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Technology Stocks

Oracle is losing database market share to new database types that may be better suited to the cloud

Business Strategy & Outlook

Oracle is a best-in-breed provider of on-premises relational database technologies and enterprise resource planning, or ERP, software and is one of the most profitable companies in the software industry. However, growth has been lacking as more customers shift their workloads to the cloud, bypassing Oracle’s solutions. Despite Oracle’s cloud migration efforts, cloud competition will likely provide headwinds for Oracle. In turn, the moat rating for Oracle is narrow, coupled with a negative moat trend rating.

Oracle’s business is centered around its relational database which stores a treasure trove of data that is the lifeblood of many enterprises. Oracle’s software offerings leverage this database as its backend, while Oracle’s servicing and hardware businesses support these database tasks. Oracle remains a best-of-breed provider of on-premises databases and software, and customers face very high switching costs if they look to migrate elsewhere. However, no one can view the company as being on the forefront of recent software trends, and new and potential customers appear to be looking past Oracle for their database needs. Database preferences are far wider today due to the sheer number of ways to manipulate data, and the different data storage practices this necessitates. In turn, Oracle is losing database market share to new database types that may be better suited to the cloud. Additionally, the transition to the cloud is prompting enterprises to change software vendors away from all-in-one ERP systems to application specific that are best of breed. In response, Oracle is banking on its second-generation cloud to not only cater to its traditional enterprise workloads, like supporting databases, but also general use workloads. However, the Oracle’s cloud as sub-scale to Amazon and others and the doubt Oracle can close this gap soon. As per the opinion, Oracle should still be successful in moving a significant amount of its traditional on-premises workloads to Oracle cloud. However, migrating all of its customers is not such a sure thing, as cloud-first software vendors have been able to take meaningful share from legacy Oracle customers.

Financial Strengths

The Oracle to be in healthy financial standing. As of fiscal 2020, Oracle had $43 billion in cash and equivalents versus $72 billion in debt. However, Oracle should generate robust free cash flow in the years ahead to settle these debt obligations over time. That Oracle will have the capital to increase its total annual dividends to $1.28 in fiscal 2025 from $0.96 in fiscal 2020, as the company continues to make share repurchases and acquisitions. However, the magnitude of acquisitions will moderate as the company comes off of its buildout of its second-generation cloud product and has stressed their recent preference to build new capabilities in house. In terms of capital expenditures, the Oracle will spend an average of $1.6 million per year over the next five years, as the company continues to require buildouts for its cloud operations.

Bulls Say

  • Oracle’s relational database should be able to post strong growth as customers continue to depend on its quality features, such as data partitioning which brings incomparable load balancing efficiency. 
  • Oracle’s autonomous database and IaaS was built with ease of use in mind, which could bring a significant base of first-time Oracle users to the company, strengthening top line results. 
  • Oracle’s stake in TikTok Global and cloud services to TikTok’s U.S. operations should add a significant boost to Oracle’s top line and attract more “general use” cloud customers.

Company Description

Oracle provides database technology and enterprise resource planning, or ERP, software to enterprises around the world. Founded in 1977, Oracle pioneered the first commercial SQL-based relational database management system. Today, Oracle has 430,000 customers in 175 countries, supported by its base of 136,000 employees.

(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

The Gap has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes.

Business Strategy & Outlook

The Gap’s family of brands lacks an intangible asset or cost advantage that would provide an economic moat. The company has experienced years of inconsistent results and has recently suffered major merchandising and supply chain woes. Still, Gap has fair liquidity, and its Old Navy chain as a solid business. According to Euromonitor, Old Navy is the largest individual apparel brand by retail sales in the United States, and, despite ongoing issues, the Gap’s goal of $10 billion in annual sales for the label (up from $9.1 billion in 2021) as achievable in 2026. Old Navy, though, faces considerable competition in the discount apparel space from wide-moat Amazon, other e-commerce, outlet stores, and discounters like narrow-moat Ross Stores. Meanwhile, Old Navy already has more than 1,250 North America stores, so much of its future growth is expected to come from stores in smaller, unproven markets. As its matter of wary of the potential of these markets, one cannot view Gap’s stated goal of 2,000 Old Navy stores in North America as reasonable. Rather, it will have about 1,500 locations in 10 years.

One cannot believe Gap’s once-powerful Gap and Banana Republic brands have competitive advantages, either. According to a 2019 presentation, Old Navy was generating about 80% of Gap’s operating profit even before the pandemic. Now, with scores of Gap and Banana Republic stores slated to be closed, the brands are permanently diminished. Moreover, while a necessary move, as a  doubt that downsizing will improve Gap’s overall margins very much. The firm says that it can reach 10% operating margins in about three years, but Gap’s long-term operating margins at just 8%. Further, one cannot think fast-growing Athleta has achieved a competitive advantage. Athleta grew to more than $1.4 billion in sales in 2021 from $249 million in 2012. However, at less than 10% of Gap’s sales, Athleta is not large or old enough to provide a moat for Gap. Moreover, while the brand benefits from a strong “athleisure” trend, it lacks the pricing power of direct competitor narrow-moat Lululemon.

Financial Strengths

One cannot think Gap has any liquidity concerns even though its free cash flow dropped significantly in 2020 and 2021 due to the COVID-19 crisis and it suffered an operating loss in 2022’s first quarter. In 2021’s third quarter, the firm issued $1.5 billion in new debt that matures in 2029 and 2031 ($750 million each) at interest rates of 3.625% and 3.875%, respectively, and subsequently paid down $1.9 billion in higher-interest debt. After these transactions, it closed March 2022 with $845 million in cash and investments and $1.8 billion in debt. Given that its earliest significant maturity is now seven years away, one cannot view Gap’s debt as a concern. Under normal circumstances, the firm generates significant cash flow, including more than $700 million in free cash flow to equity in 2019. Gap suspended dividend payments and share repurchases during the crisis but resumed both in 2021. The firm has signaled that it will continue to issue dividends despite recognizing a loss in 2022’s first quarter. It is been expected it will return around 30% of its earnings to shareholders as dividends over the next decade. Gap has also been a consistent purchaser of its own stock, having reduced its share count by about 47% between 2008 and 2021. The average yearly repurchases of about $500 million over the next 10 years. The repurchases as prudent when executed at a discount to in the assessment of the firm’s intrinsic value, as has recently been the case. The Gap’s capital expenditures to average 4% of sales over the next 10 years, in line with the 10-year historical average. Gap intends to open Old Navy and Athleta stores and continue to invest in digital capabilities and its supply chain to keep up with competitors.

Bulls Say

  • According to Euromonitor, Old Navy is the largest apparel brand in U.S. It competes in the discount apparel sector, which has been healthier than other areas of apparel retail. 
  • Athleta has established itself in the fast-growing women’s athleisure market, one of the bright spots in North America apparel. The number of Athleta stores will nearly double over the next decade. 
  • Gap’s e-commerce accounted for more than $6.4 billion in sales in 2021, 39% of its total sales. COVID-19 has accelerated e-commerce growth for Gap and others in the apparel space.

Company Description

Gap retails apparel, accessories, and personal-care products under the Gap, Old Navy, Banana Republic, and Athleta brands. Old Navy generates more than half of Gap’s sales. The firm also operates e-commerce sites, outlet stores, and specialty stores under various Gap names. Gap operates nearly 3,000 stores in North America, Europe, and Asia and franchises about 600 stores in Asia, Europe, Latin America, and other regions. Gap was founded in 1969 and is based in San Francisco.

(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

McKesson deepens its relationship with customers through offering marketing merchandising, and administrative support.

Business Strategy & Outlook

McKesson is a leading domestic wholesaler of branded, generic, and specialty pharmaceutical products. With over $180 billion in annual U.S. drug distribution revenue, McKesson supplies nearly one third of the overall market, comparable to AmerisourceBergen and slightly outpacing Cardinal Health in market share. Together, the three operate as a pharmaceutical wholesale and distribution oligopoly, supplying over 90% of the U.S. market. The highly consolidated pharmaceutical wholesale market reflects the substantial scale-based cost advantages held by the largest players.

Wholesalers play a central role in the pharmaceutical supply chain, bridging the gap between over 1,200 drug manufacturers and pharmacy, health system, and provider customers. The primary value proposition to manufacturers is the simplification in distribution logistics by shipping products to centralized wholesaler locations, as opposed to shipping direct to the tens of thousands of pharmacies or healthcare provider locations. Additionally, since McKesson takes legal ownership over the manufacturer’s product, the company effectively absorbs all credit risk associated with delinquent pharmacies, clinics, and providers. Beyond its role as an intermediator, McKesson offers consulting services directly to manufacturers, from clinical trial support through post approval commercialization. Similarly, wholesalers’ primary value proposition to pharmacy and healthcare provider customers is simplification in logistics. McKesson uses its scale to negotiate more effectively than most of its customers and typically acquires drugs at the lowest available price, most of which is passed along in cost savings. In addition, McKesson bears the burden of substantial working capital outlays associated with its comprehensive drug inventory, delivering smaller quantities directly to customer retail locations as needed. Beyond acting as an efficient supplier, McKesson deepens its relationship with customers through offering marketing, merchandising, and administrative support services to smaller independent pharmacies and providers.

Financial Strengths

As of fiscal year-end 2021, cash and equivalents were over $6.3 billion, offset by $7.1 billion in debt. Fiscal 2021 gross leverage was 1.7 times adjusted EBITDA. Free cash flow generation was $4.1 billion in the same period, but free cash flow growth will be slightly muted in the forecast period, associated with opioid settlement payments over the next 18 years. The McKesson enjoys a position of solid financial strength arising from its strong balance sheet and dominant position in a mature market with substantial scale-based barriers to entry. Working capital requirements are high in the industry, as pharmaceutical wholesalers take title, or legal ownership, over the drugs they distribute. However, McKesson’s favorable cash conversion cycle mitigates this risk and reflects its strong negotiation leverage with manufacturers and customers in establishing payment terms.

Bulls Say

  • McKesson distributes pharmaceutical products to nearly one third of the industry, leading to substantial negotiation leverage with generic drug manufacturers. 
  • The industry has largely pivoted away from pharmacy owned warehouses and self-distribution, solidifying wholesalers’ role in the supply chain. 
  • Recent data suggests generic drug price deflation and has eased in the past year, relieving a contributing factor toward wholesaler margin compression.

Company Description

McKesson is a leading wholesaler of branded, generic, and specialty pharmaceutical products to pharmacies (retail chains, independent, and mail order), hospitals networks, and healthcare providers. Along with AmerisourceBergen and Cardinal Health, the three account for well over 90% of the U.S. pharmaceutical wholesale industry. McKesson is currently divesting from its pharmaceutical wholesale and distribution in Europe and Canada in order to redeploy capital to strategic growth areas in the U.S. (oncology network and ecosystem, and biopharma services). Additionally, the company supplies medical-surgical products and equipment to healthcare facilities and provides a variety of technology solutions for pharmacies.

(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

Developed markets like the United Kingdom as well as developing economies like Mexico to be increasingly pertinent to Brown-Forman Corp overall trajectory

Business Strategy and Outlook

Brown-Forman has established itself as a stalwart in matured spirits, an enclave of the distillation industry that it is seen as particularly attractive. In addition to brand recognition and distribution, companies in this industry benefit from scarcity value, the result of the consumer perception surrounding the aging of this type of alcohol and the pricing power that this begets. Against this industry backdrop, it is alleged that Brown-Forman’s portfolio, anchored by the Jack Daniel’s brand, boasts some of the highest cachet globally. 

The firm made its bones in whiskey, with Jack Daniel’s Tennessee Whiskey being the best-selling American whiskey in the world, but it also has strong tequila brands like el Jimador and Herradura. The resonance of its trademarks is reflected in its ability to parlay them into numerous line extensions, such as Jack Daniel’s Tennessee Honey, Apple, and ready-to-drink beverages. These provide stimulus to its top line, not only by maintaining mind share among its core consumers, but by expanding the types of palates to which its drinks appeal. Brown-Forman is also benefiting from growth abroad, buoyed by the broader resurgence in global demand for bourbon. It is probable that developed markets like the United Kingdom as well as developing economies like Mexico to be increasingly pertinent to its overall trajectory. 

Still, the company’s path will not be completely unencumbered. Tariff relief remains a near-term tailwind, but dollar strength figures to slow demand for (proportionately) more expensive U.S. exports. Go-to-market changes also add a degree of execution risk. Despite a successful transition to owned distribution in the U.K, where it previously partnered with Bacardi, future transitions (such as in Taiwan) may not yield similar results. Additionally, while COVID-19 accelerated secular trends in developed markets, developing markets face a more precarious outlook, particularly amid a backdrop of swelling inflation in nondiscretionary spending categories. Nevertheless, it is likely that Brown-Forman’s embedded advantages and experienced management team will help the company navigate these risks.

Financial Strength

Brown-Forman is in solid financial health, and from analyst’s vantage point, the coronavirus pandemic has not altered this reality. The company has a manageable balance sheet and commendable cash flow generation. Net leverage currently sits well below 2 times EBITDA, with ample capacity to tilt the capital structure toward debt as financial opportunities dictate. Still, management has historically been quite conservative with mergers and acquisitions, and no transformative transactions on the horizon in seen. Free cash flow has averaged nearly $675 million over the past five years (high teens as a proportion of sales), which is viewed as a worthy accomplishment in light of the heightened investment levels that have prevailed over the same time frame. Capital expenditures have averaged north of 3% of sales over the past five years, with management investing in production lines, warehousing facilities, and modernization and automation initiatives in its supply chain. It is anticipated that gradual normalization of capital outlays throughout expert’s explicit forecast, following a sharp increase in fiscal 2023, which stands to augment Brown-Forman’s long-term free cash flow margins despite recurring working capital investments in inventory. It is alleged that the stellar cash generation will continue supporting dividends and increases, as well as appreciable reductions in the share count. Moreover, the firm’s commitment to shareholder returns should not impinge on its liquidity, even amid COVID-19. In addition to $868 million in balance sheet cash as of the end of fiscal 2022, the company maintains consistent access to capital markets primarily through a commercial paper program (backed by its revolving credit facility) facilitating borrowings of up to $800 million.

Bulls Say’s

  • Brown-Forman has a foothold in multiple matured spirits categories, where market structure and consumer perception spawn robust pricing and operating margins. 
  • Flavoured line extensions in the Jack Daniel’s family should foster brand resonance among a new generation of alcohol consumers. 
  • COVID-19 impacts in important markets like the U.S. have proven muted, thanks to a confluence of portfolio and consumer demand dynamics.

Company Profile 

Brown-Forman is the largest U.S.-domiciled producer of distilled spirits. The firm reports only a single operating segment, and whiskey represents its primary business driver, generating roughly three quarters of sales, undergirded by the Jack Daniel’s brand as well as bourbons such as Woodford Reserve and Old Forrester. Notable nonwhiskey offerings include tequilas such as el Jimador and Herradura. The firm operates globally, with products sold in more than 170 countries, and adapts its route-to-consumer model depending on regulation as well as the prevailing competitive dynamics in a given market. For example, it sells through distributors in the U.S. but operates its own logistics apparatus in many other countries. The company remains under the control of the Brown family. 

(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
Dividend Stocks

BCE distinguishes itself from competitors with a high-quality and diversified media unit

Business Strategy and Outlook

BCE has been investing heavily to upgrade its wireline network by extending fiber to the home, or FTTH, which is thought to be of positions the firm to take share over its footprint. BCE also remains a leader in providing wireless service throughout Canada and has a formidable media business. BCE is the biggest Canadian broadband provider, with nearly 4 million high-speed internet customers at the end of 2021 and a footprint that reaches three fourths of the nation’s population. Its two biggest competitors, cable companies Rogers (in Ontario), and Videotron (in Quebec) have about 2.5 million and 1.8 million subscribers, respectively. As a legacy phone provider, BCE has historically had an inferior network, contributing to better penetration rates for Rogers and Videotron. It is alleged FTTH will meaningfully reduce operating costs, allow BCE to offer speeds comparable to or better than competitors, and charge higher prices. 

It is anticipated BCE is second to none in Canadian wireless and expect it to remain atop with market with Rogers and Telus. However, it is likely for the wireless market to remain competitive and believe pricing will remain under pressure for the incumbents, even if the Shaw merger with Rogers is completed, due to regulatory scrutiny. Long term, it is held average revenue per user will be fairly stagnant, which will limit the firm’s ability to expand wireless margins. BCE also distinguishes itself from competitors with a high-quality and diversified media unit (Rogers is the only other Canadian telecom firm with media exposure, and it held BCE’s has superior assets). Crave is BCE’s over-the-top video-on-demand service available throughout Canada with a wealth of content, including from HBO, Showtime, and Starz. BCE is also the exclusive provider of HBO Max content in Canada and owns Canada’s top network (CTV) and top sports station (TSN). In total, BCE owns or has exclusive Canadian rights to 30 television channels, over 100 radio stations, an out-of-home advertising business, and broadcast rights for a multitude of sports teams, leagues, and events.

Financial Strength

Although BCE ended 2021 with a net debt/EBITDA ratio of 3.0, above the 1.75-2.25 that it targets, and it is alleged the leverage ratio to stay above the firm’s target range throughout expert’s five-year forecast, it is viewed the firm’s financial position as strong and likely to improve. At the end of 2021, the company had CAD 207 million in cash, and an interest coverage ratio (adjusted EBITDA to interest expense) of over 9.0. BCE has CAD 1.5 billion to CAD 2.6 billion maturing each year between 2022 and 2025, but it isn’t anticipated it will have difficulty rolling the obligations over. BCE also had about 3.5 billion of available liquidity at the end of 2021 thanks to its committed credit facility. Higher debt levels in recent years are attributable to acquisitions (the biggest of which was the acquisition of a portion of MTS’ business for close to CAD 1.5 billion in cash), spectrum purchases, its fiber-to-the-home network buildout, and cash needs for pension funding. Although it is likely BCE will continually participate in spectrum auctions, it is unforeseen any upcoming auctions that will be as big as 2021’s 3500 MHz auction, where BCE spent CAD 2 billion. It is also likely capital spending to come down significantly after 2022, as the firm passes the accelerated portion of its fiber buildout, and it isn’t alleged any big mergers or pension contributions, as the company has eliminated its pension deficit. These should result in higher free cash flow that can go toward paying down debt. It is still held the company has sufficient flexibility should opportunities arise. BCE has increased its dividend by at least 5% each year since having to cut it during the financial crisis in 2008. The increase has been right at 5% each year since 2015, and it is probable that to be the norm through 2026. It is probable share repurchases to be minimal for the foreseeable future, consistent with the recent pattern.

Bulls Say’s

  • The immense network improvement that will result from BCE’s fiber-to-the-home buildout will lead to wireline share gains and margin improvement. 
  • With the Canadian wireless market far less penetrated than the U.S. and Europe, a long growth runway exists. As an industry leader, BCE is well positioned to take advantage. 
  • BCE’s fiber-to-the-home buildout leaves it well positioned for a transition to 5G, which will require significant fiber capacity

Company Profile 

BCE is both a wireless and internet service provider, offering wireless, broadband, television, and landline phone services in Canada. It is one of the big three national wireless carriers, with its roughly 10 million customers constituting about 30% of the market. It is also the ILEC (incumbent local exchange carrier–the legacy telephone provider) throughout much of the eastern half of Canada, including in the most populous Canadian provinces–Ontario and Quebec. Additionally, BCE has a media segment, which holds television, radio, and digital media assets. BCE licenses the Canadian rights to movie channels including HBO, Showtime, and Starz. In 2021, the wireline segment accounted for 54% of total EBITDA, while wireless composed 39%, and media provided the remainder. 

(Source: MorningStar)

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

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

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

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

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

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

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

Categories
Global stocks Shares

Dr. Reddy’s has made relatively strong inroads into development of biosimilars

Business Strategy and Outlook 

Dr. Reddy’s Laboratories is a global pharmaceutical company based in Hyderabad, India. It manufactures and markets generic drugs and active pharmaceutical ingredients in markets across the world, but predominantly in the United States, India, and Eastern Europe. Indian pharmaceutical manufacturers have seen success over the past decade in penetrating the U.S. market, where regulatory hurdles are lower than in Western Europe. With competition on price in a commodified space, the entry of low-cost manufacturers has facilitated a deflationary price environment for generic drugs since 2015, putting substantial pressure on the margins of established manufacturers. Conversely, in India and other countries with lower generics adoption, so-called “branded” generics have seen notable success. Brand generally supports customer loyalty and more-stable prices in these markets. Given the lack of public and private prescription drug insurance and a heavily fragmented supply chain in India, there are fewer catalysts driving the switch to unbranded generics.

Generic manufacturers have taken different approaches to combat margin pressure over the past few years. While some manufacturers have addressed competition by rationalizing their U.S. portfolio and discontinuing low-margin or unprofitable drugs, Dr. Reddy’s has remained focused on expanding its U.S. market share. While its U.S. portfolio has experienced slightly higher deflation compared with peers, its pipeline is increasingly leaning toward injectables and other complex generics that command higher margins and exhibit relatively more price stability. Dr. Reddy’s has made relatively strong inroads into development of biosimilars–near-generic equivalents of biologic drugs–predominantly in India and Russia. However, U.S. and EU approval of Dr. Reddy’s biosimilars remains improbable in the near future, given the relatively more stringent regulatory requirements and marketing investment.

Financial Strength

As of December 2021, Dr. Reddy’s held gross debt of INR 28 billion ($370 million), which is more than offset by the cash on the company’s balance sheet. With very low leverage, the company faces little liquidity risk. This compares favourably with other global generic manufacturers like Teva and Viatris, which are saddled with high leverage as a result of an aggressive acquisition strategy over the past decade. The company pays an annual dividend of $0.34 per share, which translates to a dividend yield of under 1%.

Bulls Say’s

  • Dr. Reddy’s low-labour-cost operations based in India and vertical integration likely provide a low-cost edge. 
  • In the U.S. and Russia, Dr. Reddy’s has grown quickly in OTC generics, which is an attractive segment of the market with slightly higher barriers to entry than conventional retail pharmacy drugs. 
  • Dr. Reddy’s strong branded generic presence in emerging markets provides significant growth opportunities with less price competition than typically seen in developed markets

Company Profile 

Headquartered in India, Dr. Reddy’s Laboratories develops and manufactures generic pharmaceutical products sold across the world. The company specializes in low-cost, easy-to-produce small-molecule generic drugs and active pharmaceutical ingredients. Its drug portfolio in recent years has included biosimilar drug launches in select emerging markets and has shifted toward injectables and more complex generic products. Geographically, the company’s sales are well dispersed across North America, India, and other emerging markets.

(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

ResMed has a strong position in the structurally growing sleep apnea market

Business Strategy and Outlook 

ResMed is taking a “smart devices” and Big Data approach to further entrench itself as one of the two leading players in the global obstructive sleep apnea, or OSA, market. With cloud-connected devices, physicians can monitor patient compliance and encourage continued use. Higher adherence supports both reimbursement rates from payers and the resupply of masks and accessories. ResMed also plays a key role in producing clinical data that demonstrates treatment can minimise related risks such as hypertension, stroke, heart attack and Alzheimer’s disease. Through its own testing devices and education, ResMed seeks more widespread diagnosis and treatment of OSA. The global OSA homecare device market, is a two-player duopoly with over 80% estimated market share split between ResMed and Philips, with ResMed the market leader in the majority of the 140 countries it competes in. The market offers a large global growth opportunity as penetration within developed markets is estimated at one fifth of the roughly 15% prevalence, and emerging markets are essentially untapped. In the U.S. it is estimated that roughly half of the 22 million people diagnosed with OSA are treated with continuous positive airway pressure, or CPAP, with another 34 million remaining undiagnosed. ResMed operates in over 140 countries with over 900 million people estimated to have sleep apnea globally, indicating the long runway for growth.

ResMed has made acquisitions of home healthcare software platforms as it seeks to leverage the trends of digital health and providing care in a lower-cost setting. Brightree, acquired in 2016, and MatrixCare, acquired in 2019, offer business management software for a range of home health providers. ResMed is currently directing significant capital to this area, and although high returns have largely been unproven, the move has been strategically sound given the structural industry tailwinds. ResMed has a minority stake in Nyxoah who are developing a neurostimulation implant to treat OSA. Although little near-term risk from this therapy can be seen due to the higher cost and invasive surgery needed, ResMed’s minority stake hedges some risk from emerging competition.

Financial Strength

ResMed is in a strong financial position. Free cash flow conversion of earnings prior to acquisition spending has averaged 106% over the last five years and has allowed ResMed to quickly repay the debt funding its acquisitions. At the end of fiscal 2021, ResMed reported USD 360 million in net debt representing net debt/EBITDA of only 0.3 times. Free cash flow to grow to USD 1,469 million by fiscal 2026 from USD 556 million in fiscal 2021, and in the absence of major acquisitions, the company should be in a net cash position over the five-year forecast period. ResMed commenced paying a dividend in fiscal 2013 and doesn’t have a fixed payout ratio policy. 28% payout ratio is lower than the trailing three-year average of 34% of underlying net income mainly due to ResMed’s significant uplift in earnings. Still it can be implied that dividends grow at a five-year 15% CAGR versus a trailing five-year CAGR of 6%, and ResMed is likely to seek optionality for further acquisitions in the software-as-a-service segment.

Bulls Say’s

  • The long-term growth opportunity for respiratory homecare devices is sizable as both developed and emerging markets are still significantly underpenetrated. 
  • The focus on cloud-connected devices has led to increased adherence, supporting both reimbursement rates and the resupply of masks and accessories. 
  • ResMed stands to benefit from Philips’ significant product recall and the launch of its new flagship product, AirSense 11.

Company Profile 

ResMed is one of the largest respiratory care device companies globally, primarily developing and supplying flow generators, masks and accessories for the treatment of sleep apnea. Increasing diagnosis of sleep apnea combined with ageing populations and increasing prevalence of obesity is resulting in a structurally growing market. The company earns roughly two thirds of its revenue in the Americas and the balance across other regions dominated by Europe, Japan and Australia. Recent developments and acquisitions have focused on digital health as ResMed is aiming to differentiate itself through the provision of clinical data for use by the patient, medical care advisor and payer in the out-of-hospital setting.

(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

F5 Remains Focused on Software and Security Growth; $210 Fair Value Estimate

Business Strategy & Outlook

F5, a leader in application delivery controllers, or ADCs, market sells to enterprises, service providers, and government entities. More than half of F5’s revenue comes from selling support and maintenance services for its products. Mission-critical ADCs manage the uptime, delivery, and security of applications and network traffic flow. Growth in public cloud-based workloads caused a decline in the on-premises ADC hardware required and shifted ADC demand to software-based solutions. F5 was slow to embrace cloud-based workloads as it perilously defended its incumbent offerings, but a revamped management team properly pivoted F5’s focus toward software and cloud-based products as growth catalysts to supplement its legacy hardware dominance, and the firm is set to thrive. 

With 90% of its development team dedicated to software, F5’s roadmap is focused on virtual instances of ADCs, stand-alone application security products, and products and services for multi-cloud application control. IT teams may rely on the large public cloud vendors for traffic management within their respective clouds, but F5 helps control the traffic between on-premises, private, and public clouds and has enterprise rich features. As one of the leaders in the ADC market, F5 will likely remain the go-to provider of solutions for their customers’ cloud ecosystems due to product familiarity, customization features, application and network level management, security-focus, and an active developer community. The criticality of applications for organizations and the importance of a positive application experience for consumers are boons for F5. The complexity of managing application traffic will increase as disparate devices spread beyond the data center while requiring lower latency, larger data workloads, and protection from a growing quantity of security threat vectors. F5’s consolidated approach for application and networking traffic flow across the entire network will remain in strong demand as businesses expand their creation and consumption of applications and data.

Financial Strengths

F5 is a financially sound firm. The company has solidly generated strong free cash flow, possesses a war chest of cash, and has no debt on its books. At the end of fiscal 2021, F5 possessed $911 million in cash and cash equivalents versus $369 million in debt. F5 could pursue possible acquisitions, potentially targeting software and cloud-based application delivery, management, and analytics technologies. F5 has a solid track record of repurchasing shares and expects to return half of its free cash flow to investors via share buybacks starting in fiscal 2023. The company has never paid a dividend, and F5 is not expected to pay one in the current forecast. With its strong balance sheet and free cash generation, F5 is expected to continue bolting on acquisitions in areas that support application delivery and security.

Bulls Say

  • F5’s leading install base could make it the first choice for customers pursuing the high growth areas of software and cloud-based solutions for application and traffic management. 
  • A strong brand coupled a very sticky services businesses may ward off potential open source or lower cost software-based threats. F5 has key technology alliances with networking and data center providers. 
  • Data proliferation and complexities through 5G and Internet of Things offers strong growth possibilities as customers may require a seasoned application delivery vendor.

Company Description

F5 is a market leader in the application delivery controller market. The company sells products for networking traffic, security, and policy management. Its products ensure applications are safely routed in efficient manners within on-premises data centers and across cloud environments. More than half of its revenue is based on providing services, and its three customer verticals are enterprises, service providers, and government entities. The Seattle-based firm was incorporated in 1996 and generates sales globally. 

(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

AllianceBernstein Is Holding Its Own in the Face of Ongoing Market Volatility

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 is anticipated to continue to face stiff headwinds, the firm is envisioned to  produce 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

AllianceBernstein 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

Arista Gaining From High End Switching Demand Turned On As Cloud Data Centers Expand, $105 FVE

Business Strategy & Outlook

Arista Networks has solidified its market presence through data center switching and software-based networking innovation, and customers are anticipated to remain loyal to the firm’s Extensible Operating System software and peripheral products. Arista’s initial growth came from high-frequency trading firms that found value in its low-latency switches and EOS. By remaining at the forefront of switching and routing speeds, Arista became a key networking supplier to giant cloud operators, service providers, and enterprises. EOS’ novelty lies in its single software image that provides a consolidated view of device activity from end to end and its ability to centrally upgrade the entire network. EOS contains leading software-defined networking features while remaining intuitive and fully programmable. Additional software offerings like CloudVision expand functionality and interoperability across networks. Arista uses merchant silicon for its hardware, which allows the company to focus on its core competencies. 

Arista works closely with its core customers to optimize their networking ecosystems, which can strengthen its customer switching costs. To expand its customer base beyond the data centers of hyperscale cloud providers, enterprises, service providers, and financial institutions, Arista entered into the campus market. The adjacent move is due to requests from existing customers desiring one software platform across networking locations, and Arista has bolstered its clout with wireless and security capabilities. Even with current customer concentration risk, it is noted that Arista is impressively growing alongside key customers and that new ventures have expanded from core competencies. Arista is well positioned as a pioneer in the new age of software-defined networking and will continue to be a leader in next-generation switches and routers.

Financial Strengths

Arista is in a financially healthy position; its zero debt balance and $3.4 billion in cash, cash equivalents, and marketable securities as of the end of 2021 provide flexibility for the future. With no stated plans to return capital to shareholders, the company’s investment plan is fixated on developing products and expanding sales. The company’s financial health will remain stable and cash could be deployed for growth via bolt-on products or technologies.

Bulls Say

  • Demand for EOS continuity across networks should proliferate Arista’s installation base. Installation base growth causes new customers to consider Arista during upgrades. 
  • Arista has been a first mover on its path to rapid profitable growth. Upcoming industry disruptions that Arista may lead include 400 GB Ethernet switching and campus market splines. 
  • Instead of relying on partnerships to plug portfolio gaps, Arista might be able to make accretive acquisitions in adjacent markets that could catalyze growth in areas such as analytics, access points, and security.

Company Description

Arista Networks is a software and hardware provider for the networking solutions sector. Operating as one business unit, software, switching, and router products are targeted for high-performance networking applications, while service revenue comes from technical support. Customer markets include data centers, enterprises, service providers, and campuses. The company is headquartered in Santa Clara, California, and generates most of its revenue in the Americas. It also sells into Europe, the Middle East, Africa, and Asia-Pacific.

(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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