Category: Sectors

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.

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 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.

Tags Top Stories

Technology Stocks

Strong Execution Continued Into Q2 at T-Mobile; Shares Modestly Undervalued

Post author By lvc-admin
Post date August 1, 2022
No Comments on Strong Execution Continued Into Q2 at T-Mobile; Shares Modestly Undervalued

Over the shoulder view of and stock broker trading online while accepting orders by phone. Multiple computer screens ful of charts and data analyses in background.

Business Strategy & Outlook

T-Mobile’s strong brand and reputation, coupled with its industry-leading spectrum position, provides it with an opportunity to drive strong revenue and profit growth over the next couple of years. Longer term, a rational competitive landscape will allow the firm and its rivals to deliver stable, if modest, cash flow growth. In the five years leading up to the Sprint acquisition, T-Mobile expanded its postpaid phone customer base nearly 60% while the rest of the industry stagnated. Despite this growth, T-Mobile remained far smaller than AT&T or Verizon, putting it at a scale disadvantage evident in significantly lower profitability than its larger rivals. With the addition of Sprint, though, T-Mobile is larger than AT&T and reasonably close to Verizon. The combination of scale and strong management should serve T-Mobile well. 2022 will be an important year, as the firm shuts down the Sprint networks and fully moves Sprint customers to T-Mobile’s network and systems, but one has little reason to doubt this process will go smoothly, as integration thus far has been impressive.

The T-Mobile network will match up well with that of its rivals over the long term, and it is worthy of a narrow economic moat rating. Importantly, the massive amount of spectrum the firm now controls puts it in a strong position. Its mid band spectrum holdings, which will likely provide the bulk of wireless network capacity well into the future, are massive and largely unused. The firm avoided matching Verizon and AT&T egregious spending in the C-band spectrum auction as a result. Efficiently and effectively deploying this resource, something Sprint failed to do on its own, is now the firm’s primary objective. T-Mobile’s network isn’t perfect. The firm doesn’t own significant fixed-line assets, which will likely be increasingly important as wireless networks become denser. The firm will have access to third-party networks on reasonable terms, but this remains a risk. T-Mobile also leases many of its spectrum licenses and will need to renew leases or purchase licenses outright in the coming years.

Financial Strengths

T-Mobile had done a great job of reducing leverage over the past few years while Sprint had moved in the opposite direction. The merged firm started life with about $64 billion in debt net of cash, equal to about 2.9 times EBITDA, or about 3.5 times adjusted for Sprint’s heavy use of phone leases. Since the merger, T-Mobile has primarily used free cash flow to reduce leverage, but its participation in the C-band spectrum auction, where it spent $9.3 billion, pushed net debt up to $72 billion at the end of the first quarter of 2022. Growth in the business has still allowed net debt to remain at 3.0 times EBITDA. Net leverage also sits at 3.0 times “core-adjusted” EBITDA, which excludes integration costs but also eliminates the accounting benefit from phone lease revenue. T-Mobile management had said it believes it can run the business with leverage in the 3.0-4.0 times range but now targets leverage at a mid-2s multiple of core adjusted EBITDA, a level it believes it can hit by the end of 2022. Management has said it would need to cut leverage below 2.5 times to receive an investment-grade rating from the major agencies but notes that it has been able to borrow at rates only modestly higher than AT&T in recent years. The firm has also received an investment-grade rating on its secured borrowings. One suspect less favorable debt market condition would have a significant impact on T-Mobile’s borrowing costs. Taking leverage down to around 2.5 times adjusted core EBITDA seems reasonable but one wouldn’t be opposed if the firm drove leverage lower still given the ups and downs of the wireless industry and the financial capabilities of rivals AT&T and Verizon. Management expects to begin returning capital to shareholders in 2023, saying it could buy back up to $60 billion of its shares through 2025.

Bulls Say

After several years of unprecedented success, T-Mobile has the wind at its back. The firm’s reputation with consumers is as strong as ever, and its network is delivering better service than the other carriers.
The Sprint merger has catapulted T-Mobile near the top of the industry, with ample scale to compete and a spectrum portfolio no other carrier can match. Heavy network investment will bring operating costs savings and a lead in 5G.
Free cash flow, already positive during the Sprint integration, should grow sharply, providing the ability to return capital to shareholders.

Company Description

Deutsche Telekom merged its T-Mobile USA unit with prepaid specialist MetroPCS in 2013, creating T-Mobile US. Following the merger, the firm provided nationwide service in major markets but spottier coverage elsewhere. T-Mobile spent aggressively on low-frequency spectrum, well suited to broad coverage, and has substantially expanded its geographic footprint. This expansion, coupled with aggressive marketing and innovative offerings, produced rapid customer growth. With the Sprint acquisition, the firm’s scale now roughly matches its larger rivals: T-Mobile now serves 71 million postpaid and 21 million prepaid phone customers, equal to around 30% of the U.S. retail wireless market. In addition, the firm provides wholesale service to resellers.

(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 Top Stories

Technology Stocks

Rockwell’s signature platform in this strategy is Logix, which consists of programmable controllers and a line of products interoperable with third-party and some legacy application

Over the shoulder view of and stock broker trading online while accepting orders by phone. Multiple computer screens ful of charts and data analyses in background.

Business Strategy and Outlook

Rockwell as the highest quality automation player on the west side of the Atlantic based on quality, breadth of offerings, and shrewd strategic partnerships. Today, it’s one of the best-in-breed competitors seeking to gain a stronger foothold where technology meets traditional manufacturing, which Rockwell calls its Connected Enterprise. Rockwell’s signature platform in this strategy is Logix, which consists of programmable controllers and a line of products interoperable with third-party and some legacy applications. The advantage of this platform is multifold. First, Logix can perform multiple automation applications, like discrete (automotive, for example), process (chemicals), and hybrid (pharmaceuticals) on a single platform. Most competitors pursue these automation applications through a piecemeal mix of hardware and firmware platforms.

Second, by using a single, easy-to-use platform, Logix reduces training costs and maintenance expenses as well as makes it easier to communicate across different manufacturing cells. The training costs will become a greater consideration as technology inevitably becomes increasingly integrated into manufacturing facilities. Ultimately, workers will need to be comfortable with that technology, which can become complicated if they’re forced to learn multiple platforms. Third, because Logix works with third-party applications, customers can make incremental improvements to their facilities without incurring the disruption of an expensive system overhaul. This should allow for cheaper installation and scale-up costs. Finally, like other automation counterparts, the Logix platform offers customers the opportunity to run analytics on the cloud, allowing for improved asset utilization as well as lower total cost of ownership. Predictive maintenance further allows for reduced enterprise risk, while analytics helps customer products get to market faster through optimized throughput. Ultimately, the value offered by solutions like its independent cart and partnerships with Sensia and PTC, combined with inorganic opportunities, should allow the firm to remain a premium player in a growing industry.

Financial Strength

Rockwell operates from a stable and healthy balance sheet position. The firm has low risk of default, which concurs with the model-driven credit risk assessment. The company’s current unrestricted cash position can easily cover all of its short-term debt obligations as of the end of fiscal 2021. As of the end of fiscal 2021, the calculated net debt to EBITDA is of 2.3 times, and an interest coverage ratio (EBIT/interest expense) of 13 times, which is more than sufficient to address Rockwell’s financial obligations. This underpins the strength of the firm’s financial health. Rockwell sports healthy free cash flow conversion that frequently exceeds 100%, though will be closer to 90% during fiscal 2022. It also sports a best-in-class free cash flow margin in the higher midteens, which can even slightly improve on over time.

Bulls Say’s

Rockwell is the only automation competitor that integrates discrete, process, and hybrid manufacturing in a single, easy-to-use platform.
Newer initiatives like digital twi n and augmented reality, as well as software subscription services that deliver predictive analytics should drive higher growth compared with historical results.

Less than 20% factories are connected, and most insights that drive greater throughput and efficiency are now made “at the edge,” or closer to the manufacturing floor.

Company Profile

Rockwell Automation is a pure-play automation competitor that is the successor entity to Rockwell International, which spun off its former Rockwell Collins avionics segment in 2001. As of fiscal 2021, the firm operates through three segments–intelligent devices, software and control, and lifecycle services. Intelligent devices contain its drives, sensors, and industrial components, software and control contain its information and network and security software, while lifecycle services contain its consulting and maintenance services as well as its Sensia JV with Schlumberger.

(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 Top Stocks

Dividend Stocks

U.S. Bancorp has an attractive mix of fee-generating businesses, including payments, corporate trust, investment management, and mortgage banking

Business Strategy and 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. 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.

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 favour the largest banks, including U.S. Bancorp, over time. Payments 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 favourably and 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 Strength

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. There are no 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’s

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 Profile

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).

Tags Top Stocks

Global stocks Shares

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

Business Strategy and Outlook

Swedish-based Spotify is the world’s leading music streaming service provider. The fast-growing digital streaming space as becoming 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. It will not 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 is applaudable. However, while the firm has become the market leader via content acquisition, which further diversifies its revenue, its dependency on labels to be lessened much is not expected. 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 Strength

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, the firm’s annual capital expenditure to be EUR 75 million-EUR 100 million, is 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 is to equity/sales, to average around 6% the next 5 years.

Bulls Say’s

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 Profile

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).

Tags US Market

Global stocks

Equifax to focus on expanding use cases of income verification beyond mortgage to auto, card, and government service

Post author By lvc-admin
Post date July 29, 2022
No Comments on Equifax to focus on expanding use cases of income verification beyond mortgage to auto, card, and government service

Business Strategy and Outlook

Along with TransUnion and Experian, Equifax is one of the big three credit bureaus. Given the fixed costs inherent in a data-intensive business, Equifax has been able to enjoy strong operating leverage from incremental revenue. As the U.S. credit bureau market is relatively mature, the company has been adding new capabilities and expanding its geographic footprint, both organically and through acquisitions. As an example of its bolt-on acquisition strategy, Equifax announced in January 2021 that it will acquire e-commerce fraud prevention platform Kount for $640 million. Kount builds on Equifax’s existing antifraud products and acquiring unique data and software assets makes sense.

Equifax’s star in recent years has been its workforce solutions segment, which is now its largest segment. Workforce solutions include income verification (primarily for mortgages), and don’t expect Equifax has meaningful direct competition for this service. Equifax’s competitive position to persist as the large amount of existing records and the difficulty of convincing employers to share employee information would be too tough for new entrants to overcome. In the years ahead, Equifax is to focus on expanding use cases of income verification beyond mortgage to auto, card, and government services. Workforce solutions also includes employers’ services, which consist of employee onboarding solutions, I-9 management, tax form services, and unemployment claims processing. Growth by acquisition in Workforce Solutions has also been a focus, most notably with its $1.8 billion deal to buy Appriss Insights. Equifax’s reputation took a beating after a well-publicized data breach in September 2017. This wasn’t the first time Equifax suffered a data breach; however, the depth and the breadth of the breach created ire among the public and showed that the company wasn’t prepared to handle customers’ data securely. Following the breach, Equifax has invested heavily in cybersecurity and incurred significant legal and product liability costs. Equifax has largely put the episode behind it.

Financial Strength

Equifax management has historically been reasonably conservative with the balance sheet, with leverage ratios (net debt/adjusted EBITDA) between 1.5 and 3.0 times in the past several years. Management has shown a willingness to increase debt after an acquisition. Following the acquisition of Veda in 2016, the leverage ratio went to 3.5 times, but the firm quickly paid some of its debt to reduce leverage. Following the data breach in 2017, leverage increased as the firm incurred significant costs related to the breach. At the end of 2021, Equifax disclosed that it had $4.5 billion in long-term debt and $0.2 billion of cash. On a net leverage basis, Equifax’s leverage at the end of the fourth quarter of 2021 was about 2.5 times. Given this and the fact that a significant subset of the company’s business is either not very economically sensitive or countercyclical, Equifax is on strong financial footing amid the coronavirus-induced macroeconomic uncertainty.

Bulls Say’s

The workforce solutions segment is a fast-growing business built on unique data and can contribute meaningfully to earnings growth. Equifax can increase use cases in non mortgage applications for income verification.
Equifax’s business lines are capital-light, and incremental revenue tends to flow to the bottom line, generating high returns on invested capital and operating margin expansion.
Equifax’s acquisitions can further solidify its moat and diversify its lines of business.

Company Profile

Along with Experian and TransUnion, Equifax is one of the leading credit bureaus in the United States. Equifax’s credit reports provide credit histories on millions of consumers, and the firm’s services are critical to lenders’ credit decisions. In addition, about a third of the firm’s revenue comes from workforce solutions, which provides income verification and employer human resources services. Equifax generates over 20% of its revenue from outside the United States.

(Source: MorningStar)

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

Tags US Market

Global stocks

Kerry is one of the industry’s 10 major firms, which accounts for less than 50% of industry revenue

Post author By lvc-admin
Post date July 29, 2022
No Comments on Kerry is one of the industry’s 10 major firms, which accounts for less than 50% of industry revenue

Business Strategy and Outlook

Kerry Group has evolved from its humble roots as an Irish dairy co-operative into a global flavour and nutrition powerhouse serving the food, beverage, and food-service sectors. The wide economic moat rating is supported by intangible assets and switching costs stemming from the company’s wide range of ingredient solutions and strong service component, which contributes to partnership like client relationships. Kerry works with clients to find market opportunities that can be successfully delivered, in contrast to its flavour and fragrance competitors, which take a more transactional strategy that focuses on delivering bespoke taste solutions utilizing their considerable research and development resources.

These holistic collaborations with a range of customers from various end-use segments and geographies produce essential market and consumer insights that enrich Kerry’s service offering, a virtuous cycle at the heart of the company’s considerable competitive advantages. Post coronavirus, Kerry has unique exposure to the most dynamic segments of the global food and beverage business, since two thirds of its revenue comes from local and regional food and beverage clients and approximately one fifth is derived from the food-service market. Taste and nutrition accounts for over 92% of sales and is the primary growth engine for Kerry. The worldwide food ingredient and taste industry is fragmented, with projected sales of more than $70 billion and a growth rate of 2% to 3%. Kerry is one of the industry’s 10 major firms, which accounts for less than 50% of industry revenue. Kerry’s other section is a somewhat undifferentiated dairy business, after the recent sale of the company’s meals and meats division.

Financial Strength

Kerry is in strong financial health. The company has moderate financial gearing, with net debt/2021 adjusted EBITDA of 1.9 times, and consistently generates good amounts of free cash flow, though at a lower level than F&F companies and the leading consumer staple companies in general. Aggregate acquisition spending of around EUR 1.25 billion through the next five years based on the company’s strategy to lead consolidation in the fragmented food ingredient and flavour market. Due to Kerry’s acquisitive nature and above-average capital spending, discretionary cash generation (free cash flow will average close to 5% of sales over the next five years) is moderate. Typically, Kerry spends 3%-5% of sales on capital expenditures and around 6.5% (based on taste and nutrition sales) on average on bolt-on acquisitions. Although the former is to remain in line, the capital spending on acquisitions normalising a bit over the next five years, but still remaining adequate driven by the company’s core strategy to further develop its integrated solutions offering through a broader geographic presence and a wider range of ingredient solutions, catering better to both the food-service and developing markets. The dividend policy looks conservative, given a fiscal 2021 payout ratio of about 25% despite moderate financial gearing and good free cash flow generation. It appears Kerry may be deliberately keeping sufficient financial flexibility in case it decides to undertake a significant, transformational acquisition mostly paid in cash, though past experience.

Bulls Say’s

Kerry’s integrated solutions model is hard to replicate due to its high service component (based on decades of experience) and wide range of solutions offered.

Kerry is one of the largest firms in a fragmented flavour and specialty food ingredient industry, which provides ample opportunities to consolidate and gain meaningful scale.
Ingredient sales are expected to grow faster than food or beverage sales because of outsourcing, secular trends like clean labelling and health and wellness, and a rising number of applications and technologies (driving volume growth).

Company Profile

Kerry Group is a global leader in taste and ingredient technology servicing the food, beverage, and pharmaceutical sectors. The company’s more than 150 manufacturing facilities supply clients in 150 countries with 18,000 food and ingredient items. It gets around 80% of its revenue from developed countries and 20% from the developing world, servicing a wide range of end-use sectors, such as meat, meals, snacks, dairy, drinks, and pharmaceuticals. Kerry has expanded through a combination of organic development and multiple tuck-in acquisitions.

(Source: MorningStar)

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

Tags European Market

Global stocks Shares

United Airlines will participate in the recovery of business and international leisure travel in 2022 and 2023

Post author By lvc-admin
Post date July 29, 2022
No Comments on United Airlines will participate in the recovery of business and international leisure travel in 2022 and 2023

Business Strategy and Outlook

United Airlines is the most internationally focused U.S.-based carrier by operating revenue, with almost 40% of 2019 revenue coming from international activities. Before the coronavirus pandemic, much of the company’s story focused on realizing cost efficiencies to expand margins. In the leisure market, United is to continue receiving yield pressure from low-cost carriers. While its basic economy offering effectively serves the leisure market, don’t expect the firm to thrive in this segment. United’s international routes will not be as pressured, but that international flights will be difficult to fill until border restrictions are lifted.

United Airlines will participate in the recovery of business and international leisure travel in 2022 and 2023. A recovery in business travel will be critical for United to maintain the attractive economics of the frequent-flier program. Business travellers will often use miles from a cobranded credit card to upgrade flights when their company is unwilling to pay a premium price. Banks are willing to pay top dollar for these frequent-flier miles, which provides a high-margin income stream to United. The COVID-19 pandemic has presented airlines with the sharpest demand shock in history, and much of the projections are based on assumptions around how illness and vaccinations affect society. A full recovery is expected in capacity and an 80%-90% recovery in business travel that subsequently grows at GDP levels over the medium term. United has considerably greater regulatory uncertainty than peer carriers due to its increased exposure to international travel, and summer of 2022 will be a critical test of international travel recovery for United.

Financial Strength

United has a roughly average debt burden relative to peer U.S. carriers, but an average airline balance sheet is not strong in absolute terms. United carries a large amount of debt, comparatively thin margins, and substantial revenue uncertainty. As the pandemic has wreaked havoc on air travel demand and airlines’ business models, liquidity has become more important than in recent years. The primary risks to airline investors are increased leverage and equity dilution as airlines look to bolster solvency while demand is in the doldrums. United’s priority after the pandemic will be deleveraging the balance sheet, but this will take several years because of the firm’s thin margins. United came into the pandemic with a reasonable amount of debt, with the gross debt/EBITDA ratio sitting at roughly 4.5 times in 2019. United, like all airlines, has materially increased its leverage since February 2020 and has issued debt and received support from the government to survive a previously unfathomable decline in air traffic. As of the fourth quarter of 2021, United has $33.4 billion of debt and $18.3 billion of cash on the balance sheet. Roughly break-even levels of profitability are in 2022 and profitability in 2023 and beyond, there is no leverage to increase considerably from here on out.

Bulls Say’s

United has renewed its frequent-flier partnership with Chase, potentially creating room for long-term margin expansion.
An increasing focus on capacity restraint across the industry, combined with structurally lower fuel prices, should boost airlines’ financial performance over the medium term.

Leisure travellers have become more comfortable with flying during the COVID-19 pandemic.

Company Profile

United Airlines is a major U.S. network carrier. United’s hubs include San Francisco, Chicago, Houston, Denver, Los Angeles, New York/Newark, and Washington, D.C. United operates a hub-and-spoke system that is more focused on international travel than legacy peers.

(Source: MorningStar)

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

Tags US Market