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Dividend Stocks

Looking beyond the current plan, Ameren has its sight set on nearly $28 billion of additional investment opportunities

Business Strategy and Outlook 

Ameren is a regulated utility that operates in Illinois and Missouri, two historically challenging regulatory jurisdictions that are rapidly improving. With improving rate regulation come significant investment opportunities, supporting the company’s five-year $17.3 billion capital investment plan. Looking beyond the current plan, Ameren has its sights set on nearly $28 billion of additional investment opportunities for the following five years, providing a long runway of growth for the company. Management is to be applauded for attaining constructive utility legislation in Missouri. Its patient yet persistent years-long efforts resulted in increased investment opportunities across the territory, a stark change from the past. Numerous trackers are in place for fuel adjustments, pension, and tax positions. These mechanisms are attributes of a constructive regulatory environment. Recent legislation allows utilities to securitize the remaining liabilities associated with Ameren’s coal plants, potentially allowing earlier-than-planned coal plant retirements and faster renewable energy growth.

With an improved regulatory framework in Missouri, management is keeping its promise to invest in jurisdictions that support investment. Ameren is allocating nearly half of its investment plan to Missouri. Projects will focus on renewable energy, upgrading aging and underperforming assets, and employing smart grids and connected grid services. Regulation in Illinois is set to change. While performance-based ratemaking, in which allowed returns on equity are 580 basis points above the average 30-year U.S. Treasury yield, was constructive, the drop-in interest rates led to some of the lowest allowed returns among its peers. New legislation allows utilities to opt in for a four-year rate plan beginning in 2024. Under the multi year plan, utilities are able to true-up earned returns to their allowed returns and continue sales decoupling. Performance metrics, both incentives and penalties, are given in a range of 20-60 basis points. The new rate structure could produce higher allowed returns in Illinois.

Financial Strength

Ameren will invest $17.3 billion of capital between 2022 and 2026.It is expected the company to issue debt and equity in line with its current capital structure and refinance its debt as it comes due. Ameren increased the dividend 10% in 2021. Future dividend growth to be more in line with earnings growth. Ameren has tended to be at the lower end of its 55%-70% dividend payout target. Ameren’s current financial health is sound. The firm’s 58% debt/capitalization ratio is in line with its utility peers. Interest coverage is healthy at over 6.0 times, and current debt/EBITDA is over 5.0.

Bulls Say’s:

  • Ameren’s regulated utilities provide a stable source of earnings. The company’s large capital expenditure plan should drive above-average rate base and earnings growth for the next several years. 
  • Ameren’s regulatory relationships have improved significantly in Missouri.
  • Ameren’s management team has proved to be best in-class operators, having diligently worked to improve regulatory relationships and execute on substantial growth projects.

Company Profile 

Ameren owns rate-regulated generation, transmission, and distribution networks that deliver electricity and natural gas in Missouri and Illinois. It serves 2.4 million electricity customers and more than 900,000 natural gas customers.

(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.

Categories
Shares Small Cap

Zip Shares Still Cheap After Walking Away from Sezzle, But Its Fundamentals Are Getting Murkier

Business Strategy & Outlook:
Zip’s focus is on maximizing its addressable market. Its business is more diversified than single-product buy now, pay later, or BNPL, players, with varieties in financing options, transaction limits, and repayment schedules. Customers enjoy simple sign-up and checkouts, high acceptance by retailers and flexible financing solutions to help better manage their cash flows. Merchant partners may benefit from increased conversion rates, basket sizes, and transaction frequencies. Zip has a revolving credit business in Australia. ZipPay finances up to AUD 1,000, and ZipMoney AUD 1,000 and above. It also boasts a broader merchant base including retail, home, electronics, health, auto, and travel. Around 70% of revenue is derived from customers, mainly from account fees and interest. Meanwhile, Zip Business provides unsecured loans of up to AUD 500,000 to small and midsize enterprises.

Zip adopts an installment financing model overseas, helping it scale up faster and keep up with competition in the underpenetrated global BNPL landscape. The acquisition of U.S. based Quad Pay materially boosts its growth prospects. It also operates in the U.K., Canada, Europe, Mexico, and the Middle East. Zip enhances customer stickiness via ongoing product add-ons. It has a Pay Anywhere function that lets users transact at a wide variety of avenues without being confined to merchant partners. Users also benefit from promotional offers, cash-back deals, or free credits. Newer features include crypto trading, credit reporting, and savings accounts. For merchant partners, Zip invests in co-marketing to help them acquire new customers. Zip has strong earnings prospects, but its margins will be increasingly under pressure and it will not achieve the same penetration and transaction frequency overseas as it had domestically. While it benefits from the growth of e-commerce and increasing preference for more convenient/cheaper forms of financing, anticipated heightened competition to its products. The capital-intensive domestic business cannot scale up as quickly, its fee structure potentially creates friction for customers, and its product offering in the U.S lacks clear differentiation.

Financial Strengths:
While credit stress is creeping up, Zip remains overall in reasonable financial health. As of March 2022, the net bad debt ratio for its core ANZ business sits at 3.40% of receivables, while arrears are at 2.29%. But as a reprieve, Zip’s current financial position would be bolstered by: 1) its March equity raise; and 2) avoiding absorbing Sezzle’s net losses. Its debt/capital ratio is 56%, while the ratio of equity/receivables has improved to 52% in fiscal 2021 from 8.1% in fiscal 2017. Zip’s bad debts should stay manageable in a major credit event. Unlike some peers, Zip conducts a greater degree of background check before onboarding customers, such as collecting bank statements and pulling in information from a credit bureau. Soft credit checks are similarly performed when onboarding new customers overseas. This helps compensate for the fact that its receivables are higher-risk due to them having longer repayment periods and higher transaction value (notably for Zip Money) or it having a Pay Anywhere model. Its installment businesses have shorter turnover periods and lower transaction values, meaning it can know much earlier (relative to credit cards) if customers have trouble making payments and can therefore amend its risk controls accordingly. Most its Australian receivables are funded by its asset-based securitization program, with undrawn facilities totaling AUD 401.9 million as of March 2022. It also has USD 168.1 million and AUD 119.5 million of undrawn facilities to fund U.S and Zip Business’ receivables, respectively.

Bulls Say:
Zip is well placed to continue growing its transaction volume, given its variety in financing options and retailer base, as well as its Pay Anywhere model which provides a greater avenue to spend using its products.
Zip benefits from an accelerated shift to e-commerce, increased adoption of cashless payments, and a growing need among merchants for effective marketing amid a challenging retail backdrop.
Zip faces lower regulatory risks than its BNPL rivals, as it already conducts a greater degree of background checks and ZipMoney is already regulated by the National Credit Act.

Company Description:
Zip is a diversified finance provider, offering consumer financing via a line of credit (via ZipPay and ZipMoney) and installment-based finance (via Quad Pay, Spotii, Twisto, and PayFlex); as well as lending to small to midsize enterprises (via Zip Business). Zip’s fortunes are largely tied to the buy now, pay later, or BNPL, industry. Most of its products–ZipPay, Quad Pay (Zip U.S.), and PayFlex–do not charge interest based on outstanding balances. Around 60%-70% of Zip Pay’s/Zip Money’s revenue is derived from customers, mainly via account fees and interest. Meanwhile, its installment businesses primarily generate revenue by receiving a margin from merchants, which compensates it for accepting all nonpayment risk and for encouraging consumers to transact more frequently.

(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Cohen & Steers Continues to Be Affected by Equity Market Selloff; FVE Lowered to $80 per Share

Business Strategy & Outlook

While the combination of rising interest rates and an equity market selloff has had an impact on Cohen & Steers’ levels of assets under management, they are cautiously optimistic about the firm over the near to medium term. Cohen & Steers came into 2022 with a record $106.6 billion in managed assets, split among its U.S. real estate (47% of total AUM), global/international real estate (18%), global listed infrastructure (8%), and preferred securities (25%) offerings. But market losses and meager flows during the first half of the year had left the company with $87.9 billion in managed assets at the end of June. So far, market losses are having a bigger impact on AUM than flows, with Cohen & Steers reporting a 12.3% (16.0%) market loss for its managed assets during the second quarter (first half) of 2022. This was better than the Morningstar Global Markets REIT TR Index, which was down 15.6% (20.0%) during the same time frame. Part of this is likely due to the firm garnering just two thirds of its total AUM from real estate investment funds, and some can also be attributed to active management.

While REITs have generally performed well during periods of rising long-term interest rates (based on studies done by NAREIT over the years), the current tightening cycle is a push by the Fed to fight inflation, which has been hitting levels not seen since the early 1980s. Rising rates and inflation can hinder external growth efforts for REITs (as acquisitions become less accretive) and pressure existing tenants, as well as provide investors with a less risky yield alternative in fixed-income securities (leading to outflows). It looks like most of Cohen & Steers’ investors are not running for the exits, though, as flows have been relatively flattish year to date. The firm’s institutional clients tend to be first to reallocate (and generally well in advance of Fed actions), so the fact they’ve not pulled out too aggressively is a positive. The Standard & Poor’s separation of real estate-related companies from the financial services sector has forced many institutional investors to maintain exposure to REITs, adding some stability to Cohen & Steers’ managed assets.

Financial Strengths

Cohen & Steers has not had any debt on its books since 2005. Based on what to be conservative long-term estimates for profitability and cash flows, the company is unlikely to need to tap the credit markets to fund its operations during the five-year projection period. Over the past 10 calendar years, Cohen & Steers has returned more than $1.1 billion to shareholders as dividends (utilizing both regular quarterly dividends and special one-time dividends to pay out capital) and around $130 million to shareholders via share repurchases (net of share issuances). Going forward, the firm will return just over half of its expected annual free cash flow (of around $270 million on average) to shareholders as dividends, with the rest spent on share repurchases or other investments (including seed capital for new products). At the end of March 2022, the firm had $115 million in cash and cash equivalents (including $30 million in U.S. Treasury securities) and $255 million in investments (including $63 million in seed capital) on its books.

Bulls Say

  • Cohen & Steers’ long record of successful REIT investing has allowed it to tap into demand for alternatives that offer diversification away from more traditional stock and bond offerings. 
  • The firm’s funds are entrenched in the broker/dealer market, and the company also garners close to half of its AUM from institutional clients, providing it with a relatively stable base of assets. 
  • At the end of March 2022, Cohen & Steers had $2.33 in cash and equivalents per share on hand, which could be used to fund a special dividend, a strategic acquisition, or to increase share repurchases.

Company Description

Cohen & Steers is a niche asset manager concentrating on real estate securities. The firm invests mainly in the equity shares of real estate investment trusts, with holdings in domestic and international real estate securities accounting for close to two thirds of its $87.9 billion in managed assets at the end of June 2022. Cohen & Steers also manages portfolios dedicated to preferred securities, utilities stocks, and other high-yield offerings. It expects to balance distribution among its closed-end mutual funds, open-end mutual funds, and institutional accounts over time. During the March quarter of 2022, the company garnered 40% (26%) of its managed assets (base management fees) from institutional clients, 47% (55%) from open-end funds, and 13% (19%) from closed-end funds.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Assa Abloy has significant growth potential as it benefits from structural changes

Business Strategy & Outlook

Assa Abloy has significant growth potential as it benefits from structural changes. There are two key drivers of future growth. An industrywide shift toward software-driven products, expanding functionality, and linking locking systems with other building systems. Second, emerging-market demand will move up the quality curve to more sophisticated locking solutions, in which Assa Abloy is a leader. If the spectrum of today’s locks were defined by a basic mechanical lock on one end and a software-controlled locking system on the other end, Assa Abloy’s product portfolio would be heavily weighted toward the latter. Advances in the past decade have expanded the functionality of lock systems to enable ever more precise access parameters, as well as enhanced identification of lock system users. For example, a building administrator would be able to provide a registered visitor with temporary access to a computer for a specified two-hour window on a particular day.

Technological improvements are shortening the upgrade cycle for locks, as customers are eager to implement new security-enhancing features. The shift toward software-driven locks will continue over the long term, with the company’s global technologies division forging the path. The division is experiencing good initial success in selling virtual keys, typically issued on a temporary basis to mobile phones. Asia and other emerging markets lag in locking solutions, with under penetration of electromechanical locks, such as those linked to a keycard reader. Pent-up demand in the region, combined with strategic acquisitions, fueled a fivefold increase in Assa Abloy’s Asia-Pacific revenue over the past decade, with organic revenue growth averaging 5% from 2005 to 2013 (before China’s property bust). For buildings with multiple daily users, there are obvious benefits from upgrading to more sophisticated systems that can track and limit building access. Asia and other emerging markets offer a long runway of demand for Assa Abloy’s products.

Financial Strengths

At the end of March 2022, the company’s net debt/EBITDA ratio was less than 2 times. Looking to the medium term, total debt maturities from 2023 to 2026 are around SEK 13 billion out of around SEK 25 billion in gross debt. Given the forecast for roughly SEK 16 billion in annual free cash flow, which would enable the company to pay down gross debt, in theory, in about two years.

Bulls Say

  • As the global leader in locking solutions, Assa Abloy is best positioned to capture the spoils from a secular shift toward integrated lock and other building systems.
  • The growing contribution of software-driven products should strengthen Assa Abloy’s margins and returns, as well as the stickiness of customer relationships, in the medium term. 
  • Accelerated adoption of electromechanical, digital, or smart locks should ease Assa Abloy’s path toward achieving its target of 5% organic growth over the business cycle.

Company Description

Assa Abloy has the world’s largest installed base of locks, protecting some of the most security-sensitive buildings, including the European Parliament in Brussels. Three fourths of its revenue come from government and commercial customers. The company’s product base is centered on electromechanical locks, which require identification to unlock with a keycard, biometric scan, or PIN. Assa Abloy’s products are sold directly to security systems integrators, locksmiths, hardware stores, and original equipment manufacturers

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Dividend Stocks

Hannover Re a Rare Moat in Reinsurance

Business Strategy & Outlook:   

Hannover Re is a property and casualty, and life and health reinsurer with property and casualty contributing a little over two thirds of the company’s profits to shareholders. Hannover Re has slightly less than double-digit market share in both these divisions. This is a business that is characterized by underwriting and carving deep expertise in niche areas. While this may sound a bit wooly, some of this underwriting difference comes from the overall ownership of the underwriting process by Hannover Re’s underwriters. Company conceptualizes this through lenses of decision-making and responsibility. Whereas in other reinsurance firms, underwriters may need to defer back to a head of risk or perhaps even the c-suit, underwriters at Hannover Re have more authority and a better line of sight. Furthermore, it is anticipated that this leads to stronger client relationships because underwriters are client-facing and thus renewals a reiterative negotiation, with Hannover Re’s underwriters in the position to directly negotiate and discuss client needs without the need for constant deferral. This drives stronger retention rates, thereby lowering commissions and acquisition costs. 

In addition to the culture of excellence in underwriting with a proven reputation for expertise in specialist lines, Hannover Re benefits from an expense advantage and these two benefits are aligned. For example, with deeper and stronger expertise in underwriting, Hannover Re retrocedes less than comparable European reinsurance companies. As the business has the institutional capacity to absorb this internally with regard to its frontline, coupled with the lower levels of internal referrals outlined, Hannover Re supports more premium per employee than other comparable. The outcome of this is tangible with the business benefiting from at least a 1 percentage point expense-ratio advantage.

Financial Strengths:  

Hannover Re has a sound balance sheet. It has one of the better balance sheets among the companies in European reinsurance coverage. While debt to equity is a little higher than the company would like to see at 36.8%, the debt to us looks quite clean because there is no hidden debt within equity. The maturity of the debt is relatively long-dated with the closest maturity arising in over five years. Overall, coupon rates are low and so the combination of the two is encouraging. Further recent debt issues have carried similar rates of interest.

Bulls Say: 

  • Hannover Re has a strong culture of expertise and experience in specialist underwriting. 
  • Hannover Re is a cost leader with one of the lowest proportional amounts spent on administrative expenses. 
  • Hannover Re focuses on organic growth rather than acquisitions. This comes through in its lean structure, lower expenses, and approach to capital management.

Company Description:  

Hannover Re is a German-based reinsurance company with a strong reputation in writing specialist lines of reinsurance and a low-cost operating model. The business and its management team are highly disciplined, rarely ever acquiring and favoring a strategy of special dividends over committing to buybacks when looking to return excess capital to shareholders. Company also finds the business innovative in finding alternative and unearthed profit sources.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Dividend Stocks

Munich Re is the largest reinsurer in the world by gross premiums written

Business Strategy & Outlook

Munich Re is the largest reinsurer in the world by gross premiums written. A business of this size in an industry that is geared toward diversification rarely has an opportunity to improve returns on equity beyond efficiency. By that, they carve out a superior competitive position by utilizing information technology and scale in order to drive down expenses. However, in the case of Munich Re, while the occurrence of this dynamic, the implementation of innovative technology was key to the ongoing strategic positioning and development of the business. What is witnessed is institutional knowledge that is being transferred from one specialist area within the business to a division that is more commonly associated as a commodity. In the years that this transfer has taken place, one can see an improvement in divisional operating metrics. For the business unit in question, to calculate this as operating profit over gross premiums written. 

More broadly, over the past two decades, only one of Munich Re’s divisions has earned its cost of capital: nonlife reinsurance. Here, the division has earned an implied 12.3% return on equity versus the 9.0% that at the group level. Returns to shareholders in the life reinsurance division have been anemic at around 4.7% over this same period. However, it is work in the primary insurance division that is creating a competitive tailwind, combined with a growing contribution from risk solutions that houses the Hartford Steam Boiler business and sits within nonlife reinsurance.

Financial Strengths

The Munich Re is generally in good financial health and one can assess this through the solvency position. Munich Re reported a 231% solvency ratio at the end of first-quarter 2022, above its targeted 175% to 220% range.

Bulls Say

  • Munich Re has one of the strongest management teams in European insurance coverage. 
  • There is a strong focus on innovation in the business that is unusual for a company of this size and leadership. 
  • The turnaround to date of Ergo has been strong. This division is now earning over its cost of capital and there continues to be scope for improvement.

Company Description

Munich Re is one of the largest reinsurance firms in the world. It also serves clients with primary insurance.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Dividend Stocks

Australian Household Debt Levels Are a Risk, But Westpac Is Not as Risky as Share Price Implies

Business Strategy & Outlook:   

Westpac Bank is the second-largest of Australia’s four major banks. The bank provides a range of banking and financial services to retail and business customers, including mortgages, consumer finance, credit cards, business loans, and term deposits. Following the divestment of its financial planning and advice business, even its wealth arm–BT Financial Group–is likely to go. Under new leadership, most non banking units are being divested, including general, life, and mortgage insurance. Westpac’s strategy is anchored in its commitment to conservatively manage risk across all business areas, following its near-death experience in the early 1990s. The multi-brand, customer-focused strategy aims to capture an increasing share of business from its Australian and New Zealand banking and wealth management customer base. 

Westpac established itself as an integrated financial services group in the early 2000s with its expansion into wealth management, acquiring Rothschild, BT Financial Services, and Hastings. The company diversified domestically by acquiring St. George Bank in 2008, providing access to a broader customer base and adding scale. Westpac has a 22% share of home lending. While risks directly related to coronavirus have abated, wage pressures, labor, and supply chain challenges, and high inflation pose challenges as the cash rate increases. The main current influences on earnings growth are modest credit growth and widening margins as the banks reprice lending rates in a rising cash-rate environment. Operating expenses should continue to fall as the bank resets its cost base after completing a number of remediation and technology projects. The bank has suffered from slow approval times in home lending, but expects increased resources and digital investments to improve service levels. After enjoying super-low impairment charges pre-2020, large loan losses expected due to COVID-19 resulted in large provisions in fiscal 2020.The expected return to midcycle levels around 0.18% in fiscal 2025.

Financial Strengths:  

Westpac comfortably meets APRA’s common equity Tier 1 ratio benchmark of 10.5%. The bank’s common equity Tier 1 ratio was 11.3% as at March. 31, 2022, with the bank’s target range of 11% to 11.5%. This is based on APRA’s globally conservative methodology and a top-quartile internationally comparable 17.4%. The risk of higher loan losses is viewed and credit stress inflating risk-weighted assets as the greatest threat to the bank’s capital position in the near term. In the past three years, the proportion of customer deposits to total funding is about 60% to 65%, reducing exposure to volatile funding markets. After completing an AUD 3.5 billion share buyback in February 2022 Westpac has AUD 3.8 billion in excess capital as at March 31, 2022.

Bulls Say: 

  • Improving economic conditions underpin profit growth from fiscal 2021. Productivity improvements are likely from fiscal 2023.
  • Cost and capital advantages over regional banks and neo-banks provide a strong platform to drive credit growth.
  • Consumer banking provides earnings diversity to complement the more volatile returns generated from business and wholesale banking activities.

Company Description: 

Westpac is Australia’s oldest bank and financial services group, with a significant franchise in Australia and New Zealand in the consumer, small business, corporate, and institutional sectors, in addition to its major presence in wealth management. Westpac is among a handful of banks around the globe currently retaining very high credit ratings. The bank benefits from a large national branch network and significant market share, particularly in home loans and retail deposits.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Global stocks Shares

Wide-Moat Nike Faces Challenges, but Its Powerful Brand and Digital Strategy Position It Well

Business Strategy & Outlook:   

Company views Nike as the leader of the athletic apparel market and believes it will overcome the challenge of COVID-19 despite near-term supply issues. The wide moat rating on the company is based on its intangible brand asset, it will maintain premium pricing and generate economic profits for at least 20 years. Nike, the largest athletic footwear brand in all major categories and in all major markets, dominates categories like running and basketball with popular shoe styles. While it does face significant competition, the company believes it has proven over a long period that it can maintain share and pricing. Company thinks Nike’s strategies allow it to maintain its leadership position. Over the last few years, Nike has invested in its direct-to-consumer network while cutting wholesale accounts like Belk and Dillard’s. In North America and elsewhere, the firm has reduced its exposure to undifferentiated retailers while increasing its connections with a small number of retailers that bring the Nike brand closer to consumers, carry a full range of products, and allow it to control the brand message. Nike’s consumer plan is led by its Triple Double strategy to double innovation, speed, and direct connections to consumers. Triple Double includes cutting product creation times in half, increasing membership in Nike’s mobile apps, and improving the selection of key franchises while reducing its styles by 25%. It is considered that these strategies will allow Nike to hold shares and pricing.

 Although its recent results in China have been inconsistent due to supply issues and a political controversy, I still believe Nike has a great opportunity for growth there and in other emerging markets. The firm experienced double-digit annual sales growth in six of the past eight years in greater China and, fueled by high government investment in athletics, it will do so again after the current difficulties have passed. Moreover, with worldwide distribution and huge e-commerce that exceeded $10 billion in fiscal 2022, Nike should benefit as more people in China, Latin America, and other developing regions move into the middle class and gain broadband access.

Financial Strengths:  

Company believes Nike is in excellent financial shape to weather the COVID-19 crisis. At the end of fiscal 2021, Nike had $9.4 billion in debt but $13 billion in cash and short-term investments. Its debt/adjusted EBITDA and debt/equity were 1.3 and 0.6, respectively. Nike does not have any long-term debt maturities until May 1, 2023, when its $500 million in 2.25% senior unsecured debt matures, but it does have significant endorsement commitments of more than $1 billion per year. Nike has an unused credit facility of $1 billion and a separate $3 billion commercial paper facility for short-term borrowing, so it has significant unused borrowing capacity. The firm, with its investment-grade credit ratings, could easily increase debt for stock repurchases or other uses. Nike may also make acquisitions, although these are likely to be technology-focused and fiscally immaterial. It is anticipated Nike will continue to return significant cash to shareholders. The firm produced $20.6 billion in free cash flow to equity over the past five years, and estimates it will generate more than $40 billion in free cash flow to equity over the next five. It completed a $12 billion stock-repurchase program authorized in 2015 and has begun to repurchase stock under a four-year, $15 billion stock-repurchase program authorized in 2018. Moreover, Nike issued $1.8 billion in dividends in fiscal 2022, and forecast an average annual dividend payout ratio of 28% over the next decade. Over the next five fiscal years, the company forecasts that Nike will repurchase about $24 billion in stock and issue $11 billion in dividends.

Bulls Say: 

  • Nike has a great opportunity in fast-growing markets like China. More than 70% of Nike’s growth over the next five years may come from outside North America. 
  • Nike’s Triple Double strategy of increased innovation, direct-to-consumer sales, and speed may improve margins and share. Membership growth in its digital channel has exceeded expectations.  
  • Nike’s gross margins may expand by a couple dozen basis points per year through automation, ecommerce, and higher prices. Nike is actively shifting sales to differentiated retail in North America to increase full-priced sales.

Company Description:  

Nike is the largest athletic footwear and apparel brand in the world. It designs, develops, and markets athletic apparel, footwear, equipment, and accessories in six major categories: running, basketball, football (soccer), training, sportswear, and Jordan. Footwear generates about two thirds of its sales. Nike’s brands include Nike, Jordan, and Converse (casual footwear). Nike sells products worldwide and outsources its production to more than 300 factories in more than 30 countries. Nike was founded in 1964 and is based in Beaverton, Oregon. 

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Atlas Copco is a market leader with a focused product portfolio of mainly compressors and vacuum pumps

Business Strategy & Outlook

Atlas Copco is a market leader with a focused product portfolio of mainly compressors and vacuum pumps. These two product areas contribute around three fourths of revenue and four fifths of profit for the company. Its two smaller divisions, industrial technique and power technique, make up the remaining revenue. The company’s equipment is highly engineered, often with customization and application-specific variations. To that point, equipment sales are done by engineers. End markets for the company’s compressors are diverse, from automotive assembly to food processing. However, for vacuum pumps, semiconductor chip demand is the key driver. The electronics industry contributes two thirds of vacuum pump division revenue and, as a result, nearly one fifth of revenue for Atlas Copco at the group level.

 The economic cycle can cause short-term demand volatility, but the company’s flexible cost structure and large portion of service revenue underpin double-digit margin and returns throughout the cycle. Around 75% of its equipment components are outsourced. Maintenance services and spare parts contribute more than one third of group revenue. The company leverages its large service operations and trains its technicians to service competitors’ equipment as well as its own. The compressor division brings in the largest portion of service revenue at more than 40% of division revenue. The Atlas Copco’s compressor division is around twice as large as its closest competitor, Ingersoll Rand. Atlas Copco uses this near ubiquity to its advantage by acquiring other equipment and tool portfolios that it can sell to its air compressor base. Higher-volume production capabilities and an installed distribution channel allow the company to globalize the products of its acquired businesses at a lower cost than those operations could achieve by themselves.

Financial Strengths

Atlas Copco has a strong balance sheet, with around SEK 29 billion in gross debt and a net debt/EBITDA ratio of less than 1 times at the end of March 2022. Included in its debt is around SEK 11 billion in debt maturities through to 2026. However, one cannot see this as a risk as a forecast roughly SEK 22 billion in annual free cash flow for the medium term, which in theory would enable the company to pay down its total gross debt within three years.

Bulls Say

  • Atlas Copco’s tools are used in automation, including robotic applications, and offer some structural growth to an otherwise cyclical revenue stream. 
  • The expansion into vacuum technologies gives Atlas Copco exposure to long-term semiconductor growth. 
  • The company’s large, experienced service organization should help it to continue to gain share of service revenue across its own products and potentially competitors’ equipment, particularly for compressors.

Company Description

Atlas Copco is a 140-year-old Swedish company and a pioneer in air compression technology. Today, the company is still the world’s leading air compressor manufacturer, with around 25% market share. The company’s product portfolio includes power tools and vacuum pumps. For vacuum pumps, the semiconductor chip cycle is a key demand driver. The company generates revenue from three sources: initial equipment sales, spare parts, and maintenance. Its operations span 180 countries.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Dividend Stocks

Fastenal Reports Solid Sales and Margin Growth in its Second Quarter 2022 Results

Business Strategy & Outlook:   

Since opening its first fasteners store in 1967, Fastenal has built one of the largest industrial distribution businesses in the United States. For many years, Fastenal’s growth story was driven by its branch count, which now stands just under 1,800. While this expansive footprint is still an important component of Fastenal’s business model, other strategies–including expanding its product portfolio, its vending and inventory management services, and, most recently, its on-site program–have become increasingly important growth drivers. The benefits of Fastenal’s vending, inventory management, and on-site services are twofold: Not only do these services drive incremental revenue, they also embed Fastenal in its customers’ procurement processes, which supports higher retention rates and pricing power. Company believes Fastenal has a first-mover advantage in both vending and on-site services, introducing the former in 2008 and the latter in 1992 (although the on-site strategy did not become a focused strategy until the past few years), and sees long growth runways for both offerings. In addition to growth through its vending and on-site initiatives, Fastenal is well positioned to benefit from customer consolidation trends. In recent years, customers have been consolidating their maintenance, repair, and operations, or MRO, spending with large distributors to leverage their purchasing power and increase operational efficiency. With its national scale, broad product portfolio, and inventory management services, the company believes Fastenal can capitalize on this trend and take market share from smaller and less capable distributors. 

Because Fastenal’s sales mix is increasingly skewing more toward large national accounts, on-site programs, and more price-competitive MRO products, the company’s gross margins are likely to come under pressure. However, the combination of higher sales volume and containment of selling, general, and administrative costs provide Fastenal the opportunity to realize strong operating leverage and expand operating margins. It is forecasted that Fastenal’s operating margin will reach 21% by midcycle year.

Financial Strengths:  

Fastenal has an outstanding debt balance of approximately $390 million. It is leveraged at only 0.1 times 2021 EBITDA, which is very conservative relative to the other industrial distributors company covers. Fastenal’s earnings provide substantial headroom to service debt obligations. During fiscal 2021, Fastenal incurred only about $10 million of interest expense and generated about $1.4 billion of EBITDA, which equates to an extremely comfortable interest coverage ratio. Even with its expansive store footprint and cyclical end markets, Fastenal has a proven ability to generate free cash flow (defined as operating cash flow with fewer capital expenditures) throughout the cycle. Indeed, it has generated positive free cash flow every year since 2003. Given its conservative balance sheet and consistent free cash flow generation, the company believes Fastenal’s financial health is satisfactory.

Bulls Say: 

  • Vending and on-site programs should provide a long growth runway for Fastenal.
  • Fastenal can capitalize on its national scale, broad product portfolio, and inventory-management services to take market share from smaller and less capable distributors.
  • Despite serving cyclical end markets, Fastenal’s business model generates strong free cash flow throughout the cycle. Fastenal is likely to continue to use its cash flow to fund a shareholder-friendly capital allocation strategy.

Company Description:  

Fastenal opened its first fastener store in 1967 in Winona, Minnesota. Since then, Fastenal has greatly expanded its footprint as well as its products and services. Today, Fastenal serves its 400,000 active customers through approximately 1,760 branches, over 1,400 on-site locations, and 14 distribution centers. Since 1993, the company has added other product categories, but fasteners remain its largest category at about 30%-35% of sales. Fastenal also offers customers supply-chain solutions, such as vending and vendor-managed inventory. 

(Source: Morningstar)

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

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

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

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

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

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

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