Category: Sectors

Idex has consistently generated returns on invested capital in the upper midteens

Post author By lvc-admin
Post date August 2, 2022
No Comments on Idex has consistently generated returns on invested capital in the upper midteens

Business Strategy and Outlook

Idex owns a collection of moaty businesses that tend to be leaders in their respective niche end markets, typically holding the number-one or -two market share. It manufactures a wide array of products, ranging from equipment used in DNA sequencing to wastewater pumps to Jaws of Life hydraulic rescue tools. Idex’s lean manufacturing process allows it to effectively operate in a high-mix and low-volume environment, offering customers a wide variety of highly engineered products that are configurable or customizable. Furthermore, a common theme across its businesses is that they specialize in making mission-critical equipment that performs a vital function but typically constitute a small part of the customer’s total bill of materials. This aspect of the business contributes to Idex’s narrow moat through customer switching costs and allows the firm to command premium pricing. In the long run, Idex can be viewed as a GDP-plus business. Organic sales growth will continue to outpace industrial production by around 1%-2% annually as the firm’s commitment to innovation and investments in research and development continue to bear fruit and generate additional revenue through introductions of new or refreshed products. It can be projected organic sales to grow at a roughly low-single-digit clip in fluid and metering technologies as well as the fire and safety segment and the diversified products segment, and at a mid-single-digit rate in the health and science technologies segment.

Additionally, the firm will continue to supplement its organic sales growth with acquisitions. Historically, management has avoided overpaying for acquisitions. As such, despite regular mergers and acquisitions, which add goodwill and assets to the firm’s capital base, Idex has consistently generated returns on invested capital in the upper midteens. Management has remained disciplined in the current elevated valuation environment, and it will continue to manage acquisition risk appropriately and focus on maximizing returns on invested capital.

Financial Strength

Idex maintains a sound capital structure, which will help the firm navigate the uncertainty due to the coronavirus pandemic. As of Dec. 31, 2021, the firm owed roughly $1.2 billion in short- and long-term debt while holding approximately $0.9 billion in cash and cash equivalents. The company can also tap into its $800 million revolving credit facility. Idex will generate average annual operating cash flows of roughly $800 million over the next five years. Given its healthy balance sheet and solid cash flow generation, Idex is adequately capitalized to meet its upcoming debt obligations. Idex will have a debt/adjusted EBITDA ratio of roughly 1.5 times in 2022. Management will continue to prioritize investing in organic growth and executing M&A, growing the dividend, and allocating excess capital to opportunistic share repurchases. The firm has raised its quarterly dividend by an average annual rate of roughly 10% over the last five years, and the dividend will keep growing roughly in line with earnings. The payout ratio will remain around 30% over the next five years.

Bulls Say’s

Idex has a portfolio of moaty businesses that have leading shares in niche end markets.
Idex generates strong free cash flows, which have averaged around 16.5% of sales during the last 10 years.
Recent acquisitions of Akron Brass and AWG, as well as new product introductions (including eDraulic and SAM), have reinforced Idex’s already strong competitive position in the fire and safety business

Company Profile

Idex manufactures pumps, flow meters, valves, and fluidic systems for customers in a variety of end markets, including industrial, fire and safety, life science, and water. The firm’s business is organized into three segments: fluid and metering technologies, health and science technologies, and fire and safety and diversified products. Based in Lake Forest, Illinois, Idex has manufacturing operations in over 20 countries and has over 7,000 employees. The company generated $2.8 billion in revenue and $661 million in adjusted operating income in 2021.

(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 is 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.

Tags US Market

Global stocks Shares

Humana appears focused primarily on organic growth, it remains open to partnerships and acquisitions, too

Post author By lvc-admin
Post date August 2, 2022
No Comments on Humana appears focused primarily on organic growth, it remains open to partnerships and acquisitions, too

Business Strategy and Outlook

In the U.S. healthcare system, Humana pays caregivers to provide services through an integrated and value-based approach while also making the insurance experience easy to navigate for end users. Perhaps not surprisingly, given its founding as a nursing home in the 1960s, the firm has a special focus on serving the elderly population, especially in its top-tier position in administering Medicare Advantage plans. Given U.S. demographic trends and the increasing penetration of Medicare Advantage plans in the eligible population, Humana remains at the forefront of one of the fastest-growing areas in U.S. health insurance.

Within Medicare Advantage, insurers like Humana are paid the same amount that the traditional Medicare program pays to provide benefits for its consumers; then the insurer aims to lower the costs associated with caring for users by making them healthier while also providing them additional benefits and generating a profit. Given that dynamic, incentive alignment with care providers remains more important in this product than in other health insurance products and Humana sees this alignment as its key differentiator from other health insurance players. For example, about two thirds of its Medicare Advantage members have primary-care physicians that operate in value-based arrangements, which encourage those caregivers to improve quality and costs. Humana owns some of these caregivers, including primary-care practices and the planned acquisition of the largest home healthcare provider in the United States, Kindred at Home. Also, the firm provides pharmacy benefit management functions, managing that key health input in an integrated fashion primarily for internal members. While especially powerful in the Medicare Advantage market, this integrated approach benefits Humana in its other target markets too, including Medicaid, military, and small-employer plans. With large opportunities in its target markets, management aims to continue growing at a fast pace with a long-term annual earnings per share growth goal of 11%-15%. While Humana appears focused primarily on organic growth, it remains open to partnerships and acquisitions, too.

Financial Strength

Humana maintains a healthy balance sheet. Most of its cash ($3.4 billion at the end of 2021) is held at its subsidiaries, though, and the company aims to hold about $500 million of cash at the parent company typically ($0.9 billion at the end of 2021), which constrains its liquidity a bit. Humana owed $12.5 billion in debt, or 44% debt/capital by the calculations at the end of 2021, which is above management’s typical leverage after the Kindred at Home transaction in 2021. With the divestiture of some non core businesses from that transaction expected in 2022, the leverage to start falling toward the company’s target of 35% in 2022, although share repurchases may constrain that transition a bit. With limited capital expenditure requirements, free cash flows to typically range between about $4 billion-$5 billion annually through 2026. Those cash flows should help the company meet its maturity schedule during the next five years, which cumulatively totals $7.2 billion, and also deleverage after the Kindred at Home transaction.

Bulls Say’s

With its prowess in Medicare Advantage plans, Humana looks likely to benefit from strong demographic trends and increasing popularity of that program.

Humana enjoys industry-leading customer satisfaction metrics that positively influence its brand and reputation in the consumer-driven Medicare Advantage and Medicaid insurance sectors.
Humana’s growth trajectory looks strong, with management aiming for 11%-15% EPS growth in the long run.

Company Profile

Humana is one of the largest private health insurers in the U.S. with a focus on administering Medicare Advantage plans. The firm has built a niche specializing in government-sponsored programs, with nearly all its medical membership stemming from individual and group Medicare Advantage, Medicaid, and the military’s Tricare program. The firm is also a leader in stand-alone prescription drug plans for seniors enrolled in traditional fee-for-service Medicare. Humana offers employer-based plans primarily for small businesses along with specialty insurance offerings such as dental, vision, and life. Beyond medical insurance, the company provides other healthcare services, including primary-care services, at-home services, and pharmacy benefit management.

(Source: MorningStar)

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

Tags US Market

Technology Stocks

ServiceNow’s Differentiated Software Drives Multiple Organic Growth Vectors in Expanding TAM

Post author By lvc-admin
Post date August 2, 2022
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Business Strategy & Outlook:

ServiceNow has been successful thus far in executing on a classic land and expand strategy. First, it built a best-of-breed SaaS solution for IT Service Management (ITSM) based on being modular and flexible, having a superior familiar user interface, offering a way to automate a wide variety of workflow processes, and becoming a platform to serve as a single system of record for the IT function within the enterprise. Having established itself in ITSM and then the much larger IT operations management, or ITOM, market, the firm moved beyond the IT function. The same set of product design features and technologies has allowed ServiceNow to bring its process automation approach to HR service delivery, customer service, and finance. More recently, ServiceNow has been offering higher pricing tiers with an increasing array of features, along with industry specific solutions, which have higher ASPs and help drive revenue growth.

ServiceNow’s success has been rapid and notably organic. The company already offers high-end enterprise-grade solutions and boasts elite level customer retention of 97% to 98%. ServiceNow focuses on the largest 2,000 (G2K) enterprises in the world and these customers continue to renew for larger contracts, with the average annual contract value doubling in the last three years. Further, the company has no small business exposure. Additionally, customers overall are re-upping for more than one solution, as more than 75% of customers are multi-product purchasers, which is driving deal sizes higher. Having the IT function within an enterprise as the initial landing pad is fortunate, as it provides a built-in advocate for software (an IT responsibility) for other functional areas of the enterprise. ServiceNow will continue to use its position to land new IT-driven customers and upsell ITOM features on the platform, but the company will increasingly cross-sell emerging products in HR and customer service, along with the platform as a service (PaaS) offering. The product strength, market presence, and a strong sales push into areas outside of IT, will continue to drive robust growth.

Financial Strengths:

ServiceNow is a financially sound company. Revenue is growing rapidly, while non-GAAP margins are positive and expanding. The continued traction in ITSM and ITOM, along with adoption of new use cases in customer service and HR service delivery, and the PaaS solution will continue to drive revenue growth in excess of 20% for at least the next five years. As of Dec. 31, 2021, ServiceNow had $3.3 billion in cash, offset by approximately $1.6 billion in debt, resulting in a net cash position of $1.6 billion. Gross leverage sits at 2.1 times trailing EBITDA, which allows for flexibility should the environment worsen. Operating margins are increasing as ServiceNow continues to scale, with 2019 the first year of profitability on a GAAP basis. ServiceNow should be able to drive in excess of 100 basis points of margin expansion annually. Free cash flow margin was 31% in 2021, providing a preview of what will be strengthening margins over the next decade. In terms of capital deployment, ServiceNow does not pay a dividend, does not regularly repurchase shares, and makes only small acquisitions. In fact, ServiceNow has spent only a few hundred million dollars on acquisitions in aggregate since 2011. The company made a variety of tuck-in acquisitions in 2019 and 2020–all for undisclosed amounts. Small, feature-driven acquisitions are expected to continue but have not explicitly modeled any such deals. The company might not initiate a dividend in the foreseeable future, nor regular share repurchases.

Bulls Say:

ServiceNow’s superior product has led to rapid share gains and exceptional retention within the ITSM market. Now the company is using this strength to expand into other areas of ITOM.
The company has added additional growth drivers, including customer service and HR service delivery, which should help propel robust growth over the next five years.
GAAP operating margin was break-even for the first time in 2019 and see a decade-long runway for expansion.

Company Description:

ServiceNow Inc provides software solutions to structure and automate various business processes via a SaaS delivery model. The company primarily focuses on the IT function for enterprise customers. ServiceNow began with IT service management (ITSM), expanded within the IT function, and more recently directed its workflow automation logic to functional areas beyond IT, notably customer service, HR service delivery, and security operations. ServiceNow also offers an application development platform as a service (PaaS).

(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.

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.

Tags US Market

Global stocks

ADP Delivers Robust FY 2022 Result as Labor Markets Prove Resilient Despite Economic Headwinds

Post author By lvc-admin
Post date August 2, 2022
No Comments on ADP Delivers Robust FY 2022 Result as Labor Markets Prove Resilient Despite Economic Headwinds

Business Strategy & Outlook

ADP has invested heavily over the past decade to develop public cloud native solutions and consolidate its portfolio of disparate platforms. As of fiscal 2021, ADP has successfully migrated most of its small and midsize clients to its strategic platforms and will be migrating enterprise clients to its new HCM platform over the coming decade, as well as rolling out its new underlying payroll and tax engines. While the platform migrations ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics. ADP faces fierce competitive pressure from nimble upstarts, legacy peers, accounting software, and ERP providers. The new solutions will allow ADP to compete more aggressively on functionality, reduce software maintenance costs, and provide scope for greater operating leverage, supporting margin uplift. However, the increasing competitive pressure will result in greater pricing pressure and force ADP to maintain high levels of investment to ensure the functionality of its product offering remains competitive.

This investment is in addition to the continued investment in sales and implementation required to roll out new solutions and migrate clients. As such, the ADP’s price increases will be limited to about 0.5% a year on average, in line with recent growth but below long-term averages, limiting margin expansion potential. The increased regulatory complexity, tight labor markets, and growing adoption of hybrid work will underpin strong demand for ADP’s solutions, supporting greater share of wallet and market share gains in the small and midsize market. This includes greater penetration of the outsourced payroll and HR model. However, the expected forced platform migrations to hamper ADP’s enterprise market share growth over the next decade before gradually recovering as the new platform is adopted in the market. In aggregate, the ADP’s overall market share to grow modestly for the five years to fiscal 2027, followed by higher growth as platform migrations complete.

Financial Strengths

ADP is in a strong financial position. At the end of fiscal 2022, ADP’s balance sheet was modestly geared with net debt/EBITDA of 0.3. During fiscal 2021, ADP almost tripled long-term debt to $3 billion to fund share repurchases and optimize its capital structure with low cost debt. The expected ADP’s annual operating income can comfortably cover annual interest expense on its debt at least 60 times over the forecasted period. ADP also has access to short-term funding facilities to meet client’s obligations rather than liquidating available for sale securities. ADP has returned over $20 billion of capital to shareholders during the eight years to fiscal 2022 through dividends and share repurchases. The expected ADP’s strong free cash flow generation will support a dividend payout ratio of about 60% over the period. The balance sheet is robust, and ADP has ample scope to increase leverage to execute on bolt-on acquisitions.

Bulls Say

ADP benefits from high client switching costs, a scale based cost advantage, intangible brand assets, and a powerful referral network.
Despite facing fierce competitive pressures and undergoing forced platform migrations, ADP has retained high revenue retention and improved operating margins over the past decade.
ADP has a strong record of returning capital to shareholders through dividends and share repurchases.

Company Description

ADP is a provider of payroll and human capital management solutions servicing the full scope of businesses from micro to global enterprises. ADP was established in 1949 and serves over 990,000 clients primarily in the United States. ADP’s employer services segment offers payroll, HCM solutions, HR outsourcing, insurance and retirement services. The smaller but faster-growing PEO segment provides HR outsourcing solutions to small and midsize businesses through a co-employment model.

(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.

Tags US Market

Dividend Stocks

Circling Back to U.S. Bancorp After Q2 Earnings; Decreasing The Fair Value Estimate to $59 From $60

Post author By lvc-admin
Post date August 2, 2022
No Comments on Circling Back to U.S. Bancorp After Q2 Earnings; Decreasing The Fair Value Estimate to $59 From $60

Business Strategy & Outlook

U.S. Bancorp is one of the strongest and best-run regional banks. Few domestic competitors can match its operating efficiency, and for the past 15 years the bank has consistently posted returns on equity well above peers and its own cost of equity. U.S. Bancorp’s exposure to moaty nonbank businesses and its consistently excellent core banking operations make us like the company’s positioning for the future. If one was to have a complaint, it would be that the bank was already on top of its game years ago, making it difficult for the firm to further optimize efficiency and returns, while peers seem to be gradually “catching up” over time. U.S. Bancorp has an attractive mix of fee-generating businesses, including payments, corporate trust, investment management, and mortgage banking. The payments and trust businesses tend to be highly efficient and scalable due to relatively fixed cost structures. Barriers to entry tend to be high as the initial investment and scale necessary to compete are prohibitive, although competition within payments has heated up in the last several years as software and technology offerings are increasingly important.

The USB has generally made the necessary investments in technology, leading to more integrated back-end systems, a competitive payments platform, and a leading presence in the push toward omnichannel banking. The continued secular trend of the increasing digitization of payments should provide further growth opportunities, and the importance of scale and technology should favor the largest banks, including U.S. Bancorp, over time. Payment’s volumes are coming back for the bank as its merchant acquiring and commercial payments businesses are set to turn a corner in 2022 as economic activity improves. The upcoming acquisition of Union Bank favorably and I think the cost savings alone should add some value for shareholders. U.S. Bancorp has one of the best deposit market share concentrations under the coverage, which strengthens the efficiency and profitability of its traditional banking segments. Managers in the bank are also required to have 5% cost-cutting plans ready at any time if needed.

Financial Strengths

The U.S. Bancorp is in good financial health. The bank weathered the 2016 energy downturn well, and energy loans currently make up only 1% of the loan book. The bank also performed admirably through the pandemic driven downturn. Most measures of credit strain remain quite manageable, and the bank’s history of prudent lending–and the fact that the makeup of its loan book has not changed that much over time–gives us comfort with the risks here. One does not have significant concerns about capital. U.S. Bancorp had a common equity Tier 1 ratio of 9.7% as of June 2022. This is well within a reasonable range. The capital-allocation plan remains standard for the bank, with roughly 40% of earnings devoted to dividends, internal investments prioritized, and then the remainder devoted to buybacks.

Bulls Say

Strong fee revenue in moaty businesses, such as payments, helps insulate U.S. Bancorp from a flatter yield curve environment and drive higher returns on equity.
The bank’s upcoming acquisition of MUFG Union Bank should provide additional revenue growth, expense synergies, and value for shareholders.
As payments-related balances and fees come back in 2022, it should provide another earnings growth lever for U.S. Bancorp.

Company Description

As a diversified financial-services provider, U.S. Bancorp is one of the nation’s largest regional banks, with branches in well over 20 states, primarily in the Western and Midwestern United States. The bank offers many services, including retail banking, commercial banking, trust and wealth services, credit cards, mortgages, and other payments capabilities.

(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.

Tags Street Talks

Technology Stocks

Spotify Reports Strong Q2 User Growth; Likely to Continue in Q3; FVE $187; Shares are Attractive

Post author By lvc-admin
Post date August 2, 2022
No Comments on Spotify Reports Strong Q2 User Growth; Likely to Continue in Q3; FVE $187; Shares are Attractive

Business Strategy & Outlook

Swedish-based Spotify is the world’s leading music streaming service provider. The fast-growing digital streaming space has become the primary distribution platform of choice within the ever-changing music industry. Spotify can benefit from various network effects that will help the firm increase its users and amass valuable intangible assets associated with user data and listening preferences. However, it faces intense competition and has a (mostly) variable cost structure that may limit Spotify’s future operating leverage and profitability. Thus, one does not have sufficient confidence that it will generate excess returns on capital over the next 10 years. Spotify may be at the mercy of the record labels in the music industry, as it will need access to content to continue attracting more listeners. While the distribution side of the industry (Spotify, YouTube, Apple, terrestrial and digital radio, and so on) is fragmented, over 80% of licensing is controlled by the big three major record labels: Universal Music Group, Sony, and Warner Music Group.

As these licensors gather royalties from Spotify and its peers, they maintain pricing leverage as content remains king. The firm’s entry into the podcast space. However, while the firm has become the market leader via content acquisition, which further diversifies its revenue, one does not expect its dependency on labels to be lessened much. Spotify is ahead of the pack in the growing music streaming and podcast markets, but it faces stiff competition from behemoths such as Amazon, Apple, and Google. Unlike Spotify, these firms don’t rely solely on streaming music or podcasts to drive profitability and can potentially run at break-even, or even as loss leaders, while monetizing users via other products and services. It might also be harder for Spotify to steal share from these competitors over time, as Apple Music and Apple Podcasts listeners are probably entrenched with other Apple products, Amazon Music with Echo, and so on. Thus, they might be relatively more loyal to these music and podcast platforms than the users an operating-system-agnostic platform like Spotify can capture.

Financial Strengths

As of the end of 2020, Spotify did not hold any debt on its balance sheet. Spotify’s cash balance at the end of 2020 was $1.7 billion. Spotify has continued to generate cash from operations since 2016; although the firm has incurred hefty operating losses in recent years, cash flow has been better as a good portion of these costs, which are accrued fees to rights holders, have not yet been paid out in cash. While Spotify remains an asset-light business since it uses Google’s cloud platform for data storage and computing, one does expect the firm’s annual capital expenditure to be EUR 75 million-EUR 100 million, likely necessary to provide additional services and tools on the creation side especially for new, up-and-coming, or independent artists. The firm is also likely to take the M&A route with similar objectives, as displayed by its various podcast acquisitions. The free cash flow to equity/sales, to average around 6% the next 5 years.

Bulls Say

Spotify’s listener growth may help it negotiate much better terms with record labels over time.
By investing in more services and tools for artists, Spotify may attract artists away from record labels and toward independent distribution, which may allow the company to pay lower royalties over time.
Revenue growth during the next 10 years should accelerate as Spotify keeps investing in different content such as podcasts and video, attracting more users and advertisers.

Company Description

Spotify, headquartered in Stockholm, Sweden, is one of the world’s largest music streaming service providers, with over 150 million total listeners. The firm monetizes its users through both a paid subscription model, referred to as its premium service, and an ad-based model, referred to as its ad-supported service. Revenue from premium and ad-supported services represented 90% and 10% of Spotify’s 2017 total revenue, respectively.

(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.

Tags Recommendations

Dividend Stocks

Enthusiasm for Rogers’ Stellar Q2 Dampened by Yet Another Side Issue—July’s Network Outage

Post author By lvc-admin
Post date August 2, 2022
No Comments on Enthusiasm for Rogers’ Stellar Q2 Dampened by Yet Another Side Issue—July’s Network Outage

Business Strategy & Outlook

Rogers has alleviated the concern one has long had that its wireless network is falling behind rivals Telus and BCE and that BCE’s fiber-to-the-home build-out would dent Rogers’ cable dominance. It has invested to improve its wireless network, and it has skirted Shaw’s fate of cable customer losses in the face of its competitor’s network improvement, mitigating market share losses. Its proposed acquisition of Shaw will be value neutral, but the purchase price and integration uncertainty bring greater risk. Rogers is investing heavily in its wireless network. It was the biggest spender in 2019’s 600-megahertz spectrum auction and 2021’s 3500-megahertz spectrum auction. The firm is also rolling out its 5G network, which one doesn’t expect to be consequential in the near term but should ensure that Rogers doesn’t lag competitors.

While Rogers’ network has clearly been behind Telus and BCE in network speed ratings, one doesn’t think it has a practical effect on service customers receive. Nonetheless, Rogers to close the gap as it rolls out its newly acquired spectrum and transitions to a 5G network. The enhanced network in conjunction with the industry consolidation will result in churn declining, pricing power increasing, and margins expanding. Rogers will face tougher cable competition, but with BCE’s network revamp more than 50% complete, Rogers has been holding its own. Rogers has averaged better than 4% annual broadband subscriber growth since 2016. TV and phone subscribers continue to decline, which will continue, but phone service will make up only 6% of cable revenue in 2019, and the smaller TV subscriber base will be somewhat offset by the premium Ignite TV offering. The Rogers’ media unit, or at least parts of it, has more value in a sale than it does as an operating business. According to Forbes magazine estimates, the Blue Jays are worth USD 1.8 billion, but the team generates no operating profit. The move away from linear TV viewership and the shift to digital media content has impaired print publication and television and radio station holdings.

Financial Strengths

Rogers’ leverage has been significantly higher than usual in recent years, as the firm has been upgrading its networks, participating in spectrum auctions, and deploying capital to enhance its television offerings. The leverage will remain somewhat elevated in coming years as the firm’s elevated network spending continues. However, one doesn’t foresee any difficulty in Rogers’ ability to meet its obligations as the economy turns down. Though Rogers targets a net debt to EBITDA ratio under 2.5, it was 3.2 as of June 30, 2022 (excluding debt the firm has taken on and reserved for the Shaw purchase), and to remain above 3.0 through 2023, as spectrum auctions and the Shaw merger will keep debt levels heightened. However, interest coverage remains strong, with an adjusted EBITDA to interest expense ratio of nearly 7.0 at the end of 2021. The current dividend is well covered, with free cash flow still covering the dividend by nearly two times. One doesn’t think the dividend is ironclad in a prolonged period of weakness, but the firm did not cut it amid the COVID-19 outbreak, and one doesn’t anticipate it will even need to consider it unless a major recession coincides with the near-term merger and spectrum obligations. However, one doesn’t expect regular dividend increases while leverage is elevated and spectrum outlays continue.

Bulls Say

With the Canadian wireless market less penetration than the U.S. and Europe and the country receptive to immigrants and foreign workers, wireless subscriber growth should remain high. As the industry leader, Rogers is well positioned.
Rogers’ media unit is worth far more than the market is giving it credit for. If that continues, Rogers can sell some assets to create significant value.
A gradual return of roaming traffic gives a long runway for heightened wireless average revenue per customer growth.

Company Description

Rogers is the largest wireless service provider in Canada, with its more than 10 million subscribers equating to one third of the total Canadian market. Rogers’ wireless business accounted for 60% of the company’s total sales in 2021 and has increasingly provided a bigger portion of total company sales over the last several years. Rogers’ cable segment, which provides about one fourth of total sales, offers home Internet, television, and landline phone service to consumers and businesses. Remaining sales come from Rogers’ media unit, which owns and operates various television and radio stations and the Toronto Blue Jays. Rogers’ significant exposure to sports also includes ownership stakes in the Toronto Maple Leafs, Raptors, FC, and Argonauts.

(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.

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Global stocks

Accor’s Demand Stout but Inflation Is Impacting Its Near-Term Profitability

Post author By lvc-admin
Post date August 2, 2022
No Comments on Accor’s Demand Stout but Inflation Is Impacting Its Near-Term Profitability

Business Strategy & Outlook

While the coronavirus and geopolitical conflict present near-term demand headwinds, the Accor to expand share in the hotel industry over the next decade as a result of its solid loyalty and exposure to the millennial traveler through its growing lifestyle brands, supporting its intangible brand asset advantage, the source of its narrow moat. As a result, the Accor posted more than 3%-unit growth on average over the next 10 years, well above the roughly 1% long-term industry rate in its core European region (58% of total hotels in 2021). Accor’s growing room share is being driven by an increased presence in higher-end luxury/upscale rooms, which were 27% of its total in 2021. This higher luxury presence diversifies Accor from its core economy/midscale exposure, which more directly competes against Airbnb and other alternative accommodations.

The European travel to rebound in 2022-23, aided by the region’s increased vaccination rates and an ingrained desire to travel. The Accor positioned to benefit from such a recovery, given most of its hotels are in Europe, and given the company’s pracademic (2017-19) revenue per available room growth in the region exceeded the industry rate, driven by its intangible asset advantage. This recovery despite the Russian invasion of Ukraine, where around 1% of Accor’s portfolio resides. Accor sold a meaningful portion of its owned assets in 2018-19, leaving the remaining company with 98% of its rooms tied to asset-light franchise and managed business as of the end of 2021, up from 58% of the mix in 2014. These asset-light rooms offer high returns on invested capital and contract lengths of 30 years that are costly to terminate, resulting in a switching cost advantage for the company. Additionally, recent asset sales have helped provide the company enough liquidity to operate into 2023 at near zero revenue demand levels, even before tapping upon its remaining EUR 1.76 billion revolver or needing to raise financing.

Financial Strengths

While the pandemic makes near-term industry travel demand uncertain, Accor’s financial health is far clearer. By calculating that since 2018, Accor’s disposal of owned assets and investments has provided between EUR 6 billion-EUR 7 billion in cash, which provides the company with enough liquidity into 2023 at near zero revenue generation, even before tapping the remaining availability on its EUR 1.76 billion under its revolver. Accor’s debt/adjusted EBITDA turned negative in 2020, as the pandemic stalled demand, but EBITDA turned slightly positive in 2021, as demand rebounded and Accor executed on removing fixed and variable costs out of its business. This compares with 2019’s 4.5 times level. As demand continues to recover, the Accor’s debt/adjusted EBITDA reaching 4.3 and 3.5 times in 2022 and 2023, respectively. Accor has suspended dividends and share repurchases until demand visibility improves, which one believe is being done out of extreme caution–not out of necessity. The dividends and share repurchase to resume in 2023. Accor’s EBIT/interest coverage ratio was 9 times for 2019, and then turned negative in 2020, followed by a move back into positive territory in 2021. Its coverage ratio reaching 4.7 and 6.6 times in 2022 and 2023, respectively. The Accor will generate EUR 2.3 billion in free cash flow over the next five years, which gives us confidence in its ability to meet the EUR 1.5 billion in debt obligations during that time.

Bulls Say

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

Company Description

Accor operates 778,000 rooms across over 40 brands addressing the economy through luxury segments, as of Dec. 31, 2021. Ibis (economy scale) is the largest brand (37% of total rooms at the end of 2021), followed by Novotel (14%) and Mercure (15%). FRHI offers additional luxury and North American exposure. After the sale of the majority of Hotel Invest (owned assets) in 2018-19, the majority of total EBITDA comes from Hotel Services (asset-light). Northern Europe represents 21% of rooms, Southern Europe 23%, Asia-Pacific region 31%, Americas 13%, and India, Middle East, and Africa 12%. Economy and midscale are 73% of rooms.

(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.

Tags European Market

Global stocks

Hermes Delivers Record Growth and Profitability, Helped by Sales Across Segments

Post author By lvc-admin
Post date August 2, 2022
No Comments on Hermes Delivers Record Growth and Profitability, Helped by Sales Across Segments

Business Strategy & Outlook

The wide-moat Hermes International has carved out a unique niche in the luxury goods industry, which will provide it with continuing superior returns on capital. Hermes’ iconic leather bag styles (part of the more than EUR 4 billion leather goods segment) are in limited supply, supporting the brand’s exclusivity perception and providing the company with demand visibility and significant pricing power. Hermes Birkin and Kelly bags are sold in secondary markets and auctions for higher than the initial purchase prices–an impressive feat for soft luxury goods. The remainder of Hermes’ product portfolio has a wide moat and includes small leather goods, scarves, jewelry items, saddles, and dining sets. These goods cater to aspirational consumers and high-net-worth individuals and also serve as gifts, providing Hermes with recurring demand and protecting it from cyclical demand fluctuations.

Hermes is distinctive among competition thanks to its vertically integrated supply chain, from leather tanning to leather goods stitching to controlled distribution through owned and operated (as well as concessional) stores. This allows the company to maintain the necessary quality control (and the perception of it among consumers) and certain price positioning (no discounting). Over the years, Hermes has been carefully managed, but as it expands, maintaining the exclusivity perception and strong top-line growth may become more challenging. The Hermes to expand through maintainable pricing power, widening the product range, and minor store count additions. Demand should be driven by the increasing number of high-net-worth and middle-class individuals globally, as well as growth in their incomes. China is still expected to remain the biggest growth driver in the longer term, as consumption is supported by higher wages through a shrinking labor pool and new fortunes are made in such industries as technology and other value-added sectors.

Financial Strengths

Hermes is practically debt-free (excluding operating leases) with over EUR 4.6 billion in cash on its balance sheet. Its financial position is very sound. Given relatively low investment needs relative to cash generated, Hermes has ample room for maintainable increase in the dividend, paying special dividends, and complete stock buybacks.

Bulls Say

Hermes benefits from unique positioning in the leather goods segment, supported by a supply/demand mismatch for its iconic bags.
Hermes products include both big-ticket items and a range of small accessories that can be used as gifts, which helps to limit cyclicality and engages a broader customer audience.
Disciplined expansion in a cyclical upswing allowed the company to maintain its exclusivity perception and contributed to profitability improvement.

Company Description

Hermes is a 180-year-old family-controlled luxury goods company best known for its Birkin and Kelly bags. Its biggest segments are leather goods and saddlery, accounting for around half of revenue; clothes and accessories (22% of sales); silk and textiles (7%); and other products such as perfumes, watches, jewelry, and home furnishings. Hermes has around 300 stores globally, of which it owns and operates 221.

(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.

Tags European Market

Dividend Stocks

Mercedes-Benz Is a World Leader in Premium and Luxury Automobiles

Post author By lvc-admin
Post date August 1, 2022
No Comments on Mercedes-Benz Is a World Leader in Premium and Luxury Automobiles

Business Strategy & Outlook

Daimler AG completed the spinoff of its truck and bus operations on Dec. 10, 2021 and changed its name to Mercedes-Benz Group AG on Feb. 1, 2022. In 2021, the truck and bus business, now called Daimler Truck AG, accounted for 20% of consolidated revenue including discontinued operations and 11% of group adjusted EBIT. The remaining operations of Mercedes-Benz Group include premium and luxury passenger vehicles and light commercial vans as well as Mercedes-Benz Mobility, which includes financial services and other mobility services like ride-hailing. The highly regarded Mercedes-Benz brand is one of the top luxury automobile names in the world. The firm is also a European leader in commercial vans. Even so, Mercedes faces stiff competition in all of its markets. The company operates in the cyclical, capital-intense, highly competitive passenger vehicle industry where raw material commodity costs can be volatile and unionized labor can be expensive.

Geographically diverse sales reduce exposure to the economic conditions of any one region. Even so, premium brands such as Mercedes-Benz limit exposure to downturns suffered by mass-market auto companies because wealthier customers’ spending is less sensitive to recessions. Global population growth of high-net-worth individuals has averaged 5%, increasing Mercedes’ addressable market, faster than the 1%-3% rate for long-term global light-vehicle demand growth. New products are critical to spurring consumer interest and can help results even in an economic downturn. Mercedes-Benz launches new or significantly refreshed models in various markets around the world every year. Research and development spending, including capitalized development costs, is substantial, averaging roughly 6% of sales, which is a necessary part of a long-term strategy. Environmental legislation worldwide forces automakers to design vehicles with more efficient combustion engines and electrified powertrains. By 2030, the company says it will be “ready to go all-electric.”

Financial Strengths

One can consider Mercedes-Benz’ balance sheet to be in good shape. The company maintains a substantial cash balance and healthy availability on bank lines of credit. To remain competitive, automakers need high liquidity to fund R&D and capital investment to support product launches throughout economic cycles. At the end of 2021, the company had net industrial liquidity of EUR 21.0 billion (cash and credit line availability less debt). The company has healthy liquidity. The industrial business’ total adjusted debt/EBITDAR, which takes into consideration rent expense and operating leases, has averaged 0.7 times since 2011, which is strong for a capital-intensive, cyclical passenger vehicle maker. Financial liability maturities, including financial services, appear to be well laddered and matched with maturing financial loan assets. Mercedes’ consolidated capital structure is complex from its captive finance operations, which support industrial operations’ sales by providing credit to dealers and consumers but also have banking operations and other financial services. Aside from its balance sheet cash hoard, the company relies mostly on notes and bonds for its funding requirements but also uses lines of credit, deposits from banking customers, and commercial paper. The consolidated capital structure’s total debt/total capital historical average since 2011 is 63.0%. Taking Mercedes’ substantial cash position into account, net debt/total capital averages 51.6%. With the financial-services business accounted for on an equity basis, Mercedes’ total debt/total capital averages 13.8%, while net debt/total capital averages only negative 11.5%, denoting an average net cash position.

Bulls Say

Mercedes-Benz is a highly recognizable, well respected global luxury brand, giving the company a modest buffer against the cyclical downturns of auto sales.
Mercedes’ strong R&D capabilities and electrified powertrain technologies should prove valuable because of global clean-air legislation.
Management’s long-term return on sales targets are higher than what is model, so upside potential exists to the valuation.

Company Description

Based in Stuttgart, Germany, Mercedes-Benz Group AG makes premium passenger vehicles and commercial vans. Brands include Mercedes-Benz, AMG, and Maybach. Mercedes-Benz Mobility provides the company’s dealers and its customers with vehicle financing as well as mobility services in ride hailing, car sharing, and charging. Mercedes owns 11.9% of Aston Martin and 9.6% of Beijing Automotive Group. Li Shufu, chairman of Chinese automaker Geely Automobile, owns 9.7% of Mercedes-Benz. Other major shareholders include Kuwait Investment Authority at 6.8% and Beijing Automotive group at 5.0%.

(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.

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