Category: Sectors

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Dividend Stocks

Alliance Bernstein’s organic AUM growth rate averaged positive 1.9% (positive 0.2%) with a standard deviation of 2.7% (2.9%).

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 asset managers running predominantly active portfolios to generate organic growth, leaving them more dependent on market gains to drive assets under management higher. While there will always be room for active management, the advantage when it comes to getting placement on platforms will go to asset managers with greater scale, established brands, solid long-term performance, and reasonable fees.

With $687.0 billion in managed assets at the end of May 2022, AllianceBernstein has the size and scale necessary to be competitive in the asset-management industry and is structurally set up to hold on to assets regardless of market conditions, being diversified across its three main asset class segments: equities (44% of managed assets), fixed income (40%), and other investments (made up of the firm’s asset allocation services and certain other alternative investments) accounting for the remainder. However, this has not always translated into solid organic growth or above-average profitability, with AllianceBernstein’s adjusted GAAP operating margins of 23.4% on average during 2017-21 being well below the group average of 30%. During the past five (10) calendar years, AllianceBernstein’s organic AUM growth rate averaged positive 1.9% (positive 0.2%) with a standard deviation of 2.7% (2.9%). Even though the industry to continue to face stiff headwinds, the firm producing organic AUM growth in a 0% to positive 2% range annually during 2022-26. However, revenue growth and operating margins will still be affected by industry fee compression and the need for more traditional asset managers like AB to spend more to enhance investment performance and product distribution.

Financial Strengths

AllianceBernstein is structured as a limited partnership, required to pay out essentially all of its available cash flows as dividends to unitholders (but allowing it to be taxed at a significantly lower rate than most corporations). The firm has traditionally managed a fairly conservative capital structure. This does not place the company at a competitive disadvantage relative to its peers, though, because most asset managers tend to carry little to no debt on their balance sheets. At the end of the March quarter, AB had $850 million in debt (tied primarily to its commercial paper program) and $1.1 billion in unrestricted cash and cash equivalents on its books. The company maintains an $800 million revolving credit facility expiring September 2023, used primarily as backup liquidity for AB’s commercial paper program, and a $900 million committed unsecured senior credit facility with Equitable Holdings, which can be used for AB’s general business purposes (and where AB had $850 million outstanding at the end of March 2022 with an interest rate of approximately 0.3%). While the company’s structure as a limited partnership does limit the amount of capital that AB can allocate to other purposes, the firm does generally hold more cash than debt on its books, which along with substantial liquid investments and solid operational cash flows should enable AB to make investments in other assets/businesses from time to time.

Bulls Say

With nearly half of its AUM invested internationally, and 43% of managed assets sourced from non-U.S. domiciled clients, AB is one of the more global asset managers.

AB had $10 billion in its institutional pipeline at the end of March 2022, as well as a commitment from Equitable to invest $10 billion in the firm’s buildout of its private alternatives and private placements offerings.

Despite rising rates in the first quarter, AB’s bond fund performance held up with 64%, 72%, and 71% outperforming their benchmarks on a 1-, 3- and 5-year basis, respectively, at the end of the period.

Company Description

Alliance Bernstein provides investment management services to institutional (45% of assets under management), retail (39%), and private (16%) clients through products that includes mutual funds, hedge funds, and separately managed accounts. At the end of May 2022, AB had $687.0 billion in managed assets, composed primarily of fixed-income (40% of AUM) and equity (44%) strategies, with other investments (made up of asset allocation services and certain other alternative investments) accounting for the remainder. The company also provides sell-side research and brokerage services through its Sanford Bernstein subsidiary.

(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

ABB has an enviable base of robotics and automation customers that puts it in a solid position for Industry 4.0 or the Industrial Internet of Things

Business Strategy and Outlook 

ABB generates around 40% of its revenue from electrical equipment and around 40% from industrial automation products. While it has low exposure to faster-growing software, it has a fast-growing robotics business, where it is the number-two global supplier; this contributes around 9% of revenue. It is projected 4% medium-term revenue growth for ABB. Automation is the fastest-growing category in the industrial space, and ABB has an enviable base of robotics and automation customers that puts it in a solid position for Industry 4.0, or the Industrial Internet of Things. Its robotics and industrial controller (used to program equipment) products have leading market share and enjoy loyal customer bases that would be difficult for competitors to capture. Furthermore, ABB’s electrification products division offers some overlap with other customer segments, such as process industries, that could prove useful in cross-selling the automation portfolio.

However, growing demand from Industry 4.0 has meant that ABB and its close competitors have had to refresh their product offerings, acquiring or developing in-house industrial automation components and software. ABB has been slow to refresh its product offering and, in some cases, has had to turn to second-best choices. ABB’s software strategy lags that of competitors like Siemens and Schneider. ABB has a hybrid strategy for its Industry 4.0 software, offering most of its equipment productivity and maintenance optimization software from its own developed software portfolio, while for design and simulation software, it has a partnership with Dassault Systemes. The partnership structure deprives ABB of the advantage of in-house development that Siemens and Schneider enjoy, as they offer similar software developed by in-house engineering teams.

Financial Strength

At the end of December 2021, ABB’s net debt/adjusted EBITDA was less than 1. The company does not have near-term liquidity nor long-term solvency issues. The company generates about $3.6 billion annually in free cash flow, so in theory it could pay off its roughly $7 billion in gross debt in less than three years

Bulls Say’s

  • ABB is one of the best-positioned companies to benefit from industrial automation and robotics. 
  • The company’s restructuring program, which focuses on reducing corporate costs through decentralization of management, should benefit long-term margins and capital allocation by putting more profit and loss accountability into the hands of business unit leaders. 
  • ABB’s exposure to smart-grid products and electrical distribution components should benefit from a demand tailwind for grid-management and energysaving products.

Company Profile 

ABB is a global supplier of electrical equipment and automation products. Founded in the late 19th century, the company was created out of the merger of two old industrial companies: ASEA and BBC. The company is the number-one or number-two supplier in all of its core markets and the number-two robotic arm supplier globally. In automation, it offers a full suite of products for discrete and process automation (continuous processes like chemical production) as well as industrial robotics.

(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

Fortinet at the Forefront of Networking and Security Converging

Business Strategy & Outlook

Fortinet is a leading cybersecurity company that has amassed an extensive customer base because of its solutions’ high performance relative to price as well as its broad product offerings covering various security concerns. The company developed a centralized cybersecurity management plane and is at the forefront of networking and security converging with its secure software-defined wide-area networking offerings. Fortinet sells security appliances and subscriptions as well as technical and professional services. It has established customer switching costs alongside its network effect and has a nice runway for growth through its holistic approach to network and cloud cybersecurity. As organizations expand their networking footprint beyond on-premises data centers, Fortinet keeps customers locked into its ecosystem via holistic security management across any location. 

The vast creation of data and the dispersed nature of network traffic due to hybrid environments, software-as-a-service applications, and remote access needs create a larger threat surface. Attacks are becoming more masqueraded and serpentine, which drives up the complications associated with cybersecurity management and threat prevention. Fortinet gleans threat insights from its massive customer base, which keeps it at the forefront of security requirements. Compounded by a dearth of cybersecurity talent, consolidated security platforms like Fortinet’s Security Fabric will remain in high demand, as customers prefer to add capabilities via subscriptions over managing disparate software and hardware vendors. The company has a build-versus-buy mentality, with a penchant for making custom processors. While this strategy has helped establish its name within the perimeters of localized networks, Fortinet is expected to supplement its engineering prowess with inorganic growth in areas like cloud-based security, machine learning, and automated threat responses. These high-growth areas can help drive new product growth on top of a considerable base of durable services and support income.

Financial Strengths

Fortinet is considered a financially sound company that will continue to generate strong cash flow. At the end of 2021, Fortinet’s deferred revenue of $3.5 billion is a strong indication of predictable revenue streams and should help insulate the company from any IT spending downturns. Fortinet had $3.0 billion in cash and equivalents and $1 billion of debt at the end of 2021. The company has never paid a dividend, but used over $2 billion to repurchase shares between 2017 and 2021, and Fortinet is anticipated to continue repurchasing shares. Beyond returning capital, cash outflows are expected to be focused on research and development alongside sales and marketing efforts and with some smaller tuck-in acquisitions to be completed for areas such as cloud-based security and analytics.

Bulls Say

  • A growing enterprise customer base and nascent technologies like software-defined networking and 5G create sizable revenue growth potential for Fortinet. 
  • The firm’s consolidated cybersecurity platform could be enticing for customers attempting to decrease the quantity of vendors, which would drive more revenue per customer for Fortinet. 
  • With no end to cybersecurity threats, Fortinet’s products should remain in high demand from SMBs, government entities, service providers, and enterprises.

Company Description

Fortinet is a cybersecurity vendor that sells products, support, and services to small and midsize businesses, enterprises, and government entities. Its products include unified threat management appliances, firewalls, network security, and its security platform, Security Fabric. Services revenue is primarily from FortiGuard security subscriptions and FortiCare technical support. At the end of 2021, products were 38% of revenue and services were 62% of sales. The California-based company sells products worldwide.

(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

Mandiant Services and Solutions Expected To Be Demanded Amid Heightened Threat Environment

Business Strategy & Outlook

Cybersecurity pure play Mandiant (formerly FireEye) sells subscriptions and services to protect customers from threats and to resolve security breaches. Mandiant is considered a pre-eminent provider of professional consulting services for incident response, security assessments and updates, managed security, and training. Its software-as-a-service solutions include continuous security validation, managed defense, threat intelligence and automated defense. Robust demand for Mandiant’s services and subscriptions is expected due to a persistent cybersecurity talent shortage and cybercriminals continually evolving their threats, causing organizations to look for assistance from experts. 

By selling off its products division in October 2021, Mandiant is making the prudent decision to focus on its world-class incident response, threat intelligence, and security validation offerings, as strong competition from other leading cybersecurity players’ holistic security platforms and spry best-of-breed upstarts hindered its legacy products’ success. Being independent of its former product division could enhance its technology partner relationships and improve threat intelligence and enhanced customer engagements. The vast creation of data plus the increased use of software-as-a-service applications and cloud-based ecosystems will continuously drive up the quantity and complexity of cyberthreats. Mandiant’s security experts stay ahead of threat trends via in-depth research, and those insights cause organizations to demand support or potentially outsource their security to Mandiant to manage. With a lack of security talent in the marketplace, firms are anticipated to increase their usage of external threat assessments, security validation, and automated response solutions while looking toward experts, such as Mandiant, when internal teams are overwhelmed.

Financial Strengths

Mandiant is in mediocre financial shape, with an improving free cash flow profile and its cash balance outweighing its convertible note obligations. At the end of 2020, FireEye, Inc. (which included both Mandiant plus FireEye products) had $1.3 billion in cash and equivalents and $960 million in total debt made up of convertible notes. Mandiant sold its FireEye products division for $1.2 billion in October 2021, which is expected to help fuel internal investments and potential shareholder returns. The company has never paid, nor has any intention to pay, a dividend. Its share count rose from 142 million shares in 2014 to 229 million in 2020, but share dilution is anticipated to temper in the next few years. As part of selling its products division, Mandiant announced a $500 million share repurchase program. Besides the acquisitions of Verodin for $250 million in 2019, iSight Partners for $275 million in 2016, and Mandiant (when the company was FireEye) for over $1 billion in 2013, which were partly funded with cash, most of FireEye’s funds have been used for operating expenses. FireEye has made some small acquisitions, which are presumed to continue. Cash deployment is expected to remain focused on operating costs, but for the firm to drive operating leverage as it matures.

Bulls Say

  • With a skills gap in cybersecurity, customers may prefer to outsource security to Mandiant’s managed services.  
  • Mandiant’s security experts provide customers with a unique selling proposition for breach response and security posture assessments, and the expertise could become relied upon by customers. 
  • Heightened threat environments and digital transformations may make organizations uneasy regarding security, driving up demand for Mandiant’s security posture validation.

Company Description

Mandiant (formally FireEye,) is a pure-play cybersecurity firm that focuses on incident response, threat intelligence, automated response, and managed security. Mandiant’s security experts can be used on demand or customers can outsource their security to Mandiant. The California-based company sells security solutions worldwide, and sold its FireEye products division in October 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 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

Medtronic Plc – The Board declared a cash dividend of $2.72, up +8% YoY

Investment Thesis:

  • The Company should come out of COVID-19 in a solid position, with significant balance sheet liquidity increasing flexibility to undertake strategic M&A and invest in the business.  
  • Strong shareholder returns, increasing DPS by +48% over the past 5 years and +16% CAGR over the past 45 years. 
  • Market leadership position in the medical equipment and supplies industry.
  • Global footprint with continuing strong growth in EM.
  • Successful track record of developing breakthrough technologies. The Micra AV transcatheter pacing system is expected to be a blockbuster.
  • Opportunities in the growing diabetes market.
  • Successful M&A to gain strategic advantage.

Key Risks:

  • Aggressive competition by other established players putting pressure on margins.
  • Strict government regulations and scrutiny. 
  • IP theft by countries like China.
  • Challenging political environments with U.S.-China trade war and Brexit.
  • Downturn in the U.S. economy given the fact that the company still derives 51% of its revenue from the local market.
  • Currency headwinds.

Key Highlights:

  • New kidney health tech company formed.
  • As part of its portfolio management strategy, MDT reached an agreement with DaVita to form a new, independent kidney care-focused medical device company, where MDT will contribute its Renal Care Solutions business into a new company, which will focus on developing a broad suite of novel kidney care products and solutions, including future home-based products, to make different dialysis treatments more accessible to patients, and in return will receive up to $400m from DaVita (expect transaction to close in CY23) and leverage DaVita’s expertise in kidney care to commercialize and scale the new technology.
  • Solid shareholder returns with the Company returning $5.5bn capital to shareholders in the year through dividend and net share repurchase. The Board approved an increase in cash dividend for 1Q23 to 68cps, translating into an annual amount of $2.72, up +8% YoY.
  • Strong balance sheet to complement innovation-driven growth strategy with tuck-in M&A, announcing 4 acquisitions totalling over $2.1bn in total consideration in FY22. 
  • FY23 outlook – supply chain, inflation, and FX to be near-term headwinds.
  • For FY23 organic revenue growth of +4-5% YoY (FX to be a headwind of $1-1.1bn on revenue) with Cardiovascular growing +5.5-6.5%, Medical Surgical growing +3.5-4.5%, Neuroscience growing +5-6% and Diabetes declining -6-7% (excluding growth from 780G and Guardian 4 sensor in the U.S., which management remains confident to receive approval of), and non-GAAP diluted EPS of $5.53-5.65 (including an unfavourable impact of 20-25 cents from FX), negatively impacted by inflation and continued supply chain challenges.
  • For 1Q23 organic revenue decline of -4.5-5.5% YoY (FX to be a headwind of $350-400m on revenue) with Cardiovascular declining -1-2%, Medical Surgical declining -7.5-8.5%, Neuroscience declining -5-6% and Diabetes declining -8-10%, and EPS of $1.10-1.14, including an FX headwind of ~5 cents.

Company Description:

Medtronic Plc (MDT) is a medical technology, services and solutions company operating in four segments: Cardiac and Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group and Diabetes Group. The Cardiac and Vascular Group segment includes cardiac rhythm and heart failure, coronary and structural heart, and aortic and peripheral vascular; Minimally Invasive Therapies Group segment includes surgical solutions, and patient monitoring and recovery; Restorative Therapies Group segment includes spine, neuromodulation, surgical technologies and neurovascular and the Diabetes Group segment includes intensive insulin management, non-intensive diabetes therapies, and diabetes services and solutions.

(Source: Banyantree)

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

Walgreens Faces Covid Headwinds and continues to push into Primary-Care Services

Business Strategy & Outlook:
Founded in 1901, Walgreens Boots Alliance is a leading global retail pharmacy chain. In fiscal 2021, the company generated approximately $133 billion in revenue and dispensed over a billion prescriptions annually, representing just under one fourth of the U.S. drug market. The firm’s nearly 9,000 domestic stores are strategically located in high-traffic areas and generate over $13 million per store, which drives scale and remains a critical consideration in an increasingly competitive market that has witnessed rationalization. The core business is centered on the pharmacy, which accounts for about three fourths of revenue and is considered the main driver of traffic. Despite Walgreens’ scale as a leading purchaser of prescription drugs and competitive advantage over smaller retail pharmacy chains, gross margins have come under pressure in recent years as a result of pharmacy benefit managers’ negotiating leverage and market power. These pressures have affected margins across the entire retail pharmacy industry, pushing the largest players (Walgreens, CVS, Walmart) to branch into other healthcare services.

Walgreens has been focused on leveraging scale to foster strategic partnerships to increase traffic and cross-selling opportunities, with a long-term focus to improve human health in general. While Walgreens has expanded into omnichannel offerings, but its high-traffic brick-and-mortar locations and convenience-oriented approach are less susceptible to pressures from e-commerce and mass merchandisers, particularly in the health and wellness categories, than other retailers. Historically, the company’s strategy was based on footprint expansion, but having established a scalable infrastructure, the focus has evolved and the concentration has shifted to improving store utilization and strategically aligning with healthcare partners to address the macro trend of localized community healthcare. The company’s partnership with VillageMD to establish primary-care clinics in select Walgreens locations further establishes the drugstore as a one-stop shop for care.

Financial Strengths:
As of March 2022, cash and equivalents stood at $2 billion, or lower than the company’s $4 billion in combined current debt and lease obligations. Beyond those current obligations, Walgreens owes $11 billion in long-term debt and $22 billion in operating lease obligations. The company continues to focus on its core assets and expanding in primary-care services. While cash levels appear low, the firm will be able to rebuild its cash balance through the normal course of business and free cash flow generation. For example, free cash flow generation was around $4 billion in fiscal 2021, and only slightly lower cash flows going forward even after pandemic conditions ease.

Bulls Say:
As a leading retail pharmacy with around 9,000 domestic locations, Walgreens is able to reach 80% of U.S. consumers.
Strategic partnerships focused on increasing store utilization through the addition of clinical partners to localize community healthcare should be a natural extension in providing coordinated care that will increase community engagement and offset reimbursement pressures.
An increase in higher-margin health and beauty merchandise sales bolsters front-end store performance.

Company Description:
Walgreens Boots Alliance is a leading retail pharmacy chain with about 13,000 stores in the U.S. and internationally. Walgreens’ core strategy involves brick-and-mortar retail pharmacy locations in high-traffic areas, with nearly 80% of the U.S. population living within 5 miles of a store. Currently, the company has a leading share of the domestic prescription drug market at about 20%. In 2021, the company sold a majority of its Alliance Healthcare wholesale business to AmerisourceBergen for $6.5 billion, doubling down on its core pharmacy efforts and ventures in strategic growth areas in primary care (VillageMD) and digital offerings. The company also has equity stakes in AmerisourceBergen (29%) and Sinopharm Holding Guoda Drugstore (40%).

(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
Small Cap

Urban Outfitters has operated a wholesale business for more than 35 years, but it accounted for just 6% of sales in fiscal 2022.

Business Strategy & Outlook

The Urban Outfitters lacks a brand intangible asset that would provide an economic moat and pricing power. While its three major apparel brands–Anthropologie, Free People, and Urban Outfitters–remain enticing to their primary demographic of women 18-45 years old, thecompetition has taken a toll. Urban Outfitters grew to be one of the larger specialty apparel retailers in the United States on the strength of its distinctive styles. However, although sales and profits have recovered nicely as the economy has reopened, same-store sales growth and profit margins were inconsistent in the years before the pandemic. While this is partly due to shifting fashion trends, as fragmentation in apparel retail is the primary factor. Urban Outfitters, like many others, has had to resort to markdowns and promotions to compete with wide-moat Amazon and other e-commerce, outlet stores, discount stores, and key vendors’ direct-to-consumer efforts.

Urban Outfitters has strengths, but its strategies as insufficient. The firm intends to prioritize e-commerce, international expansion, Free People Movement, and its nascent Nuuly clothing rental service. To its credit, Urban Outfitters was an early adopter of e-commerce, which has grown at double-digit rates during the pandemic and now accounts for about 50% of its sales. However, digital shoppers have many alternatives and can even find Urban Outfitters’ owned brands through third parties. Meanwhile, Urban Outfitters has operated a wholesale business for more than 35 years, but it accounted for just 6% of sales in fiscal 2022. This business has been challenged by consistently declining sales in U.S. department stores. Urban Outfitters might have growth opportunities in Europe, where it is opening stores, and in China, where it is has a local team to sell through Tmall. However, the potential for international growth is unproven, as neither Free People nor Anthropologie has any real presence outside North America.

Financial Strengths

Although facing logistical challenges and higher costs, the Urban Outfitters is in fine financial shape. The firm closed April 2022 with no long- or short-term debt (apart from $1.1 billion in operating lease liabilities) and $259 million in cash and short-term investments. In March 2020, when Urban Outfitters had to close stores because of the virus, the firm took aggressive action to conserve cash. Among other actions, the company furloughed employees, cut salaries, extended payment terms, suspended rent payments, and cut other discretionary expenses. The firm also borrowed $120 million under its $350 million revolving credit facility (matures in 2024) but has already repaid the loan. While the firm’s free cash flow to equity was just under $100 million in fiscal 2022 as it recovered from the effects of the virus, the annual average free cash generation of about $280 million over the next decade. Urban Outfitters suspended buybacks during the pandemic but resumed them in fiscal 2022. The firm has, at times, repurchased shares at prices well above current levels and the historical fair value estimates. A firm reduces shareholder value when it repurchases stock at prices above the fair value estimates. Urban Outfitters has never paid dividends in its 50-year history. The Urban Outfitters’ average yearly capital expenditures at about 4.3% of sales. Between fiscal years 2012 and 2015, the firm’s capital expenditures averaged 7% of sales as it was expanding aggressively. In fiscal years 2016-22, however, its capital expenditures dropped to 4% of sales as store openings slowed. However, fiscal 2022’s capital expenditures were nearly 6% of sales due to investments in new fulfillment and distribution centers in both the U.S. and the U.K. and the opening of about 18 FP Movement stores.

Bulls Say

  • Urban Outfitters’ robust e-commerce has been a big benefit during the pandemic and now accounts for about 50% of its sales. 
  • Urban Outfitters has many exclusive products, as about 50% of its sales come from its own brands and sourcing. Moreover, the firm carries some exclusive products from national and specialty brands. 
  • The new FP Movement stand-alone stores expand Urban Outfitters’ presence in the red-hot women’s athleisure sector and make it a viable competitor to Lululemon and Gap’s Athleta.

Company Description

Founded in 1970, Philadelphia-based Urban Outfitters is an apparel and home goods retailer that operates about 700 stores and e-commerce in North America and Europe under the Urban Outfitters, Free People, FP Movement, Anthropologie, Terrain, and BHLDN brands. It also sells products through a wholesale operation, owns some restaurants, and operates a clothing rental business. Urban Outfitters primarily markets to young adults and offers products in categories such as women’s and men’s apparel, home goods, shoes, wedding, and outdoors.

(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

Square’s initial success came largely from expanding the acquiring market, as opposed to stealing material share from existing players.

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.

Business Strategy & Outlook

The Block’s business model on the merchant side, characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows the company to reach and retain micro merchants that are unviable for other acquirers. In essence, the Square’s initial success came largely from expanding the acquiring market, as opposed to stealing material share from existing players.

To develop sufficient scale, Square needed to move past its micro merchant base, and recent results suggest it is doing just that. At this point, only about two thirds of its payment volume comes from merchants generating over $125,000 in annual gross payment volume. Furthermore, absolute growth in clients above this threshold has accelerated meaningfully over the past couple of years, while absolute growth in merchants below this threshold has largely held steady. The move upstream and cross-selling will allow Square to materially improve margins in the years ahead and show the viability of its business model. But Square as a narrow-moat niche operator, not a disrupter, with market share limited by its relatively high pricing and long-term margins constrained by its relative lack of scale. The Clover has proven itself a strong competitor and appears to be outperforming Square. The company’s effort to build out a consumer business surrounding its Cash App creates option value, and the more uncertainty on this side of the business. Block is competing in a space with winner-take-all dynamics, and its competitors have large consumer customer bases, which can justify some initial skepticism. However, Cash App’s performance compared with peers has been relatively strong, suggesting it is positioning itself to be a longtime leader in the space.

Financial Strengths

The Block is in a solid financial position. Historically, it has avoided carrying a meaningful amount of debt, which seems appropriate given that the company remains unprofitable. However, the company had about $5 billion in debt on the balance sheet at the end of 2021. Absent one-time gains, Block remains unprofitable on a GAAP basis. But stock compensation makes up a significant portion of its expenses. As such, the company did turn free-cash flow-positive in 2017, and the improving profitability will increase free cash flow meaningfully in the coming years. The capital-light nature of the business creates significant financial flexibility, and the company should have room to consider cash-based acquisitions to fill in any product holes.

Bulls Say

  • The ongoing shift toward electronic payments has created, and will continue to create, room for payments companies to see strong growth without stealing share from each other. 
  • Ancillary services are becoming a more critical engine for growth and will help Square fully monetize its merchant client base and improve margins. 
  • Electronic payment growth is shifting overseas, and Square’s business model looks portable into international markets, as the company does not rely on a large local salesforce to attract merchants.

Company Description

Founded in 2009, Block provides payment acquiring services to merchants, along with related services. The company also launched Cash App, a person-to-person payment network. Block has operations in Canada, Japan, Australia, and the United Kingdom; about 5% of revenue is generated outside the U.S.

(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

Dick’s investments in new full-line and specialty stores have failed to attract enough new customers.

Business Strategy & Outlook

The no-moat Dick’s Sporting Goods lacks an edge as sporting goods are sold through an increasing number of channels. Although its sales have soared during the pandemic, the impact is temporary, as growth in sporting goods retail has generally been minimal due to external competition. According to IBISWorld, sporting goods retail sales experienced average annual growth of just 1.3% in the five years before the pandemic. Dick’s competitors include e-commerce operators (such as wide-moat Amazon), mass retailers (such as wide-moat Walmart), specialty stores (narrow-moat Lululemon, Foot Locker, Bass Pro Shops/Cabela’s), and branded stores and owned e-commerce from major vendors. As an example of the latter, narrow-moat Adidas’ direct-to-consumer business constituted 39% of its 2021 sales, up from 25% in 2015. Further, the COVID-19 crisis has accelerated manufacturers’ direct-to-consumer efforts, as evidenced by Foot Locker’s acknowledgement that wide-moat Nike will reduce shipments to the firm. One cannot believe Dick’s market position is strong enough to prevent vendors from offering their merchandise in alternate channels. Its compound average yearly sales growth of 3% over the next decade, at the lower end of projected U.S. activewear growth of 3%-5%.

Dick’s recent profitability has greatly improved, but one cannot not think the gains can hold. The firm recorded a 16.5% operating margin in 2021, but this as anomalous. In 2013, Dick’s forecast its operating margin would increase to 10.5% by 2017 from 9.0% in 2012, but its actual operating margins were only in the midsingle digits in the years before the pandemic. The 2021 operating margin was the peak level and expect its operating margins will trend downward over time due to a lack of pricing power. Ultimately, one cannot think the firm needs such a large store base (about 860 stores) especially as its e-commerce has risen during the pandemic (21% of sales in 2021, up from 16% in 2019). The Dick’s investments in new full-line and specialty stores have failed to attract enough new customers.

Financial Strengths

The Dick’s is in excellent financial shape. To conserve cash while stores were temporarily closed during the pandemic, Dick’s furloughed employees, cut its planned capital expenditures, reduced salaries, and suspended its share repurchases. In April 2020, it shored up its liquidity further by completing a $575 million convertible bond offering at an interest rate of 3.25% (matures in 2025). Then, in early 2022, the firm issued $1.5 billion in bonds, with half carrying a 3.15% interest rate and maturing in 2032 and the other half carrying a 4.1% interest rate and maturing in 2052. After this offering, Dick’s ended April 2022 with $2.25 billion in cash and equivalents, long-term debt of $1.9 billion, and about $1.6 billion in available borrowing capacity under its revolver. The firm may retire the convertible debt when it becomes callable in 2023. The Dick’s will produce significant free cash flow, which it will return to shareholders as dividends and share repurchases after the crisis has passed. Dick’s will generate $8 billion in free cash flow to equity over the next decade and will use this cash to repurchase about $5.5 billion in stock and issue about $2.6 billion in dividends. Dick’s suspended repurchases during the pandemic, but then spent nearly $1.2 billion on repurchases in 2021, its largest amount in any year by far. Unfortunately, the average price paid was $109 per share, which was possibly inefficient at well above the fair value estimates and historical price levels. For comparison, due to the large share price increase, Dick’s consumed about $400 million in cash in buybacks in 2019 but repurchased more shares than it did in 2021. The annual capital expenditures will average about $450 million (3.5% of sales) over the next five years as Dick’s opens a few stores per year, invests in e-commerce, and renovates existing locations.

Bulls Say

  • Dick’s is the largest pure sporting goods chain in the U.S. Its has a large loyalty program that is integrated with that of Nike. Dick’s has a strong business in high school and youth sports. 
  • Dick’s is replacing hunting with women’s activewear and other apparel in some stores. Popular activewear probably has better margin and growth prospects than hunting. 
  • Dick’s has adapted well to a market that has changed during the pandemic. Its digital sales skyrocketed to about $2.6 billion in sales in 2021 (21% of total), up from about $1.4 billion in 2019 (16% of total).

Company Description

Dick’s Sporting Goods retails athletic apparel, footwear, and equipment for sports. Dick’s operates digital platforms, about 730 stores under its namesake brand (including outlet stores), and about 130 specialty stores under the Golf Galaxy, Public Lands, and Field & Stream names. Dick’s carries private-label merchandise and national brands such as Nike, The North Face, Under Armour, Callaway Golf, and TaylorMade. Based in the Pittsburgh area, Dick’s was founded in 1948 by the father of current executive chairman and controlling shareholder Edward Stack.

(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

Chewy has been well-positioned to benefit from explosive e-commerce growth in the category–en route to high-40% online market share in 2021.

Business Strategy & Outlook

The pet care industry is quite attractive, with brand loyalty, sticky purchase habits, pet humanization, and minimal cyclicality representing just a handful of alluring structural features in a $119 billion U.S. market (per Packaged Facts). While a slew of players jockey for upstream (manufacturing) and downstream (retail) market share, Chewy’s service-intensive subscription-driven platform looks poised to capture a disproportionate share of online sales, with the firm building a strong brand around customer service and perceived quality.

Chewy was founded with the intention of outcompeting wide-moat Amazon for online pre-eminence in a category that was rife with inefficiencies and saw only low-single-digit online penetration at the time. By emphasizing the labor-intensive aspects of the business model that its largest competitor intentionally eschewed (building out an army of dedicated customer service representatives whose principal qualification was their love of pets), the firm amassed a loyal customer base, with robust autoship penetration and strengthening monetization over time, generating net revenue retention of over 100% for each annual cohort. The firm’s 72% autoship penetration, a subscription-based model that pet consumables lend themselves to particularly nicely, defrays fulfillment cost pressures relative to large peers, given that a high degree of order predictability renders inventory management markedly easier, reducing split shipments. With a digital native platform, expansion into adjacent sales layers in pet healthcare (filling prescriptions, offering telehealth services, partnering with veterinarians through “Practice Hub,” and offering pet wellness and insurance plans in conjunction with TransUnion), Chewy has been well-positioned to benefit from explosive e-commerce growth in the category–en route to high-40% online market share in 2021 . With the expansion of higher-margin private label product, pet healthcare, and increasingly valuable maturing cohorts, Chewy looks poised to continue its leadership well into the future, in a category with 30% online penetration and no apparent glass ceiling for e-commerce saturation.

Financial Strengths

The Dick’s is in excellent financial shape. To conserve cash while stores were temporarily closed during the pandemic, Dick’s furloughed employees, cut its planned capital expenditures, reduced salaries, and suspended its share repurchases. In April 2020, it shored up its liquidity further by completing a $575 million convertible bond offering at an interest rate of 3.25% (matures in 2025). Then, in early 2022, the firm issued $1.5 billion in bonds, with half carrying a 3.15% interest rate and maturing in 2032 and the other half carrying a 4.1% interest rate and maturing in 2052. After this offering, Dick’s ended April 2022 with $2.25 billion in cash and equivalents, long-term debt of $1.9 billion, and about $1.6 billion in available borrowing capacity under its revolver. The firm may retire the convertible debt when it becomes callable in 2023. The Dick’s will produce significant free cash flow, which it will return to shareholders as dividends and share repurchases after the crisis has passed. Dick’s will generate $8 billion in free cash flow to equity over the next decade and will use this cash to repurchase about $5.5 billion in stock and issue about $2.6 billion in dividends. Dick’s suspended repurchases during the pandemic, but then spent nearly $1.2 billion on repurchases in 2021, its largest amount in any year by far. Unfortunately, the average price paid was $109 per share, which was possibly inefficient at well above the fair value estimates and historical price levels. For comparison, due to the large share price increase, Dick’s consumed about $400 million in cash in buybacks in 2019 but repurchased more shares than it did in 2021. The annual capital expenditures will average about $450 million (3.5% of sales) over the next five years as Dick’s opens a few stores per year, invests in e-commerce, and renovates existing locations.

Bulls Say

  • E-commerce penetration should continue to increase in the category, favoring digital native players like Chewy. 
  • Chewy’s subscription-based model (72% autoship penetration) should help it retain the bulk of the customers it has added since the onset of COVID-19. 
  • With two thirds of Chewy’s customer base also boasting Amazon Prime memberships, we suspect that pressure from the e-commerce behemoth could prove less onerous than many expect.

Company Description

Chewy is the largest e-commerce pet care retailer in the U.S., generating $8.9 billion in 2021 sales across pet food, treats, hard goods, and pharmacy categories. The firm was founded in 2011, acquired by PetSmart in 2017, and tapped public markets as a standalone company in 2019, after spending a couple of years developing under the aegis of the pet superstore chain. The firm generates sales from pet food, treats, over-the-counter medications, medical prescription fulfillment, and hard goods, like crates, leashes, and bowls.

(Source: Morningstar)

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

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

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