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Global stocks

Wolters’ legacy print business, which is declining at a high-single-digit rate each year, has proved to be a drag on the overall business

Business Strategy and Outlook 

Wolters Kluwer has over the past decade or so undergone a wholesale reorganization of its business, taking it from being the leading print publisher of professional information materials to being one of the largest players in the potentially much larger digital information services space. This change has come at a cost, however, with the company spending over EUR 2 billion on net acquisitions over the period in order to position itself better in the digital information services market. Wolters’ legacy print business, which is declining at a high-single-digit rate each year, has proved to be a drag on the overall business, with organic revenue growth improving to 4.3% in 2019, the highest level in over a decade, while the proportion of print revenue fell to a new low of 9% in 2020.

The inflection point for Wolters Kluwer has now been reached, with print revenue now at a single-digit contribution to group revenue, down from 52% in 2004. With print revenue now posing less of a drag on the group, and the company’s more scalable elements gaining traction with clients, the organic revenue growth should increase linearly, albeit modestly from here. Recurring revenue across the group has also increased materially and currently stands at 80% of total revenue for 2020, increasing the stability and predictability of the underlying revenue base. These factors have also resulted in material improvements in operating margins across key verticals. Examples of this can be seen in core products such as UpToDate in the clinical solutions business, which is currently growing at double-digit rates, driving operating margins in the health business to all-time highs. As the company moves up the value chain in the information services it offers to clients, further enhancement to margins across a variety of business activities is eminently possible. However, there are inherent risks in Wolters’ strategy, as the company has moved from a print publishing business with relatively few competitive pressures to a digital information business in which it must keep innovating to stay ahead of existing and new competitors.

Financial Strength

Wolters Kluwer’s net debt/EBITDA ratio is 1.9 times, very much at the lower end of its historical range and comfortably below its 2.5 times long-term target. This is broadly in line with the industry average and it would be considered reasonable, particularly given the relative stability in the company’s revenue base. Wolters is broadly diversified (by geography and business lines) and has made significant progress increasing its recurring revenue streams, which now stand at 80% of total revenue. The company’s debt maturities are long-term-weighted, with only around 20% of its total debt maturing in the next two years. Wolters primarily returns its excess capital to shareholders via a progressive dividend policy, with a payout ratio averaging close to 50% over the past decade. Given the lack of large acquisitions and the strong cash flow, the company has also been active in buying back shares over the past few years.

Bulls Say’s

  • Wolters serves professionals in highly specialized niches, in which it generally holds a number-one or number-two market position. 
  • Digital is more scalable than physical distribution, so the mix shift toward software solutions will help the firm to reduce expenses and expand margins. 
  • Wolters serves numerous niches where there are few reputable alternatives, and pricing tends to be more rational among the major players as a result.

Company Profile 

Wolters Kluwer is a Europe-listed global information services company. It operates across four distinct business segments serving a wide array of clients: health (26% of 2020 sales), tax and accounting (31%), legal and regulatory (23%), and governance, risk, and compliance (20%). Within these divisions, Wolters aims to be the industry leader in a variety of niche, higher-value services

 (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
Global stocks Shares

Biogen has strong human genetic validation for its neurology pipeline

Business Strategy and Outlook 

Biogen’s specialty-market-focused drug portfolio and novel, neurology-focused pipeline create a wide economic moat. Biogen’s strategy has its roots in the 2003 merger of Biogen (multiple sclerosis drug Avonex) and Idec (cancer drug Rituxan). While Rituxan is succumbing to biosimilar competition, Biogen is expanding its neurology portfolio beyond MS, including blockbuster neuromuscular disease drug Spinraza and several promising drugs behind Aduhelm in Alzheimer’s disease. n MS, Avonex and longer-acting Plegridy still generate nearly $2 billion in annual sales and remain the leading MS interferon drugs. Biogen’s MS antibody Tysabri also sees $2 billion in annual sales due to its high efficacy. Oral MS drug Tecfidera peaked above $4 billion in sales in 2019, but U.S. generics drastically cut into sales in 2021 after entry in 2020. The new oral therapy Vumerity offers improved GI tolerability but will only partly offset this headwind. While pricing power and demand for Biogen’s injectable MS portfolio are eroding in the face of new competition, Biogen receives substantial royalties on the biggest new competitor, Roche’s Ocrevus, which helps offset pressure on older MS drugs.

Outside of MS, Biogen has strong human genetic validation for its neurology pipeline. Spinal muscular atrophy drug Spinraza (partnered with Ionis) is a $2 billion drug, although competition from Novartis (gene therapy Zolgensma) and Roche (oral drug Evrysdi) are beginning to erode sales. While Aduhelm was approved in the U.S. in June 2021, skepticism surrounding the launch and lack of Medicare coverage have made the drug a commercial failure. That said, Biogen and Eisai’s lecanemab (data fall 2022) could have more definitive data. While there is significant uncertainty surrounding Biogen’s Alzheimer’s pipeline, the market also underestimates Biogen’s remaining pipeline, which includes a continuing partnership with Ionis (including tau-targeting Alzheimer’s drug BIIB080) and drug candidates to treat conditions including stroke, depression, Parkinson’s, pain, and ALS.

Financial Strength

Biogen’s year-end 2021 cash and marketable securities balance ($4.7 billion) and free cash flow will help fund future repurchases and allow the firm flexibility on future acquisitions. Most maturities for Biogen’s $7.3 billion in long-term debt are well into the future, with only $1 billion in debt due before 2025. Historically, Biogen has focused on returning excess cash to shareholders via buybacks, but its limited acquisition and collaboration record is strong and more tuck-in acquisitions going forward. Of the $15 billion in free cash flow generated in 2006-15, Biogen spent the vast majority of this cash on repurchases, with an average repurchase price over 2006-15 of $87 per share.

Bulls Say’s

  • Biogen leads the $20 billion global MS market with Avonex, Plegridy, Tysabri, and Tecfidera, and the launch of Vumerity partly protects Tecfidera sales from generic headwinds in the U.S. 
  • Biogen receives royalties and profit share from Roche on MS drug Ocrevus and cancer therapies Rituxan and Gazyva, boosting Biogen’s profitability. 
  • Biogen’s neurology portfolio outside of MS, including Spinraza in SMA, should help diversify revenue and boost sales growth.

Company Profile 

Biogen and Idec merged in 2003, combining forces to market Biogen’s multiple sclerosis drug Avonex and Idec’s cancer drug Rituxan. Today, Rituxan and next-generation antibody Gazyva are marketed via a collaboration with Roche. Biogen also markets novel MS drugs Plegridy, Tysabri, Tecfidera, and Vumerity. In Japan, Biogen’s MS portfolio is co-promoted by Eisai. Hemophilia therapies Eloctate and Alprolix (partnered with SOBI) were spun off as part of Bioverativ in 2017. Biogen has several drug candidates in phase 3 trials in neurology and neurodegenerative diseases and has launched Spinraza with partner Ionis. Aduhelm was approved as the firm’s first Alzheimer’s disease therapy in June 2021.

 (Source: MorningStar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

ASML’s immersion lithography tools allowed the company to capture and maintain the leading position in the marketplace

Business Strategy and Outlook

ASML is the leader in photolithography equipment for semiconductor manufacturers. It is to materially benefit from the proliferation of extreme ultraviolet, or EUV, lithography and the uncertainty concerning the long-term extent of EUV insertion has sufficiently diminished to justify a wide moat rating. Photolithography is the process in which a light source is used to expose circuit patterns from a photomask onto a semiconductor wafer. A photomask is a flat, transparent quartz plate containing the microscopic circuit pattern. The latest technological advances in this field allow chipmakers to pursue Moore’s law and continually increase the number of transistors on the same area of silicon. Lithography tools account for a significant portion of chipmakers’ capital expenditures, with EUV platforms exceeding $150 million in price. ASML’s immersion lithography tools allowed the company to capture and maintain the leading position in the marketplace, while competitors like Nikon and Canon do not have the scale or resources to compete at the cutting-edge. Traditional immersion lithography approached its limits years ago, and chip makers adopted non litho workarounds, such as multiple patterning that uses advanced etch and deposition tools from other equipment firms.

To continue pursuing Moore’s law, chipmakers will require EUV lithography tools. EUV uses lower-wavelength light (13.5-nm versus 193-nm for current immersion tools) and simplifies the process flow (3 to 6 times cycle time reduction as a result of fewer steps and 15% to 50% cost reduction compared with multiple patterning schemes). The top three customers of the firm (Intel, Samsung, and Taiwan Semiconductor) committed to help fund a portion of research and development for EUV technologies and acquired an aggregate 23% minority equity stake in ASML in 2012 (though these stakes have come down over time). EUV industrialization in high-volume semiconductor production is now a reality, with the technology having been implemented for a few process steps at certain 7-nanometer process nodes at TSMC and Samsung and more meaningfully in each foundry’s 5-nm process technologies.

Financial Strength

ASML has a strong financial position. At the end of 2021, the company had EUR 7.6 billion in cash, cash equivalents, and short-term investments and EUR 4.1 billion in long-term debt on its balance sheet. This debt position is not an issue given ASML’s typical cash generation. The firm typically holds a significant cash position, which is appropriate given the cyclical nature of the semiconductor equipment industry. During downturns, the cash cushion allows ASML to continue investing heavily in research and development in order to maintain its cutting-edge technology position. This is especially critical in the highly arcane wafer fabrication equipment market, where companies that failed to stay at the technological forefront have seen their competitive positions erode in the past, though ASML’s dominance in lithography is unlikely to be challenged by Nikon or Canon. ASML generally returns excess cash to shareholders via annual dividend payments and share buybacks. At the end of 2021, ASML doubled its annual dividend to EUR 5.50. In July 2021, the firm announced a new share buyback program for 2021 to 2023 of up to EUR 9 billion.

Bulls Say’s

  • ASML is the market leader in photolithography, an integral part of chip manufacturing, and is pioneering EUV lithography for the next wave of Moore’s law. 
  • The extensive technical expertise needed to develop lithography tools, which are highly complex and play a critical role in enabling Moore’s law, serves as a major barrier to entry. 
  • ASML has focused on operational efficiency in recent years to improve profitability throughout the industry cycle.

Company Profile 

Founded in 1984 and based in the Netherlands, ASML is the leader in photolithography systems used in the manufacturing of semiconductors. Photolithography is the process in which a light source is used to expose circuit patterns from a photomask onto a semiconductor wafer. The latest technological advances in this segment allow chipmakers to continually increase the number of transistors on the same area of silicon, with lithography historically representing a meaningful portion of the cost of making cutting-edge chips. Chipmakers require next-generation EUV lithography tools from ASML to continue past the 5-nanometer process node. ASML’s products are used at every major semiconductor manufacturer, including Intel, Samsung, and TSMC.

(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
Technology Stocks

SAP has further entrenched itself in X data with its acquisition of Qualtrics experience management software

LONDON, UNITED KINGDOM: Analysts work on the trading floor at Goldman Sachs in London, 22 March 2004. AFP PHOTO / ODD ANDERSEN (Photo credit should read ODD ANDERSEN/AFP via Getty Images)

Business Strategy and Outlook 

SAP is a best-in-breed enterprise resource planning provider and holds dominant market share in global ERP software. However, SAP is phasing out its support of its on-premises ERP software such that by 2030 all of its ERP customers will need to shift to a cloud solution. This vulnerability is a significant threat to SAP’s switching costs, as competitors like Workday offer compelling cloud ERP solutions, while forced migration opens up opportunity to question a company’s best fit for ERP needs. In turn, SAP’s narrow moat, derived from its switching costs, is trending negative. However, it is still early in SAP’s transition of on-premises users to the cloud, which leads us to believe its negative trend could be prolonged.

ERP is not SAP’s only offering. The company offers software in its so-called intelligent spending category, which includes Ariba and Concur, which cater to procurement and travel and expense reporting. While ERP and intelligent spending software caters to operational data–otherwise known as O data–SAP also provides solutions around X data, or experience data. SAP has further entrenched itself in X data with its acquisition of Qualtrics experience management software. But, regardless of which type of data is flowing through SAP software, this data can be stored in SAP’s database offering, HANA, which is the only database compatible with SAP’s cloud ERP, S/4HANA (unlike on-premises ERP’s former database interoperability). Despite SAP’s efforts to nurture high attach rates among offerings amid the vulnerable transition to the cloud, such as via database lock-in, this is only ruffling more feathers among its customers that have adapted to the new norm of mix-and-match technology, which the cloud has enabled. Such lock-in attempts were influential in SAP’s historically declining net promoter score. Moreover, SAP’s efforts to add to its ecosystem in the hopes of more effortless user experience have proved to be anything but accretive, as its acquisition of Qualtrics has shown. SAP announced plans to spin off the company only two years after it was acquired.

Financial Strength

SAP has been acquisitive over the last decade as it has built out its ERP offerings. Despite this, SAP has maintained healthy leverage ratios and continues to do so with 2019 net debt/EBITDA close to 2. This figure includes the EUR 7 billion of debt SAP issued in December 2018 to finance the Qualtrics acquisition, leaving it with outstanding long-term debt of roughly EUR 14 billion and EUR 7 billion in cash and marketable securities at the end of the fiscal 2020 third quarter. The Qualtrics acquisition has stretched SAP’s leverage ratio slightly beyond its normal levels over the last decade and may limit the company’s ability to make transformative acquisitions in the near future. SAP IS still having the ability to make tuck-in acquisitions, and with free cash flow of at least EUR 3 billion expected in 2020 and 2021, thus SAP is not having any troubles covering its financial obligations.

Bulls Say’s

  • SAP should be able to migrate the majority of its on premises ERP customers to S/4HANA while continuing to add hefty net new customers to the platform. 
  • As more customers transition to the cloud, SAP should be able to extract significantly more lifetime value per customer, adding to its top line. 
  • SAP should see significant margin expansion as a result of improving scale in its cloud offerings.

Company Profile 

Founded in 1972 by former IBM employees, SAP provides database technology and enterprise resource planning software to enterprises around the world. Across more than 180 countries, the company serves 440,000 customers, approximately 80% of which are small to medium-size enterprises.

 (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
Global stocks Shares

American Express does have more reliance on spending patterns in this industry than its other card issuing peers

Business Strategy & Outlook

American Express has enjoyed a strong start to 2022 as the company’s payment volume benefited from a recovery in travel and entertainment spending (roughly 30% of pre-pandemic billings) as pandemic fears faded. American Express generates more than 80% of its revenue through noninterest income, with its largest source of revenue being the discount rate charged to merchants when they accept payment from one of its cardholders. This means that a recovery in travel and entertainment spending has a direct impact on the company’s revenue. Consumer travel has rebounded strongly, but the impact on business travel could be longer lasting as companies reassess their travel needs. 

While a long-term impairment of business travel would affect American Express, the overall impact would be manageable as the company is not as dependent on this segment as it once was. Another point of concern going forward in 2022 is the impact that rising fuel prices and high inflation will have on travel demand. So far travel spending has remained resilient, despite higher prices, but this will be a point to monitor given that American Express does have more reliance on spending patterns in this industry than its other card issuing peers. 

That said, note that non-travel spending on American Express’ cards is well above 2019 levels, as the firm benefits from a larger cardholder base and strong consumer engagement with its cards. Also, the company should see higher fee income as the $695 annual fee for its premium Platinum cards becomes effective for existing cardholders, providing additional tailwinds to the company in 2022. The company’s greatest strength remains its existing cardholder base of high-spending individuals and small businesses. The high average spending rate on American Express’ cards makes its cardholders attractive to merchants, and the company has been able to form valuable partnerships in exchange for access to these cardholders. This will continue as American Express’ position in the premium credit card market remains strong.

Financial Strengths

American Express has a strong financial position with a well-positioned balance sheet and a credit card portfolio that historically has had lower credit risk than its peers. At the end of March 2022, the company had a common equity Tier 1 capital ratio of 10.4%, in line with its long-term target. While American Express’ common equity Tier 1 ratio is well below its 2021 peak–a consequence of returning $9 billion in capital to shareholders during 2021– this is a sufficient level, particularly as the company has historically had credit losses well below those of peers. While the project net charge-offs to rise in 2022 and 2023, American Express’ balance sheet should be well equipped to handle higher credit costs.

Bulls Say

  • American Express operates as a closed-loop network for the cards that it issues. This allows it to capture more of the economic profit of a single credit card payment than other credit card issuers. 
  • American Express’ strong position with small businesses should help it win additional B2B payment volume as the company seeks to expand its offerings in the space. 
  • Non-T&E spending on American Express’ cards has already recovered to pre-pandemic levels, showing that cardholders remain engaged with its products even with limited opportunities to travel.

Company Description

American Express is a global financial institution, operating in about 130 countries, that provides consumers and businesses charge and credit card payment products. The company also operates a highly profitable merchant payment network. Since 2018, it has operated in three segments: global consumer services, global commercial services, and global merchant and network services. In addition to payment products, the company’s commercial business offers expense management tools, consulting services, and business loans.

(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

Alphabet dominates the online search market with 80%-plus global share for Google

Business Strategy & Outlook

Alphabet dominates the online search market with 80%-plus global share for Google, via which it generates strong revenue growth and cash flow. The continuing growth in the firm’s cash flow, as Google will maintain its leadership in search. YouTube contributes more to the firm’s top and bottom lines, and the investments of some of that cash in moonshots as attractive. Whether they will generate positive returns remains to be seen, but they do present significant upside. Google’s ecosystem strengthens as its products are adopted by more users, making its online advertising services more attractive to advertisers and publishers and resulting in increased online ad revenue, which will continue to grow at double-digit rates after the pandemic and during the next five years. The firm utilizes technological innovation to improve the user experience in nearly all its Google offerings, while making the sale and purchase of ads efficient for publishers and advertisers. 

Adoption and usage of mobile devices has been increasing. The online advertising market has taken notice and is following its target audience onto the mobile platform. Google partakes in this on the back of its Android mobile operating system’s growing market share, helping it drive revenue growth and maintain its leadership in the space. Among the firm’s investment areas, it is particularly applauding the efforts to gain a stronger foothold in the fast-growing public cloud market. Google has quickly leveraged the technological expertise it applied to creating and maintaining its private cloud platform to increase its market share in this space, driving additional revenue growth and creating more operating leverage, which will continue. Most of Alphabet’s more futuristic projects are not yet generating revenue, but the upside is attractive if they succeed, as the firm is targeting newer markets. Alphabet’s autonomous car technology business, Waymo, is a good example: Based on various studies, it may tap into a market valued in the tens of billions of dollars within the next 10-15 years.

Financial Strengths

Alphabet has a very strong balance sheet with cash and cash equivalents of nearly $140 billion and total debt of nearly $15 billion at the end of 2021. The company also has a $4 billion revolver with no outstanding balance. Over 60% of the company’s cash and cash equivalents is held outside the U.S. The company generated $92 billion cash from operations in 2021, up 41% from 2020. The cash from operations to grow 17% annually through 2026. While continuing strong top-line growth, the firm continues to invest in innovation. Alphabet’s free cash flow to equity/gross revenue ratio averaged 23% over the past three years, which indicates strong operational and financial health. A five-year model average FCFE/sales ratio of 26% through 2026.

Bulls Say

  • As the number of online users and usage increase, so will digital ad spending, of which Google will remain one of the main beneficiaries. 
  • Android’s dominant global market share of smartphones leaves Google well positioned to continue generating top-line growth as search traffic shifts from desktop to mobile. 
  • The significant cash generated from the Google search business allows Alphabet to remain focused on innovation and the long-term growth opportunities that new areas present.

Company Description

Alphabet is a holding company. Internet media giant Google is a wholly owned subsidiary. Google generates 99% of Alphabet revenue, of which more than 85% is from online ads. Google’s other revenue is from sales of apps and content on Google Play and YouTube, as well as cloud service fees and other licensing revenue. Sales of hardware such as Chromebooks, the Pixel smartphone, and smart home products, which include Nest and Google Home, also contribute to other revenue. Alphabet’s moonshot investments are in its other bets segment, where it bets on technology to enhance health (Verily), faster internet access to homes (Google Fiber), self-driving cars (Waymo), and more. Alphabet’s operating margin has been 25%-30%, with Google at 30% and other bets operating at a loss.

(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

Intellia Therapeutics’ Gene Editing Technology looks promising; FVE $85, shares undervalued

Business Strategy & Outlook

Intellia Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. Intellia’s technology platform specializes in Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/Cas9, which precisely cuts DNA to disrupt, delete, correct, and insert genes to treat genetically defined diseases. CRISPR/Cas9 has created a new class of medicines, which are well suited for targeting rare diseases or other disorders that are caused by genetic mutations. CRISPR/Cas9 works by having CRISPR (pieces of DNA sequences) guide Cas9 (an enzyme that can cut and edit DNA) to edit, alter, or repair genes. Intellia is utilizing this gene knockout approach to remove unwanted proteins using its proprietary lipid nanoparticle delivery system. Intellia has leveraged its expertise in CRISPR/Cas9 gene editing to advance a pipeline of in vivo and ex vivo therapies for diseases with high unmet medical needs. The company’s proprietary technology has the potential to build blockbusters in rare diseases with limited treatment options available.

 Intellia currently has no approved drugs and a largely early-stage pipeline, so refrain from awarding the company an economic moat. Intellia’s most advanced in vivo candidates are NTLA-2001 for the treatment of transthyretin amyloidosis (ATTR) and NTLA-2002 for the treatment of hereditary angioedema (HAE). NTLA-2001 is part of a co-development and co-promotion agreement with narrow-moat Regeneron, in which Intellia is the clinical and commercial lead party and Regeneron is the participating party. Regeneron shares in 25% of worldwide development costs and commercial profits for the ATTR program. The Intellia will retain 75% of economic profits of NTLA-2001, if approved, and the company also has the expertise and financial support of Regeneron to offset some of the development costs. In addition, the NTLA-2002 is wholly owned by Intellia. The rest of Intellia’s pipeline is either in early (Phase 1) or pre-clinical stages of development. While Intellia does not currently have approved products, the company provides long-term investors with pure play exposure to gene editing.

Financial Strengths

Intellia Therapeutics is in fair financial health. The company has no approved products, so its revenue currently comes from collaboration payments. At the end of 2021, Intellia had just over $1 billion in cash, cash equivalents, and marketable securities, which is a healthy amount to support additional investments in the company’s pipeline. As an early-stage biotechnology company, Intellia has so far only operated at a net loss. The company will not achieve positive net income until 2026 due to its early-stage pipeline and the lengthy development and regulatory approval process.

Bulls Say

  • Intellia’s partnerships allow it to receive milestones and economic benefits from drug candidate progression while offsetting some of the clinical development costs. 
  • Intellia’s CRISPR/Cas9 platform has the potential to develop highly efficacious and curative treatments for rare, genetic diseases with high unmet needs, which will likely lead to pricing power if approved. 
  • The company’s pipeline as possessing strengthening intangible assets and assign it a positive moat trend.

Company Description

Intellia Therapeutics is a gene editing company focused on the development of CRISPR/Cas9-based therapeutics. CRISPR/Cas9 stands for Clustered Regularly Interspaced Short Palindromic Repeats (CRISPR)/CRISPR-associated protein 9 (Cas9), which is a revolutionary technology for precisely altering specific sequences of genomic DNA. Intellia is focused on using this technology to treat genetically defined diseases. It’s evaluating multiple gene editing approaches using in vivo and ex vivo therapies to address diseases with high unmet medical needs, including ATTR amyloidosis, hereditary angioedema, sickle cell disease, and immuno-oncology. Intellia has formed collaborations with several companies to advance its pipeline, including narrow-moat Regeneron and wide-moat Novartis.

(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

Market Selloff Continues to Affect Invesco’s Flows and AUM Levels; No Change to $20 Per Share FVE

Business Strategy & Outlook

A confluence of several issues–poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel–has made it increasingly difficult for active asset managers to generate organic growth, leaving them more dependent on market gains to increase their assets under management. While there will always be room for active management, the advantage for getting and maintaining placement on platforms will go to managers that have greater scale, established brands, solid long-term performance, and reasonable fees. With $955 billion in managed assets before the Oppenheimer Funds acquisition, Invesco already had the size and scale to be competitive, but that deal has raised the firm to a different level, with the company holding $1.390 trillion in assets under management at the end of June 2022, making it the 13th-largest global asset manager and the seventh-largest in the U.S. retail channel. That said, size is not always a guarantor of organic growth (which is a function of performance and fees) and above-average profitability, as demonstrated by Invesco’s historical shortcomings.

During 2012-21, the firm’s organic growth rate averaged 0.9% annually with a standard deviation of 3.7%, leaving it on much better footing than most of its equity-heavy active management peers. Having seemingly put its merger-related outflows (which added to depressed organic growth during 2018-20) behind it, Invesco has now generated seven straight quarters of positive long-term flows as of the end of March 2022. The firm’s adjusted GAAP operating margins, which rose to 24%-26% following contributions from merger synergies from the Oppenheimer Funds deal and cost-cutting efforts, to deteriorate in the near term in the face of fee compression and rising costs (necessary to improve investment performance and enhance product distribution), even when considering the company’s product and channel mix as well as its recent return to positive organic growth.

Financial Strengths

Invesco entered 2022 with $2.1 billion of debt on its books, composed of $600 million of 3.125% notes due November 2022, $600 million of 4.000% notes due January 2024, $500 million of 3.75% notes due January 2026, and $400 million of 5.375% notes due November 2043. The company also has a $1.25 billion floating-rate credit facility (maturing in April 2026) at its disposal. Should the firm close out the year in line with the expectations, and roll over its debt due later this year, it would enter 2023 with a debt/total capital ratio of 11%, a debt/EBITDA ratio of 1.4 times, and an EBITDA interest coverage ratio of 16.3 times. While Invesco has traditionally dedicated much of its excess cash to seed investments, dividends, and share repurchases, the issuance of $4.0 billion of 5.9% perpetual noncumulative preferred stock as part of its financing of the 2018-19 Oppenheimer Funds acquisition is eating up cash, as the firm pays out $236 million annually to service the interest obligation. The size and scope of the Oppenheimer Funds deal means that future deals are likely to be smaller, bolt-on acquisitions aimed at plugging holes in the firm’s product mix and/or geographic reach. One had not expected the company to cut the quarterly dividend by 50% to $0.155 per share at the start of the second quarter of 2020, but given the challenges presented by the COVID-19 pandemic, as well as the commitment to the preferred dividend, it was not too surprising. The firm did, however, raise the quarterly dividend 10% to $0.17 per share during 2021 and lifted it by another 10% in early 2022 to $0.1875 per share. Even so, one cannot expect the dividend to return to pre-pandemic levels for some time, with the firm likely to maintain a payout ratio of 30%-35% longer term. One does not expect much in the way of share repurchases in the near term unless the shares are trading at a significant discount to intrinsic value.

Bulls Say

  • The Oppenheimer Funds deal lifted AUM closer to the $1.5 trillion mark, putting Invesco on a slightly better footing with industry giants like BlackRock and Vanguard, each of which oversees more than $5 trillion. 
  • Invesco’s organic AUM growth has turned positive, with the firm picking up an average of $12.8 billion in net inflows quarterly over the past eight calendar quarters compared with negative $11.9 billion the previous eight quarters. 
  • Oppenheimer Funds’ slightly higher AUM realization rate should help offset some of the impact of industry wide fee compression on Invesco’s top line.

Company Description

Invesco provides investment-management services to retail (67% of managed assets) and institutional (33%) clients. At the end of June 2022, the firm had $1.390 trillion in assets under management spread among its equity (47% of AUM), balanced (5%), fixed-income (22%), alternative investment (14%), and money market (12%) operations. Passive products account for 31% of Invesco’s total AUM, including 55% of the company’s equity operations and 12% of its fixed-income platform. Invesco’s U.S. retail business is one of the 10 largest nonproprietary fund complexes in the country. The firm also has a meaningful presence outside the U.S., with close to one third of its AUM sourced from Canada (2%), the U.K. (3%), continental Europe (11%), and Asia (15%).

(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

Cummins will continue to be the top supplier of truck engines and components, despite increasing emissions regulation

Business Strategy & Outlook

The Cummins will continue to be the top supplier of truck engines and components, despite increasing emissions regulation from government authorities. For over a century, the company has been the pre-eminent manufacturer of diesel engines, which has led to its place as one of the best heavy- and medium-duty engine brands. Cummins’ strong brand is underpinned by its high-performing and extremely durable engines. Customers also value Cummins’ ability to enhance the value of their trucks, leading to product differentiation. The company’s strategy focuses on delivering a comprehensive solution for original equipment manufacturers. The Cummins will continue to gain market share, as it captures a larger share of vehicle content. This is largely due to increasing emissions regulation, which allows Cummins to sell more of its emissions solutions, namely its aftertreatment systems that convert pollutants into harmless emissions. 

Additionally, Cummins stands to benefit from the electrification of powertrains in the industry. The company has made progress in the school and transit bus markets. Long term, the truck market will also increase electrification. The pressure to manufacture more environmentally friendly products is forcing truck OEMs to evaluate whether it’s economically viable to continue producing their own engines and components or to partner with a market leader like Cummins. One has this play out recently, through the increase in partnership announcements for medium-duty engines with truck OEMs. Some OEMs will opt to shift investment away from engine and component development, leaving it to Cummins. Cummins has exposure to end markets that have attractive tailwinds. In trucking, the new truck orders will be strong in the near term, largely due to strong demand for consumer goods. In good times, truck operators replace aging trucks and opt to expand their fleet to meet strong demand. Longer term, Cummins will continue to invest in BEVs and fuel cells to power future truck models. We believe a zero-emission world is inevitable, but the Cummins can use returns from its diesel business to drive investments.

Financial Strengths

Cummins maintains a sound balance sheet. In 2021, total outstanding debt stood at $3.6 billion, but the firm had $2.6 billion of cash on the balance sheet. In 2020, the company issued $2 billion of long-term debt at attractively low rates, some of which was used to pay down its commercial paper obligations. Cummins’ strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. One can find comfort in Cummins’ ability to tap into available lines of credit to meet any short-term needs. Cummins has access to $3.2 billion in credit facilities. Cummins can also generate solid free cash flow throughout the economic cycle. The company can generate over $2 billion in free cash flow in mid cycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, the management is determined to improve its distribution business following its transformation efforts in recent years. The Cummins can improve the profitability of the business through efficiency gains, pushing EBITDA margins higher in the near term. These actions further support its ability to return cash to shareholders. Cummins enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects of 2022.

Bulls Say

  • Strong freight demand in the truck market should lead to more new truck orders, substantially boosting Cummins’ revenue growth. 
  • Cummins will benefit from increasing emission regulation, pushing customers to buy emissions solutions, such as aftertreatment systems that turn engine pollutants into harmless emissions. 
  • Increasing emission standards could push peers to rethink whether it’s economically viable to continue manufacturing engines and components, benefiting Cummins.

Company Description

Cummins is the top manufacturer of diesel engines used in commercial trucks, off-highway equipment, and railroad locomotives, in addition to standby and prime power generators. The company also sells powertrain components, which include filtration products, transmissions, turbochargers, aftertreatment systems, and fuel systems. Cummins is in the unique position of competing with its primary customers, heavy-duty truck manufacturers, who make and aggressively market their own engines. Despite robust competition across all its segments and increasing government regulation of diesel emissions, Cummins has maintained its leadership position in the industry.

(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

Ericsson may find licensing opportunities in non handset markets, and that licensing revenue will help bolster operating results

Business Strategy and Outlook 

Ericsson is a leading provider of hardware, software, and services to communications service providers. The company is excelling in 5G build-outs and gaining share. 5G may have a longer spending period than previous wireless iterations and Ericsson’s robust portfolio of hardware and software coupled with its industry-leading services business has it primed to take advantage of 5G network demand. The company has been on a turnaround mission after its 2015 apex. Ericsson is making wise strategic efforts and management’s prudent outlook after slashing its cost of goods and operating expenses while committing to exit or renegotiate unfavourable contracts is appreciable. The management team has properly focused the company on invigorating networking innovation while honing operational efficiency.

That said, it is not to be believed the CSP equipment provider industry lends itself to economic moats because CSPs multisource vendors and flex pricing power by pitting suppliers against each other. However, Ericsson’s restructuring and strategic efforts, combined with 5G demand, to create top-line and operating margin expansion. Ericsson’s efforts within software-defined networking will be fruitful as software becomes essential in a 5G world. Ericsson is to gain from 5G networks requiring many small-cell antenna sites to propagate the fastest transmission bands. Ericsson should profit from 5G networks creating more product use cases such as “Internet of Things’ ‘ devices in cars and factories. Network complexity will increase as firms control and monitor a rapidly growing quantity of Internet of Things devices, Ericsson’s software and services will be in high demand. The company also creates revenue from licensing patents that are essential in the production of 5G smartphones (as well as previous generations). Ericsson may find licensing opportunities in non handset markets, and that licensing revenue will help bolster operating results.

Financial Strength

Ericsson is a financially stable company after making drastic changes that put itself into a position to prosper after a tumultuous period that coincided with 4G infrastructure spending declines. Ericsson is to generate steady free cash flow and be judicious with its cash deployments. Ericsson finished 2021 with SEK 67 billion of cash and equivalents with a debt to capital ratio of 23%. Ericsson will repay its outstanding debts of SEK 32 billion, as of the end of 2021, on schedule. Ericsson is to focus its expenditures on R&D innovations while continuing to remove costs from its SG&A and product costs. As a percentage of revenue, R&D will remain in the midteens and SG&A in the low double digits. Ericsson has paid a steady dividend, although it dipped through its restructuring period, and the company will gradually increase its pay-out as operating margin improves. The company does not have any stock repurchase plans.

Bulls Say’s:

  • Ericsson’s turnaround measures are happening at an opportune time. Management’s focused strategy should expand operating margins while 5G infrastructure spending increases top-line results.
  • 5G may afford Ericsson a longer spending cycle and higher equipment demand than previous wireless generations. Additionally, 5G should create more use cases for Ericsson’s software and services within Internet of Things device networks. 
  • Income sources could diversify as licensing revenue from 5G patents may grow through applications outside of Ericsson’s handset manufacturer agreements.

Company Profile 

Ericsson is a leading supplier in the telecommunications equipment sector. The company’s three major operating segments are networks, digital services, and managed services. Ericsson sells hardware, software, and services primarily to communications service providers while licensing patents to handset manufacturers. The Stockholm-based company derives sales worldwide and had 95,000 employees as of June.

(Source: MorningStar)

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