scaled down, resulting in a portfolio that usually counts over 350 holdings, ensuring proper diversification, especially on the portfolio’s riskier sleeves.

The strategy’s global mandate has historically resulted in about 60% of assets invested in U.S. high-yield bonds, with most of the balance split between Canadian and European issues, but non-U.S. currency exposure is hedged back to the U.S. dollar. In terms of credit profile, the portfolio tends to skew higher-quality than its high-yield bond category peers, with a relatively large BB stake and limited allocations to issues rated CCC or below.

The Bond Fund’s Portfolio

The team has expressed its conservatism by favouring higher-quality segments of the high-yield market. For example, issues rated BB represented 57% of this strategy’s portfolio as of March 31, 2021, versus 41% for its typical high-yield bond category peer. On the other hand, issues rated CCC and below totalled just 5% of assets or 8 percentage points less than the strategy’s typical peer. The strategy uses its global team to offer a distinct geographic footprint that separates it from many of its peers. Indeed, its non-U.S. exposure stood at 30% as of March 2021, or almost 3 times its typical peer’s. Developed European corporates accounted for 19% of assets and Canadian positions for 7%. Smaller allocations to Asia, Latin America, Africa, and the Middle East stood in the low single digits.

The strategy has had a sluggish start to 2021 owing to its higher-quality tilt and minimal use of bank loans. Rising rates for much of 2021 has prompted many peers to favour higher-yielding and lower-quality assets and bank loans to offset this. As of March 2021, the 41% in B and below was on the aggressive end for this strategy, but its typical peer had over 50% here, including 13% in CCC and below. At the same time, the strategy held less than 1% in bank loans, while a fifth of its peers held about 10% here.

The Bond Fund’s Performance

| Owing to its conservative credit profile and good security selection, this strategy has produced solid returns under lead manager Gary Russell’s watch. Since Russell took over in August 2006 through April 2021, its institutional shares returned 6.5% annualized, landing it in the top half of its high-yield bond category peers. Impressively, the team was able to keep volatility at bay for most of this period, and the strategy’s volatility-adjusted performance–as measured by Sharpe ratio–beat 66% of rivals. During the energy-led credit sell-off from June 2015 to February 2016, a lower exposure to bonds rated CCC or below helped the strategy hold up better than most rivals. Over the period, its 5.9% loss outperformed the category median by 2.3 percentage points, landing ahead of 70% of its distinct peers.

Source: Morningstar

General Advice Warning

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

Categories
Fixed Income Fixed Income

First Eagle US Value A

First Eagle’s multifaceted global value team runs the strategy. Its co-heads, Matt McLennan and Kimball Brooker, each have more than 25 years of investing experience and have cooperated as managers here since March 2010. They also spearhead siblings First Eagle Global SGIIX and First Eagle Overseas SGOIX. Comanager Matt Lamphier directs the research team whose coverage ranges from equities to sovereign bonds and investment-grade credits–all fair game for this portfolio. The manager team added depth in May 2021 with Mark Wright’s promotion to full-fledged comanager after two years of honing his skills as an associate manager.

The team takes a risk-averse approach. With capital preservation in mind, it invests mostly in large-cap equities having what it sees as margins of safety–or prices well below the value of those firms’ average earnings or profitability over a business cycle, their hard assets (such as forest lands), or the strength of their balance sheets. The managers also hold cash (often 10%- 20% of assets) and gold (5%-15%), with gold serving as a hedge against economic calamity.

The Fund’s Approach

This risk-averse approach works well on sibling strategies with broader geographic reach but is less effective for this U.S.-focused offering. It warrants an Average Process rating. Whether investing internationally or in the U.S., First Eagle’s global value team takes an uncommon line. Its managers prioritize capital preservation. While sticking mostly with large-cap equities, they will also hold bonds, gold bullion, and cash. The managers target investments with a margin of safety–that is, a price well below intrinsic value–and assets (real or intangible) that should hold value even during economic distress. The team takes a long-term view, looking at average earnings and profit margins over a business cycle, earnings stability, and balance-sheet health to determine valuations. They often keep annual portfolio turnover under 20%.

Cash and gold stakes are key to this defensive approach. The managers typically keep around 10% of assets in cash–more if opportunities are scarce–and 5%-15% in gold and the equities of gold miners as hedges against economic calamity. The team’s prowess outside the U.S. has served First Eagle’s global and international strategies well, but this U.S.-focused version has struggled to compete. Keeping so much cash and gold on the side-lines has held it back in equity bull markets, and mediocre stock selection over time hasn’t helped.

The Fund’s Portfolio

This portfolio stands out in many ways. With so much cash and gold and so few bonds, equities typically account for 60%-80% of total assets, unlike the equity-only S&P 500 prospectus benchmark and many allocation–70% to 85% equity peers who wade more into bonds. The managers usually own 70-90 stocks. Cash had never been less than 12% of assets at the end of any month in manager Matt McLellan’s 12- year tenure until April 2020; it went on to hit a low of 2% in October 2020 before rising to nearly 10% in March 2021. The portfolio’s gold stake had hovered around 10% going into 2020; it appreciated to more than 15% in July 2020 before dropping back to 10% in early 2021.

The portfolio’s equity exposure is also distinctive. It has tended to be light on consumer cyclicals relative to peers (1.5% of total assets in March compared with the 8.9% category norm) but heavy on energy (7% versus 2%) and basic materials (6% to 3%). The basic-materials stake can be larger if the team is buying the stocks of gold miners such as Newmont NEM and Barrick Gold ABX, but it pared most of those as the price of gold rallied in 2020. Firms with hard assets– such as Weyerhaeuser WY, which owns forest lands, and integrated oil firm Exxon Mobil XOM– also suit this portfolio’s conservative bent.

The Fund’s Performance

This fund’s track record is middling, though a recent category change offers better points of comparison. The portfolio’s gold and cash stakes made it a poor match for its equity-only S&P 500 prospectus benchmark in the decade-long bull market for stocks following the 2007-09 global financial crisis. The strategy’s value tilt didn’t help either, as growth stocks drove much of the rally. A December 2020 Morningstar Category change to allocation–70% to 85% equity from large blend improves the picture somewhat. From manager Matt McLennan’s January 2009 start through April 2021, the fund’s I share class gained 10.6% annualized; that beat the allocation category’s 10.2% average but trailed the S&P 500’s 15.3% and the large-blend category norm of 13.5%. The fund also lagged a custom index approximating the fund’s historical asset exposures (to stocks, cash, gold, and bonds), albeit by a narrower 1.3-percentage-point margin.

Source: Morningstar

General Advice Warning

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

Categories
Technology Stocks

Nvidia Continues to Enjoy Record Revenue, Though Crypto Demand Is Concerning; Raising FVE to $515

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Nvidia was negatively impacted by lower cryptocurrency prices in late 2018 that resulted in gaming GPU sales falling 12% in 2019 (fiscal 2020). We estimate crypto mining related demand contributed around $400 million to $500 million in GPU sales during the quarter.

Narrow-moat Nvidia continues to execute well in growing its data center business thanks to its A100 GPU for Artificial Intelligence and networking products from its 2020 Mellanox acquisition. We are raising our probability weighted fair value to $515 per share from $400. We are raising our standalone fair value estimate for Nvidia to $465 per share from $352, as we incorporate the stronger results and outlook for the second quarter. Nvidia is in the process of acquiring ARM, and if the deal closes, our fair value would increase to $565 per share. Our probability-weighted fair value estimate assigns a 50% probability of closing due to potential regulatory scrutiny and ARM customer pushback. Nvidia is paying a high multiple for ARM’s earnings but given the GPU leader’s share price is trading at a significant premium to our updated standalone $465 fair value estimate, we like that Nvidia is using its rich shares to fund a large portion of the deal.

First-quarter sales grew 84% year over year to $5.7 billion, with gaming and data center revenue up 106% and 79%, respectively. Data center sales benefitted from the inclusion of Mellanox and continued adoption of Nvidia’s A100 GPUs. We estimate data center sales were up about 30% year on year. We expect the firm’s automotive segment to resume growth in the coming years as its autonomous solutions are adopted and its legacy infotainment business is ramped down. Specifically, Nvidia’s automotive design win pipeline exceeds $8 billion through fiscal 2027. Gross margins during the first quarter grew 100 basis points sequentially thanks to a more favorable product mix.

Management expects second-quarter sales to be at a midpoint of $6.3 billion, which implies 63% year-over-year growth and was also ahead of our estimates. The chief growth drivers are expected to be gaming, data center, and crypto mining processors, or CMPs. CMPs are optimized for crypto mining power efficiency and will provide Nvidia’s management some visibility into the contribution of crypto mining to total revenue. For the second quarter, CMP sales are expected to be $400 million. We still think Nvidia’s gaming GPUs are receiving an artificial boost from crypto mining that could be difficult to sustain.

Nvidia’s channel inventories remain lean, and management expects the firm to be supply constrained into the second half of the year. While we anticipate strong growth for Nvidia in the coming quarters, we remain vigilant of signs of weaker crypto-mining demand for its GPUs should crypto prices fall.

Nvidia Corp’s Company Profile

Nvidia is the leading designer of graphics processing units that enhance the experience on computing platforms. The firm’s chips are used in a variety of end markets, including high-end PCs for gaming, data centers, and automotive infotainment systems. In recent years, the firm has broadened its focus from traditional PC graphics applications such as gaming to more complex and favorable opportunities, including artificial intelligence and autonomous driving, which leverage the high-performance capabilities of the firm’s graphics processing units.

Source: Morningstar

General Advice Warning

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