Category: Sectors

Magellan High Conviction ETF: A Highly Intense Strategy Reshuffles Its Leadership

Post author By sakshi Khamesara
Post date April 14, 2022
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Approach

This exchange-traded fund is the listed entry point for the unlisted Magellan High Conviction, after converting from a closed-end structure in August 2021. Magellan believes sustainable competitive advantages enable companies to earn lasting returns above their cost of capital. Concentrating on financial services, consumer franchises, IT, healthcare, industrials, and infrastructure trims the universe to about 4,000 names. Quantitative and qualitative screening cuts this down to about 200 stocks. These filters exclude measures incorporating current market prices, although Magellan seeks firms that have enduring competitive advantages, lucrative reinvestment potential, low agency risk, and low business risk to facilitate predictable cash flows. Relying mainly on discounted cash flow techniques, analysts elongate the model’s duration for wide-moat stocks and vice versa.

Targets must be discounted sufficiently to intrinsic value to give a margin of safety. Stocks are ranked along qualitative and valuation dimensions, from which Magellan constructs an ultraconcentrated portfolio of eight to 12 of the best ideas. Unlike the Magellan Global strategy, there are no hard limits on the portfolio’s “combined risk ratio” (a proprietary risk measure based on historic stock beta and drawdown risk). The portfolio can hold up to 50% cash, which aims to provide protection in a falling market. From November 2020, the portfolio has unhedged currency exposure, having previously been actively hedged based on the managers’ views. Magellan publishes an intraday net asset value on its website to help price discovery. It is calculated using live prices and foreign exchange movements but doesn’t use futures, so it might be a lagging indicator in highly volatile markets. The vehicle targets a spread of 7 basis points on either side, but they can widen notably during volatile periods.

Portfolio

Magellan ignores index weightings when building this ultraconcentrated portfolio of eight to 12 companies. Historically, the manager has tilted towards consumer-related and technology sectors while steering clear of commodities. By its nature, sector concentration is large, and as at January 2022, 62% of the portfolio was exposed to information technology and Internet and e-commerce, while consumer discretionary and financials names accounted for less than 10% each. The manager’s preference for giant-cap multinationals with strong franchise value also leads to a strong bias towards North America. At year-end 2021, the portfolio held only three stocks outside of the United States, with Chinese ecommerce giant Alibaba the portfolio’s smallest holding.

However, the managers carefully assess the portfolio’s underlying earnings exposure by geography, and on this basis European and emerging-markets ex-China exposure was around 32%. No single position can exceed 20% of the portfolio, and no more than four stocks can be weighted at over 12.5% each. The portfolio can hold up to 50% cash. At the end of 2021, the cash position was 5%. Turnover ranges between 30% and 40% and is lumpy given that a single stock initial purchase or exit represents a sizable trade. Given the strategy’s high level of concentration, it is suitable as a supporting player, composing only part of a more broadly diversified portfolio.

People

CIO Hamish Douglass co-founded Magellan and has been this strategy’s key decision-maker. In February 2022, he announced an indefinite leave of absence due to medical reasons, forcing a new lead portfolio manager. The firm called on Douglass’ co-founder Chris Mackay to step into the lead role as replacement. Mackay was Magellan’s CIO from 2006 inception to 2012, before choosing to focus on managing the listed MFF Capital Investments. At the same time, former head of research Nikki Thomas rejoined Magellan as comanager on the flagship strategy, after departing in 2017 following the decision to cease development of the non-US strategy she managed. Thomas had a four-year stint comanaging Alphinity’s global equities strategy. In early 2018, Chris Wheldon rejoined the group as assistant portfolio manager, concentrating on the High Conviction strategy as comanager. He had previously spent eight years at Magellan working as an analyst in the franchises team and as head of the industrials team, before a stint at US-based Davis Advisors.

There is the backing of a strong team of investors and analysts, however. This includes Dom Giuliano, who was promoted to deputy CIO in December 2014, and Gerald Stack, who oversees the team as head of investments and is chair of the investment committee. Similarly, portfolio managers Chris Wheldon, Arvid Streimann, and Stefan Marcionetti have experience as a sounding board to Douglass at the portfolio level.

Performance

Magellan High Conviction unlisted fund has delivered performance slightly below benchmark and category average since its inception in July 2013 to January 2021. Significant underperformance over 2020 and 2021 has undone the strategy’s respectable track record. Measured over all rolling three-year periods, it outpaced the benchmark over 75% of the time during its history. The returns have also exceeded the manager’s target absolute return of 10% per year. Indeed, 2016 was a setback when positioning into Brexit, then the Trump reflation rally, saw the fund lag the market. This underperformance was more than made up for in 2017 by almost 10% outperformance, driven by holdings in Apple and Facebook.

The year 2018 was more volatile, but the strategy still managed to achieve a positive return of 3.4% and beat out the benchmark. Notably, however, it lagged the flagship Magellan Global strategy by around 6.4% as the latter’s more-diversified portfolio did better during the more volatile periods of the year. The portfolio kept pace in 2019’s strongly rising market, with many of its tech holdings appreciating significantly. But the strategy’s punchy approach fell significantly behind the index throughout a volatile 2020 market. Active currency hedging also detracted value over the year to October. Fortunes weren’t any better in 2021, trailing the benchmark by a similarly wide margin, as volatility returned to technology names and Alibaba sold-off heavily.

About Fund:

The Magellan High Conviction Trust seeks to invest in outstanding companies at attractive prices, while exercising a deep understanding of the macroeconomic environment to manage investment risk. This vehicle is the listed entry point for the unlisted Magellan High Conviction. CIO Hamish Douglass announced a medical leave of absence from Magellan in February 2022, leaving a big void to fill. His indefinite absence exposes Magellan’s lack of succession planning across the investment team and the broader business. The firm has had to step outside the immediate team, albeit to somewhat familiar faces. Magellan co-founder Chris Mackay returns to the fold as lead manager; he had relinquished the CIO role in 2012 to focus on managing MFF Capital Investments. Portfolio manager Chris Wheldon provides some continuity, having been comanager alongside Douglass since rejoining the firm in 2018 after a stint at a USbased manager.

(Source: Morningstar)

General Advice Warning

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

Tags Australian Market, ETFs

Technology Stocks

Accessing lower-costs funds providing SoFi the opportunity to drive net interest income growth

Post author By lvc-admin
Post date April 13, 2022
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Business Strategy and Outlook

SoFi targets young, high-income individuals who may be underserved by traditional full-service banks. The company is purely digital and engages with its clients exclusively through its mobile app and website. Unlike existing digital banks, which generally have limited product offerings, SoFi offers a full suite of financial services and products that includes everything from student loans to estate planning. The intent is that this will allow its customers to structure the entirety of their finances around SoFi, and the company’s reward structures are designed to encourage its clients to do so. By acting as a one-stop shop for its customers’ finances, SoFi intends to create powerful cross-selling advantages that will reduce its cost of acquisition and give it a competitive advantage in the marketplace.

In order to meet this goal, SoFi has used a mixture of internal development and external partnerships to rapidly expand the services offered to its clients. The use of partnerships has allowed SoFi to build out its product offerings with impressive speed, transforming SoFi from being a student and personal loan company into a one-stop shop for financial services in just a few years. The company’s expanded product lineup along with increased adoption of digital banking during the pandemic has helped accelerate SoFi’s growth, with the number of members increasing by nearly 90% in 2020. Rapid growth has persisted into 2021, and SoFi remains the only company utilizing a digital full-service model, giving it a clear niche.

While SoFi has offered its clients banking services for some time, the company itself has only recently become a true bank. Having successfully gained a national banking charter in early 2022, SoFi is now able to retain deposits into its SoFi Money accounts and use them to support its lending operations. Prior to SoFi obtaining a charter, deposits into these accounts were swept out to SoFi’s partner banks, leaving SoFi to finance its lending arms entirely though external financing. Access to these lower-costs funds will give SoFi the opportunity to drive net interest income growth as the firm leans into its unique model for digital banking.

Financial Strength

SoFi is in a good financial position with a strong balance sheet and limited credit risk from its lending operations. During its SPAC merger, SoFi raised $1.2 billion through PIPE financing, which came in addition to the $800 million in liquidity that the company acquired during the SPAC merger itself. SoFi does not pay a dividend or make any kind of shareholder returns. This is expected given where SoFi is in its corporate life cycle. It is not likely, SoFi to commit itself to making dividend payment or to repurchase shares at any point in the immediate future as the company is far more likely to reinvest any excess capital into its business. Additionally, the company’s financial reserves should be more than sufficient to cover any credit losses it may experience. SoFi either sells or securitizes the loans it originates. While historically SoFi has retained some of the securitizations it has made, recently the company has been moving away from this practice and many of the loans it has on its books are “float” from its lending business. In other words, loans that have been made but not yet sold through. Because these loans are recently originated, SoFi experiences limited credit losses, and the company’s write-off expense is low relative to the size of its balance sheet. With low credit losses and substantial financial assets at its disposal SoFi is in a good position financially and should have plenty of flexibility to invest in its business as it sees fit.

Bulls Say’s

SoFi has managed to rapidly launch an impressive array of products and services, and the company remains the only firm offering a digital full-service model.
SoFi has enjoyed rapid growth driven by the introduction of new products and broader adoption of digital banking.
The company’s acquisition of Galileo was likely a major win as the number of accounts using Galileo’s platform has risen sharply since the purchase.

Company Profile

SoFi is a financial services company that was founded in 2011 and is currently based in San Francisco. Initially known for its student loan refinancing business, the company has expanded its product offerings to include personal loans, credit cards, mortgages, investment accounts, banking services, and financial planning. The company intends to be a one-stop shop for its clients’ finances and operates solely through its mobile app and website. Through its acquisition of Galileo in 2020 the company also offers payment and account services for debit cards and digital banking.

(Source: MorningStar)

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

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Upon U.S. federal legalization, Tilray to own 21% of the U.S. multistate operator

Post author By lvc-admin
Post date April 13, 2022
No Comments on Upon U.S. federal legalization, Tilray to own 21% of the U.S. multistate operator

Business Strategy and Outlook

Tilray cultivates and sells cannabis in Canada and exports into the global medical market. It also sells CBD products in the U.S. The company is the result of legacy Aphria acquiring legacy Tilray in a reverse merger and renaming itself Tilray in 2021. Canada legalized recreational cannabis in October 2018. Since then, recreational sales have come to represent an increasingly larger portion of sales for producers. The Canadian market is overly crowded with producers, so Tilray faces stiff competition to develop consumer brands that can lead to meaningful pricing power. Buoyed by attractive deal terms, Tilray’s acquisition of HEXO’s senior secured convertible notes could potentially help drive necessary market consolidation.

Legacy Aphria had an extensive international distribution business, which generated the majority of its net revenue, a far larger portion than many of its Canadian cannabis peers. Legacy Tilray had also entered the global medical market. With both companies’ international capabilities intact, Tilray looks well positioned. The global market looks lucrative given higher realized prices and growing acceptance of the medical benefits of cannabis. Exporters must pass strict regulations to enter markets, which protects early entrants. It is foreseen, roughly 15% average annual growth through 2030 for the global medicinal market excluding Canada and the U.S.

In 2020, legacy Aphria acquired SweetWater, a U.S. craft brewery. Legacy Tilray previously acquired Manitoba Harvest to distribute CBD products in the U.S. It finally secured a toehold into U.S. THC when it acquired some of MedMen’s outstanding convertible notes. Upon U.S. federal legalization, Tilray would own 21% of the U.S. multistate operator. Furthermore, Tilray paid a great price while also getting downside protection as a debtholder. It is held, the U.S. offers the fastest growth of any market globally. However, the regulatory environment is murky with individual states legalizing cannabis while it remains illegal federally. It is alleged federal law will eventually be changed to allow states to choose the legality of cannabis within their borders

Financial Strength

At the end of its third fiscal quarter 2022, Tilray had about $710 million in total debt, excluding lease liabilities. This compares to market capitalization of about $4 billion.In addition, Tilray had about $279 million in cash, which will allow it to fund future operations and investments. Management has been deliberate with its SG&A spending given the slow rollouts and regulatory challenges the Canadian market has faced. Legacy Aphria was the first major Canadian producer to reach positive EBITDA, with legacy Tilray reaching positive EBITDA in the quarter immediately preceding its acquisition. However, the combined company continues to generate negative free cash flow to the firm, which pressures its financial health.The proposed deal to purchase $211 million in HEXO senior secured convertible notes is unlikely to add any pressure to Tilray’s financial health.With most of its development costs completed, it is anticipated Tilray will have moderate capital needs in the coming years. As such, it is held, debt/adjusted EBITDA to decline. It is alleged Tilray is unlikely to require significant raises of outside capital. In September 2021, the company received shareholder approval for increasing its authorized shares in order to rely on equity for future acquisitions. This bodes well for keeping its financial health strong.

Bulls Say’s

Legacy Aphria’s acquisition of Legacy Tilray created a giant with leading Canadian market share, expanded international capabilities, and U.S. CBD and beer operations.
Tilray’s management focuses on strategic SG&A spending and running a lean business model, benefiting its financial health in the early growth stage industry.
Tilray management’s careful approach to expansion has allowed it to reach profitability faster than any of its Canadian peers.

Company Profile

Tilray is a Canadian producer that cultivates and sells medical and recreational cannabis. In 2021, legacy Aphria acquired legacy Tilray in a reverse merger and renamed itself Tilray. The bulk of its sales are in Canada and in the international medical cannabis export market. U.S. exposure consists of CBD products through Manitoba Harvest and beer through SweetWater.

(Source: MorningStar)

General Advice Warning

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

Tags Recommendations, Small Caps

Technology Stocks

Launching Coverage of No Moat, Stable Moat Trend GoDaddy With an $80 FVE

Post author By lvc-admin
Post date April 13, 2022
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Business Strategy & Outlook:

GoDaddy’s position as the world’s leading domain registrar creates a unique opportunity to capture demand from newly formed businesses and upsell complementary products beyond domain registration. The one-stop-shop model will appeal to micro- and small businesses looking to establish and manage a ubiquitous online identity with integrated commerce solutions. The initial domain registration process is typically a customer’s first interaction with GoDaddy, and acts as an onramp for additional products. For example, an entrepreneur seeking an online presence for their idea may approach GoDaddy for a domain registration initially, and as a natural extension purchase a subscription to a domain linked email account, website building tools and commerce solutions.

GoDaddy has expanded its offering beyond domain registration to include a domain aftermarket platform, website design, security and hosting services, productivity tools such as email, and omni-commerce solutions. While domain registration remains the company’s core offering, GoDaddy made a strategic shift into the omni-commerce market via the 2021 acquisition of payment processing platform Poynt. This acquisition complements the company’s existing product suite and allows GoDaddy to compete more directly with providers such as narrow-moat Block (owner of Square) and narrow-moat Shopify. While the company’s shift into payment processing remains in its infancy, GoDaddy aspires to offer payment functionality across all surfaces including attaching it to every new domain registered. However, GoDaddy is pursuing growth in a crowded market with several established providers, and the company is expected to face challenges upselling products to existing clients due to customer switching costs and inertia. While the GoDaddy will have greater success upselling products to newly formed businesses or those upgrading from a subpar product, the company will need to maintain competitive pricing over the medium term to take share, limiting margin upside. In conjunction, GoDaddy’s core offering is commoditized, with new entrants such as Google Domains increasing pricing pressure.

Financial Strengths:

GoDaddy’s balance sheet is stretched as the company has increased leverage to support growth and return capital to shareholders. As of year-end fiscal 2021, the company had a net debt position of about $2.6 billion and reported $3.9 billion of long-term debt from a credit facility and senior notes. This includes $800 million of senior notes issued in February 2021 intended to fund working and capital expenditure, as well provide headroom for strategic acquisitions. While this has increased the company’s leverage, the GoDaddy will be able to meet interest and maturity payments on outstanding debt over our forecast period. the company will remain compliant with the operating and financial covenant’s related to the various debt instruments including remaining below certain gearing ratios.

GoDaddy does not pay dividends but instead returns capital to shareholders through a share repurchase program. The company intends to return $3 billion of capital to shareholders over the three years to fiscal 2024, which shall be funded through free cash flow and debt.

Bulls Say:

GoDaddy benefits from a highly recognizable brand, economies of scale, and customer switching costs.
Omni-commerce is a natural extension for GoDaddy with promising uptake to date.
The strategic shift into payment processing should provide opportunity for greater scale-based cost advantage.

Company Description:

GoDaddy is a provider of domain registration and aftermarket services, website hosting, security, design, and business productivity tools, commerce solutions, and domain registry services. The company primarily targets micro- to small businesses, website design professionals, registrar peers, and domain investors. Since acquiring payment processing platform Poynt in 2021, the company has expanded into omni-commerce solutions, including offering an online payment gateway and offline point-of-sale devices.

(Source: Morningstar)

General Advice Warning

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

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Dividend Stocks

Pandemic-Driven Home Improvement Trend Pushes Demand Forward for Kingfisher; Shares are Undervalued

Post author By lvc-admin
Post date April 13, 2022
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price of btc is going to breakout

Business Strategy & Outlook:

Kingfisher is a leading home improvement retailer operating under the retail banners of B&Q and Screwfix in the U.K and Brico Depot and Castorama in France, while also expanding in other European markets. Kingfisher has attempted multiple strategies to optimize its product offering and leverage its leading position in the French and British home improvement market with little success delivering excess economic returns. While the coronavirus pandemic has provided unexpected tailwinds for Kingfisher, such as increases in do-it-yourself activity and online penetration rates, operating margins remain below U.S peers, who enjoy greater scale and are thus able to operate at a more efficient cost base. Prior to the pandemic, Kingfisher had not reported an increase in like-for-like sales since fiscal 2017. The COVID-19-driven home improvement trend is unlikely to be maintainable as customers shift expenditures toward services as governments no longer impose lockdown restrictions and rising interest rates lowers accessibility to homeownership, a major driver of home improvement activity.

With consumer demand currently elevated, greater emphasis is placed on Kingfisher’s ability to grow market share through investments into its digital capabilities and own-exclusive brands, especially from trade customers who visit stores more frequently and have a larger basket size. Kingfisher’s retail banners in France are dilutive to the group and will benefit from the reorganization of its logistics operation in the region, which will reduce transportation costs and improve customer service. Self-help measures such as optimizing Kingfisher’s store footprint, lease renegotiations at lower rates and reversing stock inefficiencies will free up cash that will be returned to shareholders via a dividend payout ratio of approximately 40%.

Financial Strengths:

Kingfisher is in a sound financial position. The group ended fiscal 2022 with a net debt/EBITDA ratio (including lease liabilities) of 1.0 times, below its 2.0-2.5 target range, which provides a cushion for any potential slowdown in DIY activity in the future. The group is also one of the few around with a pension surplus. Kingfisher has very little funded debt, which is comfortably covered by the group’s cash balance.

Kingfisher’s main source of debt are lease liabilities, consisting of GBP 2.4 billion within its net debt position of GBP 1.6 billion as at fiscal 2021-22. Approximately 40% of Kingfisher’s store space is owned (mostly in France and Poland), which provides financial flexibility, as these assets can be monetized through sale and leaseback transactions, a tool Kingfisher has begun to use. Better inventory management, which lags peers, would also improve Kingfisher’s cash generation.

Bulls Say:

Demand for Kingfisher’s home improvement products stands to benefit from aging housing stock in the U.K. and France, as well as people spending more time indoors during the pandemic.
Self-help opportunities at Kingfisher should help increase operating margins by optimizing its store space footprint and improving logistical inefficiencies across its French operations.
As the second-largest home improvement retailer in Europe, Kingfisher has the opportunity to better leverage its size to drive costs down and use its customer knowledge to develop its own products.

Company Description:

Kingfisher is a home improvement company with over 1,470 stores in eight countries across Europe. The company operates several retail banners that are focused on trade customers and general do-it-yourself needs. Kingfisher’s main retail brands include B&Q, Screwfix, and TradePoint in the United Kingdom and Castorama and Brico Depot in France. The U.K. and France are Kingfisher’s largest markets, accounting for 81% of sales. The company is the second-largest DIY retailer in Europe, with a leading position in the U.K. and a number-two position in France.

(Source: Morningstar)

General Advice Warning

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

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Global stocks Shares

Carnival’s Return to Profitability in Sight Despite Omicron and Geopolitical Speed Bumps

Post author By lvc-admin
Post date April 12, 2022
No Comments on Carnival’s Return to Profitability in Sight Despite Omicron and Geopolitical Speed Bumps

Business Strategy & Outlook:

Carnival remains the largest company in the cruise industry, with nine global brands and 91 ships at 2021 fiscal year-end. The global cruise market has historically been underpenetrated, offering cruise companies a long-term demand opportunity. Additionally, in recent years, the repositioning and deployment of ships to faster-growing and under-represented regions like Asia-Pacific had helped balance the supply in high-capacity regions like the Caribbean and Mediterranean, aiding pricing. However, global travel has waned as a result of COVID-19, which has the potential to spark longer-term secular shifts in consumer behavior, challenging the economic performance of Carnival over an extended horizon. As consumers have slowly resumed cruising since the summer of 2021 (after a year-plus no-sail halt), the cruise operators will have to continue to reassure passengers of both the safety and value propositions of cruising.

On the yield side, the Carnival is expected to see some pricing pressure as future cruise credits continue to be redeemed through 2022, a headwind partially mitigated by the return of capacity via full deployment of the fleet. And on the cost side, higher spend to maintain tighter cleanliness and health protocols should keep expenses inflated. Aggravating profits will be staggered reintroduction of the fleet through the first half of 2022, crimping near-term profitability and ceding previously obtained scale benefits. As of March 22, 2022, 75% of capacity was already deployed and the entire fleet should be sailing by the important summer season. These persistent concerns, in turn, should lead to average returns on invested capital including goodwill, that are set to languish below our 10.4% weighted average cost of capital estimate until 2026, which supports our no-moat rating. While Carnival has carved out a broad offering across demographics, the product still has to compete with other land-based vacations and discretionary spending for share of wallet. It could be harder to capture the same percentage of spending over the near term given the perceived risk of cruising, heightened by persistent media attention.

Financial Strengths:

Carnival has secured adequate liquidity to survive a slow resumption of domestic cruising, with around $7 billion in cash and investments at the end of February 2022. This should cover the company’s cash burn rate through the end of the redeployment ramp-up, which had run around $500 million or more in recent months due to higher ship startup costs. The company has raised significant levels of debt since the onset of the pandemic with $35 billion in total debt, up from around $12 billion at the end of 2019. The company has less than $3 billion in short term and $2 billion in long-term debt coming due over the next year (as of Feb. 28, 2022).

The company is focused on reducing debt service as soon as reasonably possible in order to reduce future interest expense. It has also actively pursued the extension of maturities, limiting the cash demand on debt service over the near term. Carnival has just over one year’s worth of liquidity to operate successfully in a no-revenue environment. There is no anticipation on an imminent credit crunch in the near term, even with no associated revenue (which the company has successfully resumed capturing), as long as capital markets continue to function properly. Additionally, in order to free up cash to support operating expenses, Carnival eliminated its dividend in 2020 ($1.4 billion in 2019). Another $3 billion in current customer deposits were on the balance sheet, offering working capital that can be utilized to run the business and indicating demand for cruising still exists. And capital markets remain open to financing, with the company announcing a $500 million at-the-market equity raise at the end of January 2022, indicating access to cash is still plentiful.

Bulls Say:

As Carnival deploys its fleet, passenger counts and yields could rise at a faster pace than we currently anticipate as capacity limitations are repealed.
A more efficient fleet composition (after pruning 19 ships at the onset of the pandemic) may benefit the cost structure to a greater degree than initially expected, as sailings fully resume.
The nascent Asia-Pacific market should remain promising post-COVID-19, as the four largest operators had capacity for nearly 4 million passengers in 2020, which provides an opportunity for long-term growth with a new consumer.

Company Description:

Carnival is the largest global cruise company, with 91 ships in its fleet at the end of fiscal 2021, with all of its capacity set to be redeployed by summer 2022. Its portfolio of brands includes Carnival Cruise Lines, Holland America, Princess Cruises, and Seabourn in North America; P&O Cruises and Cunard Line in the United Kingdom; Aida in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia. Carnival also owns Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Carnival’s brands attracted about 13 million guests in 2019, prior to COVID-19.

(Source: Morningstar)

General Advice Warning

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

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Dividend Stocks

Watsco to continue executing its buy and build strategy to outperform market growth

Post author By lvc-admin
Post date April 12, 2022
No Comments on Watsco to continue executing its buy and build strategy to outperform market growth

Business Strategy and Outlook

Watsco is the largest player in the fragmented heating, ventilation, air-conditioning, and refrigeration distribution industry with low-double-digit percentage market share. The company predominantly operates in the United States (approximately 90% of revenue) with an outsize presence in the Sunbelt states. Since entering the HVACR distribution market in 1989, Watsco has operated a “buy and build” strategy and has completed over 60 acquisitions that have expanded the company’s geographic footprint and product assortment. Watsco’s acquisition strategy has primarily targeted smaller family-owned businesses. The firm also operates three joint venture partnerships with narrow-moat-rated HVAC manufacturer Carrier. These JVs account for approximately 60% of consolidated revenue, and the relationship grants Watsco exclusive distribution rights for Carrier products across select regions of the U.S.

According to the Air-Conditioning, Heating, and Refrigeration Institute, shipments of air-conditioners and furnaces in the U.S. have grown at about a 6% compound annual rate since the 2009 housing crisis trough. Over the same period, Watsco increased its top line at about a 10.5% CAGR, driven by about 5% average same-store sales growth and 5.5% average growth from acquisitions (including the formation of Carrier JVs).

Residential HVAC demand (along with repair and remodel spending) soared during the pandemic, driven by more time spent at home and increased discretionary income. Strong pricing power for HVAC manufacturers and distributors accompanied the robust demand environment. Fiscal 2021 was an excellent year for Watsco with over 20% year-over-year revenue growth and record operating margin (10% compared with the 8% 10-year average). However, it is unlikely this performance is maintainable over the long run. Despite upcoming regulatory tailwinds, it is anticipated to see only modest HVAC shipment growth over the next 10 years (using 2021 as the base year) as the replacement cycle matures. Nevertheless, it is alleged Watsco will continue to execute its buy and build strategy to outperform market growth.

Financial Strength

Watsco has a perennially strong balance sheet as the firm has historically operated with very low financial leverage. While Watsco generates sufficient operating cash flow to reinvest in organic growth opportunities and acquisitions and return capital to shareholders, the firm does have an unsecured revolving credit facility that it uses to fund its capital allocation outlays. Nevertheless, Watsco’s net debt/EBITDA ratio averaged less than 0.5 during the last 10 years. It is held management will continue to operate with a conservative balance sheet for the foreseeable future.

Bulls Say’s

Watsco will continue to effectively employ its “buy and build” strategy to consolidate the HVAC distribution market and compound cash flow.
Watsco serves end markets with attractive long-term growth prospects driven by an undersupplied U.S. housing stock, structurally higher R&R spending, and favorable regulatory changes (for example, energy efficiency standards).
Watsco’s investments in digital technology have differentiated the firm from its competition.

Company Profile

Watsco is the largest heating, ventilation, air-conditioning, and refrigeration products distributor in North America. The company primarily operates in the United States (90% of 2021 revenue) with significant exposure in the Sunbelt states. Watsco also has operations in Canada (6% of sales) and Latin America and the Caribbean (4% of sales). The company’s customer base consists of more than 120,000 dealers and contractors that serve the replacement and new construction HVACR markets for residential and light commercial applications.

(Source: MorningStar)

General Advice Warning

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

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Global stocks

Through its own operations and through those of its alliance partners, Renault has a solid presence in Eastern Europe, South America, and South Korea

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Business Strategy and Outlook

Renault owns 43.7% of Nissan, while Nissan owns roughly 15% of Renault and 34% of Mitsubishi. The alliance is structured as a partnership, with each company operating as an individual entity. Combined, the alliance stands as one of the largest global automakers. The companies benefit from increased scale, purchasing power, and the ability to share vehicle technology and platforms. The group is governed by the alliance board of Renault-Nissan BV, which is 50% jointly owned by Renault and Nissan. Boardroom and management upheaval from the Carlos Ghosn scandal was a huge distraction for the alliance. Renault installed Jean-Dominique Senard (formerly in charge of Michelin) as chairman. The company hired Luca de Meo as CEO (former head of SEAT), who started on July 1, 2020.

Renault also owns 67.7% of the parent of Russian automaker AvtoVAZ, which makes Lada, the country’s best-selling brand. However, on March 23, 2022, the company said it may write down its Russian assets, another turnaround setback. In addition, Renault owns 99.4% of Romanian automaker Dacia, and 80.0% of Samsung Motors. Nissan holds a 34% stake in Mitsubishi Motors. Renault has organized these companies into an integrated global alliance, sharing purchasing, information services, research and development, production facilities, vehicle platforms, and powertrains. Through its turnaround plan, dubbed “Renaulution” and initiated in 2020, Renault will focus on its geographic market strength and better utilization of alliance cost efficiencies.

In the Western European new-car market, Renault has the third-largest share, trailing Volkswagen and Stellantis. To its detriment, Renault has only had limited exposure to China, the world’s largest auto market, but upon the formation of a joint venture with Chinese automaker Dongfeng, local production began in 2017. Nissan has successfully penetrated the Chinese market, annually selling more than 1.0 million units. Renault also has production facilities in Brazil, India, Russia, and Turkey. Through its own operations and through those of its alliance partners, Renault has a solid presence in Eastern Europe, South America, and South Korea.

Financial Strength

Renault’s automotive business has significant financial leverage, but in experts’ opinion, this is not overly burdensome relative to the company’s substantial cash position. With financial services on an equity basis, total debt/EBITDA has averaged 1.0 times during the period from 2011 to 2021 but was negative 9.7 times at the end of 2020 due to operating losses from COVID-19. The ratio was 3.4 times at the end of 2021. Adding in the impact of operating leases and netting cash against debt, net adjusted debt/EBITDAR during the same period averaged negative 0.2 times, with 2020 coming in at negative 4.2 times, and year-end 2021 at 0.9 times.Before 2008, with financial services on an equity basis, total debt/EBITDA was around 1.5 times. On lower EBITDA and higher outstanding debt in 2008 and 2009, the leverage ratio jumped to 3.6 and 20.6 times, respectively. In early 2009, the company received a EUR 3 billion loan from the French government to reduce refinancing risks associated with accessing credit markets at extremely high interest rates. In 2012, Renault also sold its entire stake in AB Volvo to reduce indebtedness. In response to the coronavirus pandemic, the company announced that it would not pay a dividend in 2020 on 2019’s financial results. Also, the company arranged a EUR 5 billion credit line guaranteed by the French government, on which, it drew down EUR 4 billion. At the end of 2020, the undrawn EUR 1 billion was no longer available. Management targets full reimbursement of the French guaranteed loan by the end of 2023. Total liquidity of the automotive group was EUR 17.3 billion at the end of 2021, including a EUR 3.4 billion undrawn credit line and EUR 13.9 billion in cash.

Bulls Say’s

Renault’s alliance with Nissan provides scale and purchasing power that the company would otherwise struggle to achieve on its own.
Renault is the largest manufacturer of light commercial vehicles in Europe, excluding pick-ups, with around a 16% share of the market and a 25% share of the electric LCV market.
The company’s low-cost products, like the Dacia Logan, have benefited from increased demand for value-priced vehicles by cost-conscious consumers.

Company Profile

Renault possesses a global alliance of automotive manufacturing, financing, and sales operations. The company’s alliance partners consist of AvtoVAZ (67.7%), Dacia (99.4%), Nissan (43.7%), Renault Samsung Motors (80.0%), and Mitsubishi (Nissan owns 34%). Total 2021 Renault-Nissan-Mitsubishi alliance sales volume of 7.9 million vehicles makes the alliance the third largest vehicle group in the world, behind Toyota at 10.5 million and Volkswagen at 8.6 million vehicles sold.

(Source: MorningStar)

General Advice Warning

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

Tags European Market

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Narrow-Moat Nordstrom Poised for a Turnaround as Its Strategic Plans Take Hold

Post author By lvc-admin
Post date April 12, 2022
No Comments on Narrow-Moat Nordstrom Poised for a Turnaround as Its Strategic Plans Take Hold

Business Strategy & Outlook:

Nordstrom continues to be a top operator in the competitive U.S. apparel market. The firm has, cultivated a loyal customer base on its reputation for differentiated products and service and has built a narrow moat based on an intangible brand asset. While the company was unprofitable in 2020 because of the COVID-19 crisis, its profitability returned in 2021, and its brand intangible asset is intact. Despite a rocky couple of years, the Nordstrom’s full-price and Rack off-price stores have competitive advantages over other apparel retailers.

Nordstrom is responding well to changes in its market. The company has about 100 full-price stores, with nearly all of them in desirable Class A malls (sales per square foot above $500) or major urban centers. This is viewed as an advantage, as some lower-tier malls are unlikely to survive. Moreover, Nordstrom has a presence in discount retail with Rack (about 250 stores) and significant e-commerce (42% of its sales in 2021). Still, the firm’s full-price business is vulnerable to weakening physical retail, and Rack competes with firms like no-moat Poshmark and narrow-moats TJX and Ross.

Nordstrom unveiled a new strategic plan, Closer to You, in early 2021 that emphasizes e-commerce, growth in key cities (through Local and other initiatives), and a broader off-price offering. Among

the merchandising changes, Nordstrom intends to increase its private-label sales (to 20% of sales from 10% now) and greatly expand the number of items offered through partnerships (to 30% from 5% now). The firm set medium-term targets of annual revenue of $16 billion-$18 billion, operating margins above 6%, annual operating cash flow of more than $1 billion, and returns on invested capital in the low teens. Nordstrom will consistently generate more than $1 billion in operating cash flow, achieve ROICs in the teens, and reach $16 billion in annual revenue in 2024. However, they will trend higher, the operating margins will be slightly below 6% in the long run due to intense competition, but this could change if some of the new initiatives are more successful than expected.

Financial Strengths:

The Nordstrom is in good financial shape and will overcome the virus-related downturn in its business. The firm closed 2021 with more than $300 million in cash and $800 million available on its revolving credit facility. Although it also had $2.9 billion in long-term debt, most of this debt does not mature until after 2025. Nordstrom had net debt/EBITDA of a reasonable 2.5 times at the end of 2021. Nordstrom generated $200 million in free cash flow to equity in 2021, but this amount to rise through reductions in operating expenses, working capital management, and moderate capital expenditures. As per forecast an annual average of about $840 million in free cash flow to equity over the next decade. As Nordstrom’s results have improved, it has resumed cash returns to shareholders. In 2021, about $250 million in share repurchases and dividends totaling $0.76/share (23% payout ratio). Also, to conserve cash, Nordstrom has suspended its dividends and share repurchases (used more than $400 million combined in cash in 2019), but to anticipate both will resume in 2022. Over the next decade, the buybacks of about $340 million per year and an average dividend payout ratio of about 23%. Nordstrom’s capital expenditures were quite elevated prior to 2020. Its store count has increased from 292 at the end of 2014 to about 360 today as more than 60 Rack stores have opened

since 2014 and the company has expanded into Canada and New York City. Nordstrom has estimated its total investment in Canada and New York at $1.1 billion for 2014-19. The estimated Nordstrom’s yearly capital expenditures will average about $650 million over the next decade, well below 2019’s $935 million.

Bulls Say:

ONordstrom’s online sales exceeded $6 billion in 2021, making it one of the largest e-commerce firms in the U.S.

ONordstrom suspended dividends and share repurchases when the pandemic hit but has resumed cash returns to shareholders. The projected annual combined dividends and share purchase above $400 million over the next five years.

ONordstrom serves an affluent customer base in its full line stores, which separates it from the many midlevel retailers in malls. Most of its stores are in productive malls that are not expected to close.

Company Description:

Nordstrom is a fashion retailer that operates approximately 100 department stores in the U.S. and Canada and approximately 250 off-price Nordstrom Rack stores. The company also operates both full- and off-price e-commerce sites. Nordstrom’s largest merchandise categories are women’s apparel (28% of 2021 sales), shoes (25% of 2021 sales), men’s apparel (14% of 2021 sales) and women’s accessories (14% of 2021 sales). Nordstrom, which traces its history to a shoe store opened in Seattle in 1901, continues to be partially owned and managed by members of the Nordstrom family.

(Source: Morningstar)

General Advice Warning

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

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