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Technology Stocks

Nokia’s solutions could appeal to a wider client base as industries integrate “Internet of Things” devices into their networks

Business Strategy and Outlook 

Nokia is a primary provider of telecommunication hardware, software, and services to communication service providers. CSP equipment spending provides robust growth during generational wireless upgrade cycles followed by spending lulls, with 5G being the latest tailwind. 5G’s promise of connecting billions of wireless devices at incredible speed across more spectrum bands, along with more use cases than 4G, may offer Nokia more upside than previous wireless generations. However, Nokia’s core market is not a moat supportive because CSPs typically multisource equipment and possess purchasing power over their vendors. Nokia has a fundamentally strong strategy to remain a leader in its competitive environment after bloated initial 5G costs caused the firm to overhaul its products. Nokia’s core operation should benefit from 5G network infrastructures requiring more hardware to cover the increased quantity of spectrums bands and transmit at the highest speeds. Nokia’s solutions could appeal to a wider client base as industries integrate “Internet of Things” devices into their networks and enterprises build private wireless networks. It is expected, a healthy demand for Nokia’s software and service offerings as software-defined networking becomes commonplace and customers desire solutions to optimize increasingly complex networks.

Nokia’s technology segment creates revenue through licensing critical communication patents and receiving royalty payments through HMD’s Nokia-branded smartphone sales. Nokia has license agreements with leading 5G handset manufacturers, and the company has stated its intention to pursue licensing in industries such as automotive and consumer electronics. Alongside selling more enterprise private wireless networks, 5G networks and Internet of Things device propagation offer Nokia a chance to be less reliant on CSPs’ generational network upgrade spending.

Financial Strength

After taking corrective actions to remove excess costs in its 5G products, Nokia is a financially stable company which can be expected to generate positive free cash flow as 5G networks are built out. While Nokia primarily funnels cash toward organic development, sales, and marketing efforts, the company has made minor acquisitions since its large Alcatel-Lucent purchase in 2015, and Nokia is well positioned to bolt-on smaller software, Internet of Things, or related technology firms as needed. Nokia finished 2021 with EUR 9 billion in cash and equivalents and EUR 5 billion in total debt, with a debt to capital ratio of 21%, and can expect the company to repay its debts on schedule. As 5G networks are rolled out alongside cost-extraction efforts, the revenue growth to outpace operating expenditures as Nokia capitalizes on up-front 5G innovation expenditures while strengthening operational efficiencies. After pausing its dividend to fix bloated product costs in 2019, Nokia announced a plan to restart payments in 2022, alongside a buyback program.

Bulls Say’s

  • 5G should have more uses and a longer build-out cycle than previous wireless generations. Internet of Things device proliferation, from autonomous vehicles to smart factories, should broaden the demand for Nokia solutions. 
  • Nokia’s moving away from an end-to-end networking portfolio could be aligned with purchasing preferences. Its focus on software for 5G networks is wise, as enterprises may require custom data analytics and optimized networks. 
  • 5G may create licensing opportunities outside of handsets, and Nokia royalties could grow via a resurging smartphone brand.

Company Profile 

Nokia is a primary vendor in the telecommunications equipment industry. The company’s network business derives revenue from selling wireless and fixed-line hardware, software, and services. Nokia’s main operating segments are mobile networks, network infrastructure, cloud and network services, and Nokia technologies. The company, headquartered in Espoo, Finland, operates on a global scale, with most of its revenue from communication service providers.

(Source: MorningStar)

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

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

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

Categories
Shares Small Cap

SkyCity’s Earnings are Returning as Restrictions Ease

Business Strategy & Outlook:   

SkyCity to deliver strong earnings growth over the next decade, buoyed by the recovery from current coronavirus-induced lows and solid performance from its core assets in Auckland and Adelaide. SkyCity’s Auckland and Adelaide properties underpin the firm’s narrow economic moat. SkyCity is the monopoly operator in both jurisdictions, with long-dated licenses (exclusive license for Auckland expires in 2048, and Adelaide license expires in 2085 with exclusivity guaranteed until 2035). These properties have performed strongly, thanks to SkyCity’s solid record of reinvestment, resulting in high property quality, stable visitor growth, and earnings resilience. The quality of these assets, particularly SkyCity Auckland, has helped build the firm’s VIP gaming business. 

SkyCity’s exposure to the volatile VIP gaming market is smaller than that of Australian rivals Crown Resorts and Star Entertainment. VIP revenue typically represents over 20% of Crown’s and Star’s sales, compared with SkyCity’s typical 10%-15%. While high rollers have no alternatives when in Auckland or Adelaide, SkyCity effectively competes as a destination casino on a global scale against locations such as The Star in Sydney and Crown Melbourne. The VIP gaming will be a negligible share of revenue in fiscal 2021 amid border closures. However, the segment recovered as border restrictions ease and tourism recovers, to around 15% of revenue. To protect its competitive position and retain appeal, SkyCity is investing in its key properties. Successful execution of the two major projects in Auckland and Adelaide is key. They provide good earnings accretion opportunities, in particular at the core Auckland property. This includes a NZD 750 million upgrade to SkyCity Auckland to be completed by calendar 2025 and a AUD 330 million expansion for SkyCity Adelaide, a transformational project completed in fiscal 2021. Beyond 2025, when these expansion projects come on line in full, SkyCity Entertainment is expected to resume generating excess returns and revert to a strongly cash-generating business on a substantially stepped-up earnings base.

Financial Strengths:  

Despite near-term earnings weakness, SkyCity’s balance sheet remains robust, bolstered by a NZD 230 million capital raise completed at the end of fiscal 2020 and extensions to new and existing debt facilities. The firm received covenant waivers for the first half of fiscal 2022, given earnings weakness, and second-half gearing covenants are to be tested at double second-half EBITDA (rather than for the full year) with a higher testing threshold. While the higher threshold was undisclosed, the forecasted second-half net debt/EBITDA to rise to around 3.0–above the firm’s target range of 2.0 to 2.5, but comfortably below estimated covenant levels of closer to 5.0. The net debt/EBITDA is forecasted below 2.0 in fiscal 2023–below the target range of around 2.0 to 2.5. The completion of the NZD 330 million Adelaide expansion in fiscal 2021 takes some pressure off cash flows, and of the further NZD 500 million in capital expenditure flagged for the NZICC project, around NZD 380 million will be funded by insurance payments to be received following the NZICC fire. SkyCity’s balance sheet shall continue to improve over coming years as earnings recover, with net debt/EBITDA dropping below 1.0 in fiscal 2024 as expansionary projects roll off and earnings recover. SkyCity’s balance sheet will have the strength to continue paying around 75% of underlying earnings as dividends, while still being able to fund expansion projects at Auckland in the meantime.

Bulls Say: 

  • Long-dated exclusive licenses to operate the only casino in Auckland and Adelaide allow SkyCity to enjoy economic returns in a regulated environment.
  • Transformative capital expenditure is expected at SkyCity’s Auckland and Adelaide casinos will lead to a sizable step-up in earnings.
  • SkyCity is well positioned to benefit from the emerging middle and upper class in China.

Company Description: 

SkyCity Entertainment operates a number of casino-hotel complexes across Australia and New Zealand. The flagship property is SkyCity Auckland, the holder and operator of an exclusive casino license (expiring in 2048) in New Zealand’s most populous city. The company also owns smaller casinos in Hamilton and Queenstown. In Australia, the company operates SkyCity Adelaide (exclusive license expiring in 2035).

(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

HP’s Markets Are Declining Despite Growth Initiatives and It Doesn’t Have a Moat

Business Strategy & Outlook

The HP to remain a leader in the personal computer and printing markets but these markets are facing challenging long-term growth prospects. Industry shifts toward using mobile devices as computer supplements or replacements and fewer printing tasks being performed for economic and environmental reasons may create headwinds for HP. The HP’s growth initiatives will expand its market share within the PC and printing industries as consolidation occurs, but the cost competitiveness among the remaining vendors to limit potential upside. The personal computer purchases will contract as more households primarily use smartphones for computing tasks and as cloud-based software upgrades can delay the impetus to upgrade computer hardware. HP’s personal systems business, containing notebooks, desktops, and workstations, yields a narrow operating margin that one cannot foresee expanding. The company’s growth focus areas of device-as-a-service, or DaaS, and expanding its gaming and premium product offerings should help stem losses from its core expertise of selling basic computer systems. Contractual service offerings like HP’s DaaS are alluring to businesses since IT teams can offload hardware management, receive analytics to proactively mitigate computer issues, and pay monthly instead of facing unpredictable large capital expenditures.

HP’s push toward contractual managed print services, in additional to focusing on graphics, A3, and 3D printers are moves in the correct direction, but the overarching trend of lower printing demand should stymie revenue growth within printing. HP is combating the challenge of lower-cost generic ink and toner alternatives in the marketplace. The company is innovating in a mature market, but the competitors can mimic HP’s successes or cause price disruption. HP’s scale may enable success within the 3D printing market; even though HP is a late entrant, its movement into printing metals could cause customer adoption. The printing market is the overall trend of screen reading replacing printed pages, and one cannot believe HP’s initiatives can offset the macro trend.

Financial Strengths

The HP’s solid balance of cash and equivalents and its ability to generate free cash flow as indicators of a financially secure firm. As of the end of the fiscal 2021, the company had $4.3 billion in cash and equivalents and $7.5 billion in total debt. The HP’s leverage to decrease as retained earnings increase and the company pays off debt on schedule. HP spends about 8%-9% of its revenue on SG&A and about 2%-3% of its revenue on R&D, and the expenditure trends to remain consistent. The company’s yearly dividend has increased year-over-year since fiscal 2016, and a modest dividend increase annually. HP has a solid track record of repurchasing shares, and the company will continue to invest in buybacks. Additionally, as part of thwarting Xerox’s 2020 takeover attempt, HP targeted $16 billion in shareholder returns, with the majority being share repurchases. The company’s strategy regarding its pension plan funding is to commit at least the minimum contribution required by the respective local authorities. At the end of fiscal 2020, the defined benefit plans and post-retirement plan were underfunded by $1.6 billion. One cannot see HP’s benefit payment schedule as a hinderance to operations and posit that HP should be able to properly invest in growth opportunities while supporting its benefit plan obligations.

Bulls Say

  • Expected challenges within the printing and PCs markets may be overstated. Enterprises adopting managed print services and Device-as-a-Service over hardware purchases could expand HP’s margins. 
  • HP’s innovation in notebooks and tablets could moderate concerns about a lengthening computer upgrade cycle. With an invigorated brand, HP is making inroads with premium and gaming PC buyers. 
  • Existing 3D and A3 vendors could be disrupted via HP’s scale. HP’s 3D materials open platform could make HP the preferred choice while offering A3 products opens up a $55 billion market.

Company Description

HP Incorporated is a leading provider of computers, printers, and printer supplies. The company’s mains segments are personal systems and printing. Its personal systems segment contains notebooks, desktops, and workstations. Its printing segment contains supplies, consumer hardware, and commercial hardware. In 2015, Hewlett-Packard was separated into HP Incorporated and Hewlett Packard Enterprise and the Palo Alto, California-based HP Incorporated sells on a global scale.

(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

Campbell Soup Co aims to realize around $1 billion in savings through fiscal 2025

Business Strategy and Outlook

To say CEO Mark Clouse’s three-year tenure heading up Campbell Soup has been fraught with change might be considered an understatement. Since January 2019, Campbell has parted ways with its fresh business and the bulk of its international operations and worked to steady its core meals, beverages, and snacking arms, while navigating a global pandemic. But it doesn’t attribute its recent performance (14% consumption growth on a three-year stack basis) as merely a by-product of heightened consumer stock-ups of essential fare since March 2020. Rather, it’s likely, management’s strategic agenda–anchored in funnelling additional investment across its operations–fuelled by its pursuit of extracting inefficiencies has set Campbell on a sound course. And while much consternation rightly centres on how the business is poised to emerge in a post-COVID-19 world, it is held the steps that had been underway to steady the business and to juice its sales trajectory before the pandemic should serve as a springboard against a more normalized demand environment. 

Campbell is also battling unrelenting raw material inflation (which management now anticipates will prove a double-digit percentage hit in fiscal 2022), though it’s not sitting still. As a means to offset these pressures, Campbell is raising prices across its mix (with its third round of pricing set to hit shelves in August). Further, the firm aims to realize around $1 billion in savings through fiscal 2025 (up from $850 million by the end of fiscal 2022), with a focus on reducing complexity, investing in automation, and optimizing its supply chain and manufacturing network, which strikes us as achievable. But despite these near-term pressures, it’s unsurmised brand spending will contract. Rather, management has suggested its intent to funnel a portion of any savings realized behind its brand mix (in the form of both R&D as well as marketing), supporting the intangible asset that underpins its wide moat. This aligns with foreseeable calling for research, development, and marketing to edge up to 7% of sales over the next 10 years (or about $650 million annually), above the 6% expended the past three years on average ($500 million).

Financial Strength

It is unlikely that a lack of financial flexibility will encumber Campbell’s prospects against the current backdrop, with free cash flow as a percentage of sales amounting to 9% in fiscal 2021. Even though Campbell opted to raise $1 billion in 10- and 30-year bonds in April 2020, the firm has been making good on its commitment to lower its debt balance, with net debt/adjusted EBITDA standing at 2.6 times at the end of fiscal 2021, down from 4.9 times at the end of fiscal 2019 and 3 times when the books closed on fiscal 2020. From analyst’s viewpoint, after hitting its leverage targets, Campbell could be warming to a deal, though it is alleged that its aims are likely anchored in smaller, bolt-on tie-ups (as opposed to larger, transformational deals that could shoulder it with an increased debt load once again). In this context, management’s rhetoric suggests that it isn’t angling for an acquisition that would compromise its ability to reinvest in its business. Further, a mid-single-digit growth in its dividend each year over expert’s forecast, with its dividend pay-out holding around 50% of earnings on average annually (currently yielding around 3%), is expected. It is also foreseen Campbell will repurchase around 2% of shares on average each year, which is likely to be prudent use of cash when shares trade at a discount to analyst’s assessment of intrinsic value.

Bulls Say’s

  • Removing excess costs should afford Campbell the fuel to invest in its brands, nearly one dozen of which generate more than $100 million in sales each year. 
  • Campbell’s innovation focus (leveraging technology, data insights, and artificial intelligence to aid its efforts to bring consumer-valued new products to the shelf in a timely fashion) is attracting new consumers to the aisle and its product mix. 
  • About half of Campbell’s sales result from the faster growing on-trend snack aisle, which stands to offset more muted long-term prospects for the mature soup category.

Company Profile 

With a history that dates back around 150 years, Campbell Soup is now a leading manufacturer and marketer of branded convenience food products, most notably soup. The firm’s product assortment includes well-known brands like Campbell’s, Pace, Prego, Swanson, V8, and Pepperidge Farm. Following the sale of its international snacking operations, which wrapped in calendar 2019, the firm derives nearly all of its sales from its home turf. Campbell has made a handful of acquisitions to reshape its product mix the past few years, including the tie-up with Snyder’s-Lance (completed in March 2018), which enhances its exposure to the faster-growing on-trend snack food aisle, complementing its Pepperidge Farm line-up. 

(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

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 and 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 labour-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 auto ship penetration and strengthening monetization over time, generating net revenue retention of over 100% for each annual cohort. The firm’s 72% auto ship penetration, a subscription-based model that pet consumables lend themselves to particularly nicely, defrays fulfilment 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, by analyst’s estimates. 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 Strength

With no long-term debt and $605 million in cash and cash equivalents on the balance sheet at the end of the first quarter of 2022, it is assessed Chewy’s financial position to be strong. The firm also maintains access to a $500 million credit facility with a $300 million extender. Consistent with many high-growth e-commerce names, Chewy has elected to fund its growth entirely with internally generated funds and proceeds from equity issuances, freeing the company from the constraints of debt covenants and the restrictions on corporate actions that those often carry. While it is encouraged for the firm to optimize its capital structure with the addition of leverage longer term (lowering its WACC and expanding its frontier of net present value (NPV) positive projects), it is understandable, management’s reluctant approach given the company’s stage in its life cycle. The firm’s investment priorities strike us as reasonable–investing in expanded fulfilment centre (FC) capabilities, with $20 million in buildout costs adding an incremental $750 million to $1 billion in sales capacity (for automated centres), retrofitting existing traditional FCs, and continuing to invest in platform development and ease of use. Though Chewy’s free cash flow, or FCF, generation (with FCF clocking averaging less than 1% of sales through 2024) doesn’t afford a ton of flexibility, it offers the leeway to make fulfilment centre investments without necessitating a costly capital raise, and should see the firm through the leaner years of profitability during its high-growth phase. As margins (and free cash flow generation) expand over time, it is alleged shareholder returns to find their way onto management’s agenda, with CEO Sumit Singh and company likely to favour share repurchases, in analyst’s view, for the flexibility they offer (given the signalling properties of dividends). Analyst’s forecast anticipates share repurchases as soon as 2024, accelerating through 2031 as Chewy approaches mid-to-high-single-digit operating margins.

Bulls Say’s

  • E-commerce penetration should continue to increase in the category, favouring digital native players like Chewy.
  • Chewy’s subscription-based model (72% auto ship 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, it is probed that pressure from the e-commerce behemoth could prove less onerous than many expect.

Company Profile

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 fulfilment, 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 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

CrowdStrike Remains Attractive Even as We Lower Our Long Term Profitability Assumptions; FVE to $196

Business Strategy & Outlook

CrowdStrike is a leader in endpoint security, a necessity that aids in protecting devices and networks, and its threat hunting and breach remediation services are topnotch. While nefarious threat actors are continually upping their attack methodology to create zero-day attacks and are using the rise in entities using cloud-based resources to their advantage, CrowdStrike developed a methodology to turn any entities’ weak-point into better protection for all of its clients. CrowdStrike’s cloud-delivered endpoint protection platform continuously ingests data from all of its installed agents to enhance its protection solutions while keeping all users up to date against the latest threats. CrowdStrike’s customer base, revenue, and margins will experience profound growth throughout the 2020s as customers update their endpoint and workload security requirements in a hybrid-cloud world. 

CrowdStrike’s endpoint protection platform melded the needs of next-generation antivirus, threat intelligence, endpoint detection and response, and other features like managed threat hunting into a consolidated management plane. The lightweight agents, installed on physical devices like servers and laptops, or in virtual machines and cloud environments, are continually improving through its cloud database algorithms, becoming more capable as more data is received. CrowdStrike’s solutions establish customer switching costs and its network effect makes changing vendors a challenge as clients rely on having the latest threat protection. Alongside a persistent talent shortage in cybersecurity and firms attempting to manage disparate toolsets for various parts of endpoint security, entities are challenged to stay secure in networking environments without distinct security perimeters. CrowdStrike’s experts supplement these overwhelmed or short-staffed teams, and the firm also offers breach remediation and proactive testing services. CrowdStrike is in the early stages of becoming a market mainstay as businesses and governments rapidly adopt cloud-based endpoint protection platforms.

Financial Strengths

CrowdStrike is a financially sound company that will be able to generate solid free cash flow and expand its margin profile throughout the 2020s. CrowdStrike had its initial public offering in June 2019 and has historically operated at a loss on a GAAP basis. CrowdStrike’s capital deployment efforts are true to a land-and-expand strategy, whereby CrowdStrike initially has elevated sales and marketing expenses to gain a customer cohort before expanding its revenue per customer while lowering its operating costs per customer (on a revenue percentage basis). CrowdStrike can benefit from cross-selling and up-selling tangential products to its existing base and new clients, while also converting breach remediation service clients to be product customers. As of the end of fiscal 2022, CrowdStrike had $2.0 billion of cash, cash equivalents, and marketable securities and $740 million of debt. With a strong balance sheet and free cash flow generation, CrowdStrike is anticipated to pay its obligations on time.

Bulls Say

  • CrowdStrike’s innovative endpoint security solutions, delivered as a platform, are quickly attracting customers as clients want to consolidate their myriad legacy security tools. Its threat remediation services are a powerful tool in landing new subscription clients. 
  • After landing a client, CrowdStrike can gain significant margin leverage via the cross-selling and up-selling of additional security modules. 
  • CrowdStrike’s products become more capable as new clients are added, and its threat intelligence and hunting can become a core part of customer’s cybercrime defense.

Company Description

CrowdStrike Holdings provides cybersecurity products and services aimed at protecting organizations from cyberthreats. It offers cloud-delivered protection across endpoints, cloud workloads, identity and data, and threat intelligence, managed security services, IT operations management, threat hunting, identity protection, and log management. CrowdStrike went public in 2019 and serves customers worldwide.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Dividend Stocks

Cisco Remains Focused on Recurring Revenue via Software and Services; $54 FVE

Business Strategy & Outlook

The networking equipment behemoth Cisco continues to execute on its strategic focus of increasing recurring revenue via selling software and services to supplement its hardware products. Software and services were more than half of fiscal 2021 revenue, up from 43% in fiscal 2017. Cisco embracing software from hardware disaggregation, and even selling networking chips, can help keep demand for its solutions high although some customers rely on cloud-based resources or generic hardware. Narrow-moat Cisco’s plan is assessed as the correct direction for maintainable growth and believe the firm’s strategic shifts through organic developments and acquisitions, keep Cisco as mainstay in today’s networks. 

The company is the dominant supplier of switches, routers, cybersecurity, and complementary networking products. Cisco’s products are mission critical for network performance, stability, and security. Cisco is proliferating software, analytics, wireless, and security offerings to satisfy nascent trends, and Cisco is considered the only one-stop-shop networking vendor. Cisco is uniquely positioned to interweave complimentary necessities, like networking and security, together to provide comprehensive solutions for clients. Despite Cisco’s commanding position in switches and routers, IT professionals are increasingly shifting computer workloads to the cloud, in turn buying less data center hardware. Alongside changing its product offerings, Cisco is moving product sales toward subscription-based offerings, which is the preferred method of consumption for cloud-based resources. Cisco is rolling this sales model to additional products and it is encouraging that customers look to purchase bundles with analytics and security. Cisco is evolving its portfolio at a more rapid rate to stay ahead of trends in areas such as switching, communications, cybersecurity management, software-defined wide-area networking, and analytics. Cisco is anticipated to continue looking to acquisitions to bolster its capabilities in these areas to offset pressure in maturing market segments.

Financial Strengths 

Cisc is considered a financially healthy company. With a low debt/capital ratio, abundant free cash flow generation, and expected on-time debt payments, there are no fiscal concerns. The company could safely lever back up to fund development projects, acquisitions, and shareholder returns if needed. Cisco has continually exceeded its commitment to return at least 50% of free cash flow, calculated as cash from operating activities minus capital expenditures, to shareholders. Cisco initiated its share repurchase program in 2001 and has increased the authorization over time. Cisco is anticipated to opportunistically look to purchase shares. Cisco has recurrently raised its dividend year over year, and modest annual increases are forecasted. Even after shareholder returns and debt repayments, the company remains financially flexible with plenty of cash to support acquisitions and its large marketing and R&D expenditures. Growing recurring revenue will provide a steadier income stream, and strong operational and free cash flow generation is expected to continue in the future. Cisco is also anticipated to manage its growing war chest with future cash deployments into strategic developments and acquisitions.

Bulls Say

  • Cisco’s one-stop-shop ecosystem, from switches to data analytics, should remain valued as more networking customers migrate to hybrid clouds.
  • Despite the rise of public clouds, Cisco should continue to grow its customer base via hybrid cloud and software offerings. 
  • The expected rapid proliferation of devices to hit networks should drive customer demand for Cisco products. Cisco’s hardware is regarded as needed for access points, routing, and switching while software is crucial for analytics, security, and intent-based networking.

Company Description

Cisco Systems, Inc. is the world’s largest hardware and software supplier within the networking solutions sector. The secure, agile networks business contains switching, routing, and wireless solutions. The hybrid work division has products for collaboration and contact center needs. The end-to-end security group has products spanning a variety of threat prevention necessities. The internet for the future division has routed optical networks, silicon, and optics. Optimized application experiences offer solutions such as full stack observability. Services are Cisco’s technical support and advanced services offerings. In collaboration with Cisco’s initiative on growing software and services, its revenue model is focused on increasing subscriptions and recurring sales.

(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

We Are Lowering Long-Term Growth Estimates for Palantir; FVE Down to $16

Business Strategy & Outlook

The Palantir is well suited to help organizations consolidate and harness the power of data. With its leading position in the government sector with the U.S. and its allies and a growing presence with commercial data applications, this narrow-moat company is poised for robust growth and margin expansion as deployment costs are optimized and product acceptance hastens with task-specific modules. Uncovering insights and easy integration of data is a largely untapped market, due to legacy data sets saved in different locations, various data formats, the uptick in cloud-based resources, and the proliferation of the need for real-time access via distributed devices. Palantir established itself by working with the U.S. government intelligence and defense sectors to integrate data into a consolidated dashboard and then drove outcomes by uncovering patterns with artificial intelligence support. Its Gotham software platform is used across various government sectors of the U.S. and its allies.

Palantir sells its Foundry software platform to commercial organizations, targeting large-scale data operations. Holistically combining data has typically involved consulting alongside in-house customized development efforts for enterprises, but Palantir’s commercial offering is attempting to change the industry’s procurement motion. Its software is used in a variety of industries; Palantir’s aim is to be the data operating system for companies and industries. By stitching together various seemingly disparate components of the airline industry, as one example, Palantir has made inroads into becoming a data platform standard for the industry and looks to other industries to achieve similar results. The company rotates its engineers into the field to understand customer and industry issues firsthand to make its platforms more valuable while gaining deployment cost efficiencies. A robust growth trajectory comes from new commercial ventures on top of a strongly expanding government base, and that installation efficiencies and the strategic shift toward a software-as-a-service model will be conducive to margin expansion throughout the 2020s.

Financial Strengths

The Palantir is in a solid financial position that is on a positive trajectory. The company has historically operated at a loss while producing negative operating cash flow; however, these results improve throughout the 2020s. The rapid revenue growth alongside an improving margin profile will help generate bottom-line improvement alongside positive free cash flow. The company’s existing customer base generates the bulk of revenue, which gives high visibility and an opportunity to expand customer margins. Although the model Palantir generates positive free cash flow and being profitable on an adjusted basis, after adding back copious amounts of stock-based compensation, the GAAP profitability may not come until the middle to latter half of the 2020s. The expansion into the commercial market, proliferation across government sectors, and further decreasing the expenses required to initially deploy its software platforms will drive Palantir’s operating profile and cash flow improvements.  As of the end of June 2021, Palantir had no outstanding debt and $2.3 billion of cash and cash equivalents, excluding restricted cash. The company chose to use a direct listing to join the public markets in 2020, so no cash was raised during the IPO process. Although the company had various funding rounds before going public, the direct listing can be viewed as a testament to Palantir’s solid financial footing and being confident of funding new ventures internally. The strategic initiatives to expand its enterprise software subscription business, alongside sticky government deals, could reward investors over the long run.

Bulls Say

  • Palantir could be the answer to the problems that governments and commercial customers face in successfully integrating large-scale, disparate data in a cohesive and coherent manner to gain insight and drive actions. 
  • Palantir has a strong government business and is diversifying into potentially higher-margin commercial markets; it could become the data operating system for companies and industries. 
  • The company has substantial margin expansion opportunities via improvements in deployment costs and by offering commercially available solutions to prospects.

Company Description

Palantir Technologies provides organizations with solutions to manage large disparate data sets in an attempt to gain insight and drive operational outcomes. Founded in 2003, Palantir released its Gotham software platform in 2008, which focuses on the government intelligence and defense sectors. Palantir expanded into various commercial markets with its Foundry software platform in 2016 with the intent of becoming the data operating system for companies and industries. The Denver company had 125 customers as of its initial public offering and roughly splits its revenue between commercial and government customers.

(Source: Morningstar)

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

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

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

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

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

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

Hewlett Packard Enterprise Is Focused on the Hybrid Cloud but Hasn’t Earned a Moat

Business Strategy & Outlook

Hewlett Packard Enterprise is a leading supplier of IT infrastructure products and services. It generates revenue from selling servers, storage, and networking equipment, as well as the associated software. HPE also has financial services arm it uses to provide financing to customers. HPE is committed to make its entire portfolio available as-a-service by 2022, and The HPE is wisely focusing on profitability and shareholder returns. Commoditized industry-standard servers, HPE’s largest segment, is in a competitive market with large brand-name foes and low-margin white-box manufacturers. To combat profitability concerns, HPE pared its sales of servers to hyperscale cloud providers and shifted toward expanding margin-accretive areas like hyperconverged infrastructure, network edge, and hybrid cloud solutions. The HPE should benefit from IT infrastructure upgrades in the short term. However, one cannot expect HPE to gain a long-term competitive advantage over peers that offer similar portfolios or pure-play companies focused on a sole aspect of HPE’s offerings. One cannot think the firm holds an economic moat.

The HPE’s hybrid cloud strategy, which contains Pointnext, GreenLake, and OneSphere. HPE offers the public cloud pay-per-usage model for on-premises and private clouds to stay in tune with favored consumption models. To bolster its cloud strategy, HPE acquired firms with public cloud integration and cloud analytics expertise. The HPE can position itself as a one-stop shop with hardware for on-premises and private clouds while selling software and services to manage and optimize an entire network. While this flexible sales approach, the competitors mimicking the consumption-based model will intensify competition. As data proliferates expeditiously, networks are transforming to process data closer to the end users, or the network edge, for efficiency. HPE’s business outlook may hinge on its concerted network edge focus and its ability to cross-sell hybrid cloud solutions to permeate HPE solutions throughout enterprise networks.

Financial Strengths

After the split from HP Inc. in November 2015, HPE’s free cash flow has been a roller-coaster ride due to large spinoffs and acquisitions. The HPE as a more streamlined firm that can focus on IT infrastructure hardware, software, and cloud-based solutions. The HPE is a financially stable firm that may generate healthy free cash flow as it moves toward focusing on higher margin products paired with software and service sales. HPE’s fiscal 2021 debt/capital ratio was 40% and the deleveraging to occur through the forecast period and for HPE to pay its obligations on schedule with the spread-out nature of the maturities. The company had $13.4 billion in debt at the end fiscal 2021, with $1.4 billion of that being the operating portion of HPE. The majority of HPE’s debt is used by its financial arm, which has committed to maintaining an investment-grade rating. Its debt is largely associated with financing receivables, and management stated that it had less than 0.5% bad losses related to average net receivables. The company finished fiscal 2021 with $4.0 billion in cash and cash equivalents and as per forecast it to utilize its cash to reward shareholders through buybacks and dividends. Outside of operating expenses, the HPE to continue using its cash to gradually grow its dividend, potentially repurchasing shares opportunistically, and acquiring smaller firms to bolster its hybrid cloud and software capabilities.

Bulls Say

  • HPE may prosper from enterprises requiring cloud management and optimization services, and its payper-usage consumption model could win over customers. 
  • Edge computing, hyperconverged infrastructure, and software-defined networking present rapid growth possibilities. The HPE is wise to dedicate capital to these large market opportunities. 
  • The company’s paring down of hyperscale cloud server sales is smart. Additionally, the HPE is bolting on cloud service and analytics firms since cloud migration should present robust growth opportunities.

Company Description

Hewlett Packard Enterprise is a supplier of IT infrastructure products and services. The company operates as six segments. Its compute division primarily sells computer servers and services. The high-performance compute segment includes its Cray supercomputers. Storage arrays are sold out of the storage segment, and the intelligent edge group sells Aruba networking products and services. HPE’s financial services division offers financing and leasing plans for customers. The Palo Alto, California-based company sells on a global scale and has approximately 60,000 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

No-Moat Gap’s Problems Are Undeniable, but Old Navy and Athleta Align With Market Trends

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 there is a 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, one can forecast it will have about 1,500 locations in 10 years. No one can 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, 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 does not 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. The expect 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. As per the forecast average yearly repurchases of about $500 million over the next 10 years. The repurchases as prudent when executed at a discount to 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)

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