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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
Dividend Stocks

Ferguson has built leading positions across most of its end markets through its roll-up acquisition strategy

Business Strategy and Outlook 

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Between 2008 and 2020, Ferguson’s exposure to the U.S. RMI market (as a percentage of sales) increased from 31% to 60%, while U.S. new construction revenue exposure decreased from 58% to 32%. The U.S. R&R spending to grow at a 4%-5% compound annual rate this decade (using 2020 as the base year). While R&R spending surged during the pandemic, a dramatic downturn in home improvement projects cannot be seen. Instead, it is believed the pandemic stepped R&R sales up to a structurally higher base for more normalized growth going forward. In terms of U.S. residential construction, housing starts to decline about 10% to 1.45 million units in 2023. That said, there’s still plenty of pent-up demand for new homes, and less buyer competition and more entry-level construction should usher in price relief. Housing starts will average about 1.5 million units annually this decade.

Ferguson has built leading positions across most of its end markets through its roll-up acquisition strategy. The company typically acquires local competitors, gaining access to new brands, suppliers, regions, and customers. It is expected that Ferguson will continue this strategy, which should augment its scale-driven competitive advantage. Ferguson sold its Wolseley U.K. business for approximately $420 million in February 2021. This business struggled to generate shareholder value despite being one of the largest distributors in the United Kingdom. There were very few synergies between geographies and little overlap in suppliers. Ferguson’s strategic shift to the United States will be a tailwind for the firm’s prospects, and Ferguson’s primary listing on the New York Stock Exchange could increase interest from U.S. investors.

Financial Strength

Ferguson set out to clean up its balance sheet following the great financial crisis, and its improved net debt/EBITDA from 3.5 times before the 2008 crisis to 0.8 times as of April 30, 2022. Net debt at the end of the third quarter of fiscal 2022 (April 2022) was $2.4 billion. Ferguson’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy that augments growth with acquisitions but also returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations, given its strong cash balance. Its cash position at the end of the third quarter of fiscal 2022 stood at $1.2 billion. Also a comfort can be seen in Ferguson’s ability to tap available lines of credit to meet any short-term needs. The countercyclical nature of industrial distributors’ free cash flow generation looks encourage able, which results from the ability to drawdown inventory during times of economic malaise. Ferguson generated over $1 billion of free cash flow during the great financial crisis, and the current economic weakness is to push free cash flow levels materially higher as working capital requirements ease. Ferguson enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  • Ferguson’s roll-up strategy in the U.S. should lead to market share gains, boosting revenue growth in excess of the market average. 
  • Ferguson’s strategic shift to the U.S. away from international markets has strengthened group operating margins. 
  • Ferguson generates strong free cash flow throughout the economic cycle despite serving cyclical end markets

Company Profile 

Ferguson distributes plumbing and HVAC products primarily to repair, maintenance, and improvement, new construction, and civil infrastructure markets. It serves over 1 million customers and sources products from 34,000 suppliers. Ferguson engages customers through approximately 1,600 North American branches, over the phone, online, and in residential showrooms. In fiscal 2021, Ferguson derived 94% of its nearly $23 billion of sales in the U.S. According to Modern Distribution Management, Ferguson is the largest industrial and construction distributor in North America. The firm sold its U.K. business in 2021 and is now solely focused on the North American market.

(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

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.

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

Operating cash flow was up +42.0% to $502.4m reflecting strong business performance and underlying cash flow generation capability

Investment Thesis:

  • Trades on attractive multiples and valuation.
  • On market buy back should be supportive of its share price.
  • Fasting growing Digital business, with strong execution by management.
  • Expectations of new product releases will gain significant traction with customers. 
  • Increasing skew towards recurring revenue.
  • Global gaming exposure. 
  • Growing market share in underpenetrated markets. 
  • Leveraged to a falling AUD.
  • Strong balance sheet with ample liquidity provides management with significant flexibility to take advantage of value accretive acquisitions or pursue organic growth opportunities. 

Key Risks:

  • Any further downside to the Japanese market.
  • Low replacement/uptake in the US market.
  • Competition risk.
  • Loss in market share.
  • Lack of product development.
  • Adverse currency movements.
  • Adverse outcome from any potential court case. 

Key Highlights:

  • Group revenue increased to $2.7bn, up +23.1% in reported terms, or up +19.7% in constant currency compared to the pcp, driven by strong performance in Gaming Operations and Outright Sales, supported by robust portfolio performance from Pixel United.
  • EBITDA of $970m, up +30% on a reported basis and +27% higher on a constant currency basis compared to the pcp.
  • Normalized profit after tax and before amortization of acquired intangibles (NPATA) of $580m, up +41% (up +37% in constant currency). According to management, this was +37% ahead of (pre-COVID) 1H19 profit performance, despite mixed operating conditions and supply chain disruptions.
  • Operating cash flow was up +42.0% to $502.4m reflecting strong business performance and underlying cash flow generation capability.
  • ALL’s balance sheet remained robust, with gearing (net (cash)/debt to EBITDA) further reduced to (0.3x), and more than $3.3bn of liquidity available as of 31 March 2022.
  • The Board declared an interim fully franked dividend of 26.0cps (A$173.7m).

Company Description

Aristocrat Leisure Ltd (ASX: ALL) manufactures and sells gaming machines in Australia and globally, to casinos, clubs and hotels. In addition, ALL provides complementary products and services such as gaming systems and software, table gaming equipment and other related products.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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.

Categories
Technology Stocks

Bilibili’s video sharing site has a superior business model compared with most other streaming companies

Business Strategy and Outlook 

Bilibili generates revenue through five major sources: 1) advertising; 2) mobile games; 3) live streaming; 4) subscriptions; and 5) e-commerce. The advertising business (as part of its YouTube-like video sharing website) is the most important asset for the company’s long-term success. Bilibili’s video sharing site has a superior business model compared with most other streaming companies. The company has appropriately decided to focus most of its resources on building a platform for UGC (user-generated content) instead of investing heavily into original content or paying huge up-front content licenses. By doing so, it avoids going head-to-head against Tencent Video and iQiyi, both of whom are spending hundreds of billions on content development and licensing, and have yet to generate operating profit.

More importantly, Bilibili has created a self-maintainable UGC ecosystem that allows the firm to acquire video content at significantly lower costs than traditional streaming players such as iQiyi and Tencent Video. In 2021, Bilibili recorded just CNY 11 in content cost per MAU, less than one-fourth of iQiyi’s, while delivering a comparable level of revenue per user. The fact that it has a lower cost structure demonstrates the superiority of Bilibili’s platform business model. Although Bilibili is ahead of the pack in the growing video sharing and streaming markets, it faces potential competition from behemoths such as Tencent and ByteDance. Unlike Bilibili, these firms don’t rely solely on a single app to drive profitability and can potentially run at break-even, or even as loss leaders, while monetizing users via other products and services. In addition to its core video platform, Bilibili also offers other services such as live streaming, mobile games, and e-commerce. While they offer some growth, which looks less confident of their outlook than the core video product due to weak competitive positioning, low barrier to entry, and numerous existing competitors.

Financial Strength

Bilibili might need to raise additional capital before it achieves breakeven cash flows in 2026. The firm was sitting on a net cash of CNY 11.2 billion at the end of 2021, but it is expected that another 17 billion of cash burn before Bilibili becomes net cash generative. In the past, Bilibili has used convertible debt and stock issuance to finance its operations. Its 2021 listing in Hong Kong alone provided CNY 19 billion of funds for the company. It is expected that Bilibili is to continue running its asset-light business model. The company will continue to focus its resources on building a platform for user-generated content, or UGC, instead of investing heavily into original content or paying huge up-front content licenses. Besides revenue-sharing, the bulk of cost is in people (R&D, sales and marketing). Over the next few years, the firm is to spend upward of 10 billion annually in these two categories in total. Bilibili is not expected to take part in major M&A deals as management remains focused on organic growth opportunities.

Bulls Say’s

  • Bilibili’s video sharing platform is in early stage of monetization with significant runway for growth.
  • Bilibili’s strong hold on younger users provide tremendous value to advertisers seeking to target such demographic group.
  • The firm still has room to attract a wider base of users, potentially increasing the platform’s appeal to advertiser

Company Profile 

Bilibili is a Chinese online entertainment platform that is best known for its video-sharing site that resembles YouTube. The site was founded in 2009 and started as a long-form video platform for anime, comics, and gaming, or ACG, content that appealed to Gen Z users. Since then, it has expanded its content on the platform to include a broader range of interests that have attracted Chinese users outside of the Gen Z cohort. The firm generates revenue through five main areas: advertising, mobile games, live streaming, value-added services, and e-commerce.

 (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

Sensata to use bolt-on M&A to supplement sensor content growth in its core markets

Business Strategy and Outlook 

Sensata Technologies is a differentiated supplier of sensors and electrical protection, predominantly for the automotive market. The firm has oriented itself to benefit from secular trends toward electrification, efficiency, and connectivity, and investors will see meaningful top- and bottom-line growth as upon an automotive market recovery. Despite the cyclical nature of the automotive and heavy vehicle markets, electric vehicles (EVs) and stricter emissions regulations provide Sensata the opportunity to sell into new sockets, which has allowed the firm to outpace underlying vehicle production growth by about 4% historically. Such an outperformance is achievable over the next 10 years, there are expectations for a fleet mix shift toward EVs and Sensata’s growing addressable content in higher-voltage vehicles.

Sensata’s ability to grow its dollar content in vehicles demonstrates intangible assets in sensor design, as it works closely with OEMs and Tier 1 suppliers to build its products into new sockets. The mission-critical nature of the systems into which Sensata sells gives rise to switching costs at customers, leading to an average relationship length of roughly three decades with its top 10 customers. As a result of switching costs and intangible assets, Sensata benefits from a narrow economic moat and will earn excess returns on invested capital for the next 10 years. Over the next decade, it is expected Sensata to use bolt-on M&A to supplement sensor content growth in its core markets. Sensata established a leading share in the tire pressure monitoring system market in 2014 with its acquisition of Schrader, and acquisitions will play a key role in allowing the firm to enter new, higher-growth, adjacent markets. Recent acquisitions of GIGAVAC and Xirgo will allow Sensata to compete in the electric vehicle charging infrastructure and telematics markets, respectively, which is to begin to bolster the top line and margins near the end.

Financial Strength

Sensata Technologies is leveraged, but its balance sheet is in good shape, and that it generates enough cash flow to fulfil all of its obligations comfortably. As of Dec. 31, 2021, the firm carried $4.2 billion in total debt and $1.7 billion cash and equivalents. Sensata closed out 2021 with a net leverage ratio of 2.8 times, which is squarely in management’s target range of 2.5-3.5 times. Over the next few years, Sensata is expected to stay in its target leverage range as it continues to engage in supplemental M&A. Between 2023 and 2026, Sensata has $2.1 billion total in debt maturing, with $400 million-$700 million coming due each year. The firm will easily fulfil its obligations with its cash balance and cash flow– over $700 million in average annual free cash flow over the explicit forecast. Finally, Sensata has a variable cost structure that allows it to keep a relatively healthy balance sheet during difficult demand environments. Even with weak end markets in 2019 and 2020 that shrunk the top line, Sensata’s free cash flow generation held steady, with its free cash flow conversion jumping to 130% in 2020.

Bulls Say’s

  • Sensata should benefit from secular trends toward electrification, efficiency, and connectivity to continue outgrowing global vehicle production. 
  • Fleet management is an opportunity for Sensata to expand its margins and create a recurring base of revenue in an emerging, high-growth market. 
  • Accelerating adoption of electric vehicles should be a significant tailwind for Sensata’s burgeoning GIGAVAC high-voltage contactor sales.

Company Profile 

Sensata Technologies is a global supplier of sensors for transportation and industrial applications. Sensata sells a bevy of pressure, temperature, force, and position sensors into the automotive, heavy vehicle, industrial, heating, ventilation, and cooling, and aerospace markets. The majority of the firm’s revenue comes from the automotive market, where it focuses on bumper-in applications.

 (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

ABB Shares Look Attractive Even When Factoring In a Slower 2023 Due to Potential Macro Headwinds

Business Strategy & 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. We project 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 Systems. 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 Strengths:  

At the end of December 2021, ABB’s net debt/adjusted EBITDA was less than 1. We do not believe the company has 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: 

  • 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 energy saving products

Company Description:  

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 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

Challenges Abound and its Targets Look Aggressive, but PVH’s Brands have Global Appeal

Business Strategy & Outlook: 

Neither Tommy Hilfiger nor Calvin Klein has the pricing power or competitiveness to provide PVH with a moat. Moreover, the firm is dealing with the war in Ukraine, shipping delays, inflation, depreciation of the euro versus the dollar, and higher taxes. The adjusted EPS will drop about 10% this year. Due to these challenges and competition, PVH will fall short on its PVH+ plan targets of 2025 revenue, operating margin, and free cash flow of $12.5 billion, 15%, and $1 billion, respectively. The estimates are $10.6 billion, 12.4%, and $900 million. Even so, its key brands as healthy, and believe efforts to elevate product, achieve cost efficiencies, and build e-commerce will result in consistent earnings growth after this year. Once known as a producer of mid-tier men’s shirts, PVH purchased fashion brand Calvin Klein in 2003. It acquired a second large fashion brand in Tommy Hilfiger (2010) and Calvin Klein licensee Warnaco (2013). 

PVH now has employees in more than 40 countries, and the share of its revenue generated in the U.S. fell to just 32% in 2021 from nearly 90% in 2009. Growth rates and operating income for the international segments of both Calvin Klein and Tommy Hilfiger have consistently exceeded those of their North American segments over the past few years. While PVH’s international expansion, its brands suffered sales declines in North America in both 2019 and 2020 and remain below peak levels, which is a sign of weakness in these brands. PVH, has failed to connect with North American consumers as well as some peers. PVH’s dependence on just two brands is risky. Its U.S. business is exposed to department stores, such as no-moat Macy’s and narrow-moat Nordstrom, that have closed full-price stores. However, PVH is working to reduce its dependence on these channels by increasing sales through mono-branded stores and e-commerce. Its five largest customers only accounted for 15% of sales in 2021, down from 22.2% in 2015. Aside from its two key brands, PVH owns and licenses a few smaller brands that have minimal profitability and strategic value.

Financial Strengths:  

PVH has taken the proper steps to get through the COVID-19 crisis. During the first quarter of 2020, PVH collected $169 million in cash from its sale of Speedo and raised EUR 175 million in a bond offering at an attractive interest rate of 3.625% (matures in 2024). In the second quarter, it raised an additional $500 million in a debt offering at 4.625% interest (matures in 2025). Then, in 2021, it closed its heritage brands retail stores and sold most of the brands for about $220 million. It also cut costs in several parts of its business in both years. After taking these measures, PVH paid down $1 billion in debt in 2021, bringing its long-term debt down to $2.3 billion. PVH’s net debt/adjusted EBITDA fell to 0.9 at the end of 2021 from 6.6 at the end of 2020 due to this debt reduction, cash generation, and increased EBITDA. PVH resumed share repurchases in the second half of 2021. Before the crisis, PVH was repurchasing stock even as it put a priority on reducing debt from its acquisitions of Tommy Hilfiger (2010) and Warnaco (2013). Buybacks increase shareholder value if completed at prices below the estimate of intrinsic value. PVH repurchased about $1.3 billion in stock between 2016 and early 2020 and repurchases exceeded $300 million in 2021. Over the next 10 years, the firm averages are forecasted $880 million per year in free cash flow to equity, which it uses for about $730 million in average annual combined share repurchases and small dividends (2% average payout ratio).

Bulls Say: 

  • Calvin Klein and Tommy Hilfiger have proven global strength, with the potential for greater sales in Asia, Europe, and the Americas. PVH has taken greater control of its brands through acquisitions, allowing improved marketing and pricing. 
  • PVH has paid down debt and resumed share repurchases and dividends. The free cash flow to equity will rise above pre-pandemic levels by 2024.
  • Tommy Hilfiger is known as a casual and active brand, which nicely aligns with recent fashion trends.

Company Description: 

PVH designs and markets branded apparel in more than 40 countries. Its key fashion categories include men’s dress shirts, ties, sportswear, underwear, and jeans. PVH’s leading designer brands, Calvin Klein and Tommy Hilfiger, generate nearly all its revenue after it disposed of most of its smaller brands in 2021. PVH distributes its clothing wholesale to retailers and through company-owned stores and e-commerce. The firm traces its history to 1881 and is based in New York City.

(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

Inflation Pressures Rage, but Harshey’s Competitive Prowess Should Enable It to Weather the Storm

Business Strategy & Outlook:   

Even in the face of competitive and macro-economic headwinds, wide-moat Hershey’s dominance in U.S. confectionery is undeniable (46% share of the chocolate aisle versus just 1% for private label, as cited by the firm, according to IRI). But more so, the strategic focus CEO Michele Buck has brought to helm–ramping up investments in its core domestic brands while pulling back international (high-single-digit percentage of total sales) spend. Hershey’s category mix didn’t benefit from stock up grocery trips that stemmed from concerns surrounding COVID-19–given the impulse nature of the purchase–like other areas of the consumer product landscape. But despite facing labor, packaging, and raw material inflation, it continues to funnel resources to elevate its brands (including a slate of new products in the better-for-you lane), which is perceive as supportive of its leading product mix and its engrained standing with its retail partners. As important, it will back down from these efforts, with the forecast calling for Hershey to direct a high-single-digit level of sales toward research, development, and marketing annually. 

While Hershey’s prominence in North America is without question, its standing abroad (in its key markets of Brazil, China, India, Malaysia, and Mexico) has historically been shakier (particularly given the beachheads wide-moat Nestle, wide-moat Mondelez, and privately held Mars/Wrigley have amassed). But after a rough 2020 plagued by the corollaries of the pandemic (lockdown measures that siphoned off foot traffic and sales at traditional outlets), Hershey has begun chalking up more modest gains (including fiscal 2021 sales that nearly matched the level chalked up two years prior). From the vantage point, these marks are the byproduct of steps CEO Buck has taken since assuming the top spot, including rightsizing its international footprint to strike an appropriate balance between the level of cost and the return likely to ensue. And a runway is viewed for additional improvement over the longer term, with the forecast calling for it to boast mid- to high-single-digit top-line growth annually beyond its home turf.

Financial Strengths:  

With debt/adjusted EBITDA of around 2 times and interest coverage holding in the double-digits at the end of fiscal 2021, which haven’t wavered from stance that the Hershey’s balance sheet strength will buttress its ability to weather a volatile macroeconomic and competitive landscape ahead. And Hershey continues to churn out a significant amount of cash; free cash flow as a percentage of sales has averaged 16% the past five years, and forecasted a similar level (16.2% on average annually) over 10-year explicit forecast horizon. Importantly, don’t expect Hershey will abandon its long-standing commitment to returning excess cash to shareholders; the forecasted 7% annual growth in its dividend over the next 10 years, rendering the payout around 50% of earnings). The sizable ownership stake of the Milton Hershey School Trust (at around 80%) should ensure its stable cash flows aren’t jeopardized by a larger, more transformative deal. From the vantage point, its focus will remain on smaller, bolt-on acquisitions (with an appetite for deals that enhance its exposure to salty or better-for-you alternatives), since the Hershey School depends on the firm’s dividends to fund its operations. However, don’t surmise that Hershey merely hungers for added revenue. In this context, in fiscal 2020, management divested of three brands (its premium meat jerky offering, Krave, and its two premium chocolate brands, Scharffen Berger and Dagoba brands) –though estimated the proceeds were immaterial.

Bulls Say: 

  • Hershey has been intentionally rationalizing its fare over the past few years to ensure shelf space and ad dollars are allocated to the highest return opportunities.
  • Low-priced competition is scant in confectionery, as private-label fare holds just 1% share of U.S. chocolate, versus 46% for Hershey.
  • Hershey has pivoted to use local distributors in China (versus its own salesforce), which is viewed as an opportunity to refocus the business on its areas of competency and to expend resources on ensuring its mix continues to evolve with consumer trends.

Company Description: 

Hershey is a leading confectionery manufacturer in the U.S. (around a $25 billion market), controlling around 46% of the domestic chocolate space (per IRI). Beyond its namesake label, the firm’s mix has expanded over the last 85 years and now consists of 100 brands, including Reese’s, Kit Kat, Kisses, and Ice Breakers. Hershey’s products are sold in about 80 countries, albeit with just a high-single-digit percentage of sales coming from markets outside the U.S., including Brazil, India, and Mexico. The firm has sought inorganic opportunities to extend its reach beyond its core confection business, adding Amplify Snack Brands and its Skinny Pop ready-to-eat popcorn to its mix and Pirate Brands (including the Pirate’s Booty, Smart Puffs, and Original Tings brands) over the past few years.

(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.

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