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Dividend Stocks

Boeing to Ramp 737 MAX Production Above Previous Peak Levels to Serve Global Aircraft Demand

Business Strategy and Outlook

Boeing is a major aerospace and defense firm that generates revenue primarily from manufacturing commercial aircraft. Boeing’s commercial aircraft segment can be split into two parts: narrow-bodied planes that are ideal for high-frequency short-haul routes, and wide-bodies that are used for transcontinental flights. Sales volumes for narrow-bodies have increased over the past 20 years the worldwide rise of low-cost carriers and an emerging-market middle class. 

Boeing’s narrow-body business is bruised after the extended grounding of the 737 MAX, but it is anticipated that the structural tailwinds driving narrow-body demand, particularly the development of emerging-market economies, will continue as the world emerges from the COVID-19 pandemic. As nations grow richer, their citizens tend to demand travel, and almost all aviation demand is served by two firms. It is projected that Boeing will ramp 737 MAX production above previous peak levels to serve global aircraft demand. Critical to our thesis is a normalization of U.S.-China trade relations, as management anticipates China will provide about a quarter of the growth in the aviation market over the next decade. 

It is expected that wide-body demand will recover more slowly from the COVID-19 downturn than narrow-body demand because wide-bodies are used for longer haul trips, which are unlikely to recover until a COVID-19 vaccine is distributed globally, which likely will begin happening in 2022. It is held that Boeing’s 787 Dreamliner is a fantastic aircraft for long-haul travel, but it is expected production issues will stop deliveries until 2022. It is alleged Boeing’s commercial deliveries will sustainably return to 2018 levels in 2026. 

Boeing has segments dedicated to the production of defense-specific products and aftermarket servicing. These businesses together generate about 38% of our midcycle operating income. It is broadly assumed GDP-like growth in the defense business and expect the services business will regain profitability faster than Boeing as a whole because aftermarket revenue increases directly with flights, but that global retirements will slow the recovery of this segment over the medium term.

Financial Strength

Boeing’s capitalization is looking more uncertain since the COVID-19 outbreak has substantially reduced air travel. EBITDA turned negative in 2020, which renders many traditional leverage metrics meaningless. The company ended 2021 with about $58.1 billion in debt and $16.2 billion in cash. Analysts’ expect EBITDA expansion and debt reduction over our forecast period to lead to gross debt/EBITDA levels at about 8.0 in 2022 and lower levels in subsequent years. Our estimated 2022 EBITDA covers interest expense 2.4 times, and the company has access to additional liquidity if necessary. In subsequent years, free cash flow is positive and EBITDA covers interest expense by about 5 or more times. The firm’s first capital allocation priority is to reduce debt, but will face considerable challenges as it needs to also reinvest in new technology to remain competitive. It is likely the correct balance between debt reduction and reinvestment is the critical question management needs to address.

 Bulls Say’s

  • Boeing has a large backlog that covers several years of production for the most popular aircraft, which gives us confidence in aggregate demand for aerospace products. 
  • Boeing is well-positioned to benefit from emerging market growth in revenue passenger kilometers and a robust developed market replacement cycle over the next two decades. 
  • It is probable that commercial airframe manufacturing will remain a duopoly for most of the world for the foreseeable future. It is anticipated customers will not have many options other than continuing to rely on incumbent aircraft suppliers.

Company Profile 

Boeing is a major aerospace and defense firm. With headquarters in Chicago, the firm operates in four segments, commercial airplanes, defense, space & security, global services, and Boeing capital. Boeing’s commercial airplanes segment generally produces about 60% of sales and two-thirds of operating profit, and it competes with Airbus in the production of aircraft ranging from 130 seats upwards. Boeing’s defense, space & security segment competes with Lockheed, Northrop, and several other firms to create military aircraft and weaponry. The defense segment produces about 25% of sales and 13% of operating profit, respectively. Boeing’s global services segment provides aftermarket servicing to commercial and military aircraft and produces about 15% of sales and 21% of operating profit. 

(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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Funds Funds

The Hartford Capital Appreciation Fund Class C Soaring High, But a Little Safety Won’t Hurt

Process:

Lingering uncertainty about this factor-oriented fund’s potential for sleeve manager and style changes keeps its Process rating at Below Average. 

Between March 2013 and the end of 2017, Wellington Management’s investment strategy and risk group altered this fund from a wide-ranging, single-manager offering to its current form. Six managers now run separate sleeves of the portfolio. The sleeves vary in size, but each is concentrated in 50 or fewer stocks and has distinct emphases, whether value or growth, market cap, or domicile. Gregg Thomas, who took over the investment strategy and risk group in late 2018, controls the aggregate portfolio’s characteristics by adjusting the size of Thomas Simon’s sleeve, which uses a multifactor approach to complement the five other sleeves, and by shifting assets among or even swapping managers to match the Russell 3000 Index’s risk profile. The idea is to let the stock-pickers rather than size, sector, or factor bets drive performance. 

Although regular line-up changes have made it difficult to assess the strategy, there could be more stability in the future. Thomas now envisions making a manager change every three to five years, on average, down from every two years when he took over in 2018. The current roster has been stable only since late 2019, however, when Thomas changed two managers, including replacing a veteran global manager with a relatively inexperienced mid-cap value manager.

Portfolio:

A rotating cast of six sleeve managers has had collective charge of the portfolio since the late 2017 retirement of long-time sole manager Saul Pannell. His departure concluded a transition that started in March 2013 when Wellington Management’s investment strategy and risk group began apportioning 10% of the fund’s assets to different managers–a total that hit 50% by mid-2014 and stayed there until early 2017, after which the group gradually redirected Pannell’s remaining assets. 

The transition to a multimanager offering beginning in 2013 ballooned the portfolio’s number stocks to 350- plus before falling to around 200 since April 2017. The fund’s sector positioning versus the Russell 3000 Index began to moderate in 2013 and has since typically stayed within about 5 percentage points of the benchmarks. Its tech underweighting dipped to nearly 10 percentage points in November 2020 but was back to around 5 percentage points by late 2021. 

Industry over- and underweighting’s tend to stay within 4 percentage points. In late 2021, however, the portfolio was 5.6 percentage points light in tech hardware companies, entirely because it did not own Apple AAPL. The fund’s non-U.S. stock exposure neared 30% of assets in 2014 but has been in the single digits since late 2019, when a domestic-oriented mid-cap value sleeve manager replaced a sleeve manager with a global focus. 

People:

The fund earns an Above Average People rating because its subadvisor’s multimanager roster includes veterans who have built competitive records elsewhere at sibling strategies where they also invest alongside shareholders. Those managers, however, serve this fund at the behest of Wellington Management’s Gregg Thomas. He took over capital allocation and manager selection duties at year-end 2018, when he became director of the investment strategy and risk group. Between March 2013 and year-end 2017, this group changed the fund from a wide-ranging single-manager offering to a multimanager strategy. Six managers now oversee separate sleeves of the portfolio. Growth investor Stephen Mortimer, dividend-growth stickler Donald Kilbride, and contrarian Gregory Pool each run 15%-25% of assets; mid-cap specialists Philip Ruedi and Gregory Garabedian 10%-20% each; and Thomas Simon uses a multifactor approach on 5%-20% assets to round out the whole portfolio’s characteristics. Thomas monitors those characteristics and redirects assets or even swaps managers to match the Russell 3000 Index’s risk profile, leaving it up to the stock-pickers to drive outperformance. That’s led to considerable manager change here. Of the original seven sleeve managers the investment strategy and risk group installed in March 2013, only Donald Kilbride remains; and the current six-person roster has been in place only since Sept. 30, 2019.

Performance:

This multimanager offering has struggled since Wellington Management’s Gregg Thomas took over capital allocation and manager selection duties at year-end 2018. Through year-end 2021, the A shares’ 22% annualized gain lagged the Russell 3000 Index and large-blend category norm by 3.8 and 0.8 percentage points, respectively, with greater volatility than each. The fund also has not distinguished itself since its current six-person sleeve manager stabilized on Sept. 30, 2019.

The fund was competitive in 2019’s rally and in 2020’s market surge following the brief but severe coronavirus-driven bear market. Of those two calendar years, the fund fared best against peers in 2020, with a top-quartile showing. But in neither year did it beat the index. 

Results in 2021 were then relatively poor. The A shares’ 15.2% gain trailed the index by 10.5 percentage points and placed near the peer group’s bottom. It was an off year for the sleeve managers’ stock picking. Especially painful were modest positions in biotechnology stocks Chemocentryx CCXI and Allakos ALLK, whose shares both tumbled after disappointing clinical trial data. 

The fund was lacklustre during its four-plus years of transition from a single-manager offering under Saul Pannell to its current format. From March 2013 to Pannell’s 2017 retirement, its 13.1% annualized gain lagged the index by 1.5 percentage points and placed in the peer group’s bottom half.

About Funds:

The firm maintains a long-standing relationship with well-respected subadvisor Wellington Management Company. Wellington has long run the firm’s equity funds–over half of its $116 billion in fund assets–and took the reins of Hartford Fund’s fixed-income platform beginning in 2012. In 2016, Hartford Funds began offering strategic-beta exchange-traded funds with its acquisition of Lattice Strategies and partnered with U.K.-based Schroders to expand its investment platform further. The Schroders alliance added another strong subadvisor to Hartford’s lineup, with expertise in non-U.S. strategies. Hartford Funds mostly leaves day-to-day investment decisions to its well-equipped subadvisors and instead steers product development, risk oversight, and distribution for its strategies. In 2013, the firm reorganized and grew its product-management and distribution effort. Since then, leadership has added resources to its distribution and oversight teams, merged and liquidated subpar offerings, introduced new strategies, evolved its strategic partnerships with MIT AgeLab and AARP, and lowered some fees. That said, fees are still not always best in class but have improved.

(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.

Categories
Technology Stocks

PerkinElmer renewed strategic focus on diagnostic product mix and life sciences business will drive growth

Business Strategy and Outlook:

With myriad acquisitions in the past few years, PerkinElmer has been in a constant state of evolution since 2016 when the company transitioned into two new business segments, Diagnostics and Discovery and Analytical Solutions (DAS), with life sciences being the most attractive segment of the DAS business.

The Diagnostics business makes up slightly over half of the company’s total revenue and is led by the immunodiagnostics business, followed by reproductive health, and finally applied genomics. The immunodiagnostics business is characterized by Euroimmun, the global leader in autoimmune testing, allergy testing, and infectious disease. The recent acquisition of Immunodiagnostics (IDS) and Oxford Immunotec has only extended product offering to PerkinElmer’s customer base. Although declining birth rates globally have negatively impacted growth in the reproductive health segment, the firm still holds leading positions in newborn testing worldwide. The U.S. market is characterized by stable profits and pricing power with opportunity to provide additional screenings for rare diseases. The firm should capitalize on the growth opportunities in newborn screening in China and India where there is opportunity to provide additional screening and expand reach. Finally, the applied genomics segment should see continued growth as the cost of sequencing goes down, increasing sequencing by genetic labs and a need for PerkinElmer products.

Financial Strength:

The fair value of the Perkin Elmer has increased to recognize recently generated cash flows, the company’s strong near- and long-term outlook including margin expansion (after a postpandemic reset), successful product mix shifts to diagnostics and life sciences, and recent acquisitions like BioLegend, IDS, and Oxford.

PerkinElmer carries a manageable debt load, but its history of consistent acquisitions tended to keep financial leverage elevated. At the end of September 2021, PerkinElmer held $0.5 billion in cash and $5.1 billion in debt with a leverage at the end of the quarter at 2.2 times net debt-to-EBITDA. Of said debt, $2.8 billion of new debt was added to fund the $5 billion BioLegend acquisition. Acquisitions remain the top capital allocation priority for excess cash flow. PerkinElmer does not tend to engage in significant share buybacks. The company pays a small quarterly dividend, amounting to about $31 million in 2020, and has not provided any recent updates to its payout ratio.

Bulls Say:

  • PerkinElmer possesses a well-entrenched niche in newborn screening and stands to benefit from growing menu expansion globally and expanding to emerging markets, particularly China and India. 
  • The Biolegend acquisition will accelerate new product growth in the Diagnostics and DAS business segments with high growth areas, including biologics, cell and gene therapy, and single cell analytics. 
  • Euroimmun is positioned to be a strong growth driver, especially since it is the largest player in autoimmune diagnostics and has more product offerings from the recent IDS and Oxford acquisitions.

Company Profile:

PerkinElmer provides instruments, tests, services, and software solutions to the pharmaceutical, biomedical, chemical, environmental, and general industrial markets. The company operates in two segments: diagnostics, which includes immunodiagnostics, reproductive health, and applied genomics, and discovery and analytical solutions, composed of life science, industrial, environmental, and food applications. PerkinElmer offers products and services ranging from genetic screening and environmental analytical tools to informatics and enterprise software.

(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.

Categories
Technology Stocks

PTC Continues Aggressive SaaS Transition to Fuel Future Growth; Raising FVE to $105

Business Strategy and Outlook

PTC operates in the high-end computer-assisted design software market, but Morningstar analyst view this market as mature and don’t foresee significant top-line growth in this area. PTC’s foray into growth areas such as “Internet of Things,” AR, and midmarket CAD, on the other hand, will significantly add growth to the top line, and as per Morningstar analysts view, PTC’s revenue mix to shift significantly to these areas over the next 10 years. 

PTC’s Creo software is considered a staple among many large assembly and complex product engineer teams, whether it’s in designing the efficient transportation of fluids or cabling. The small high-end CAD market compared with the mid-market has safeguarded PTC from new entrants to some extent. However, Morningstar analysts think the firm has largely been able to maintain its claim in the CAD industry based on its high switching costs, which as per Morningstar analysts apply not only to its core CAD offering but also its product lifecycle management software and new growth areas–like its Internet of Things and AR platforms. Still, switching costs alone aren’t enough to drive hefty growth in high-end CAD.

While Morningstar analysts expect a mix shift in the future for PTC, a shift to a subscription model from a license-based model is largely in the recent past. PTC has suffered only temporary declines in revenue, margins, and returns on invested capital, as per Morningstar analysts view. As per Morningstar analyst’s perspective, the company will be able to recover well from the transition as its converted subscribers mature.

With this expected recovery, PTC’s growth areas will be able to contribute to a much greater portion of PTC’s business due to strong partnerships. While PTC’s mid-market SaaS CAD software, Onshape, is within the company’s growth segment, and Internet of Things will see better success as entering the mid-market will be a tough task. In contrast, partnering with Microsoft and Rockwell Automation, PTC’s Internet of Things platform, Thingworx, has been able to gain greater traction for its solution that is widely known as among the best of breed.

PTC Continues Aggressive SaaS Transition to Fuel Future Growth; Raising FVE to $105

Narrow-moat PTC kicked off its fiscal year 2022 by posting results slightly below Morningstar analyst top- and bottom-line expectations. Nonetheless, results weren’t discouraging, as PTC is accelerating its SaaS transition, which brings with it short-term growth headwinds–but worthwhile benefits in the long term. Despite slight earnings misses, Morningstar analysts are raising its fair value estimate to $105 per share from $97, in most part due to rosier long-term corporate tax rates that Morningstar analysts have baked in after updating in-house estimates. Shares remained flat after hours, trading around $113 per share, leaving PTC fairly valued.

Financial Strength 

PTC to be in good financial health. As of fiscal 2021, PTC had a balance of cash and cash equivalents of $327 million and long-term debt at $1.4 billion. This leaves PTC with a debt/EBITDA ratio of 2.77 at fiscal year-end 2021. We estimate PTC’s growing base of cash and cash equivalents will be more than enough to support mild acquisition spend going forward, at an average of $50 million per year. Despite the company’s financial health, we do not foresee the company starting to issue dividends given the relatively significant transition PTC will undergo over the next 10 years, as per Morningstar analysts view, and the consequent possibility of additional cash needs as a result.

Bulls Say

  • PTC’s revenue should be able to grow significantly as its Internet of Things solutions take off. 
  • PTC’s Onshape platform makes headway in the midmarket as Autodesk and Dassault Systèmes are slow to move to a fully SaaS-based model. 
  • PTC should be able to improve gross margins as its low-margin services business comes down as a percentage of total revenue

Company Profile

PTC offers high-end computer-assisted design (Creo) and product lifecycle management (Windchill) software as well as Internet of Things and AR industrial solutions. Founded in 1985, PTC has 28,000 customers, with revenue stemming mostly from North America (45%) and Europe (40%).

(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.

Categories
Global stocks

Company books multiple records which results in increase of its fair value estimate

investment stockbroker risk analysis. Financial analysis using phone app and laptop. Market trading profit.

Business Strategy and Outlook:

Stifel Financial, along with other investment banks, had relatively strong revenue in 2020 that has been sustained in 2021 as economic uncertainty led to strong trading volume. Additionally, an initial need for capital in the recession and then low interest rates and a strong stock market led to high capital-raising activity.

Stifel Financial has a long history of being an active acquirer. The company ended 2020 with a Tier 1 leverage ratio of about 12% compared with a previously targeted 10%. With several hundred million dollars of arguably excess capital, the company could make some decent-size acquisitions. Barring growth through acquisitions, as valuations may be too high for most investment banks and investment managers, the company may see some growth from a renewed commitment to its independent advisor business.

Financial Strength:

Stifel’s financial health is fairly good. At the end of 2020, the company had approximately $1.1 billion of corporate debt and over $2 billion of cash on its balance sheet. Its next large debt maturity is $500 million in 2024.The company’s total leverage is less than 8, which is fair considering the mix of its investment banking and traditional banking operations. At the end of 2020, Stifel was at its disclosed target of a 11.9% Tier 1 leverage ratio. Given that its Tier 1 leverage ratio is above management’s previously stated target of 10%, the company should resume more material share repurchases or pursue acquisitions. Stifel has a history of making opportunistic acquisitions.

Bulls Say:

  • Stifel’s string of acquisitions has increased operational scale and expertise. 
  • Stifel is an experienced acquirer and integrator. A recession could provide ample acquisition opportunities. 
  • Net interest income growth over the previous several years at the company’s bank materially expanded wealth management operating margins, and the increased size of the bank and wealth management business provides diversification with its institutional securities business.

Company Profile:

Stifel Financial is a middle-market-focused investment bank that produces more than 90% of its revenue in the United States. Approximately 60% of the company’s net revenue is derived from its global wealth management division, which supports over 2,000 financial advisors, with the remainder coming from its institutional securities business. Stifel has a history of being an active acquirer of other financial service firms.

(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.

Categories
Dividend Stocks

J.B. Hunt’s Intermodal Rate Backdrop Holding Strong, Comfortably Offsetting Volume Constraints

Business Strategy and Outlook

At its core, J.B. Hunt is an intermodal marketing company; it contracts with the Class I railroads for the line-haul movement of its domestic containers. It was one of the first for-hire truckload carriers to venture into intermodal shipping, forming a partnership with Burlington Northern Santa Fe in the West in 1990. Years later, it struck an agreement with Norfolk Southern in the East. Hunt has established a clear leadership position in intermodal shipping, with a 20%-plus share of a $22 billion-plus industry. The next-largest competitor is Hub Group, followed by Schneider National’s intermodal division and XPO Logistics’ intermodal unit. Intermodal made up slightly less than half of Hunt’s total revenue in 2021.

Hunt isn’t immune to downturns, but over the past decade-plus it’s reduced its exposure to the more capital-intensive truckload-shipping sector, which represents about 28% of sales (including for-hire and dedicated-contract business) versus 60% in 2005. Hunt is also shifting its for-hire truckload division to more of an asset-light model via its drop-trailer offering while investing meaningfully in asset-light truck brokerage and final-mile delivery. 

Rates in the competing truckload market corrected in 2019, driving down intermodal’s value proposition relative to trucking. Thus, 2019 was a hangover year and fallout from pandemic lockdowns pressured container volume into early 2020. However, truckload capacity has since tightened drastically, contract pricing is rising nicely across all modes, and underlying intermodal demand has rebounded sharply on the spike in retail goods consumption (intermodal cargo is mostly consumer goods) and heavy retailer restocking. Hunt is grappling with near-term rail network congestion that’s constraining volume growth, but the firm is working diligently with the rails and customers to minimize the issue. It is  expected that 2.5%-3.0% U.S. retail sales growth and conversion trends to support 3.0%-3.5% industry container volume expansion longer term, with 2.0%-2.5% pricing gains on average, though Hunt’s intermodal unit should modestly outperform those trends given its favorable competitive positioning.

Financial Strength

J.B. Hunt enjoys a strong balance sheet and is not highly leveraged. It had total debt near $1.3 billion and debt/EBITDA of about 1 times at the end of 2021, roughly in line with the five-year average. EBITDA covered interest expense by a very comfortable 35 times in 2021, and we expect Hunt will have no problems making interest or principal payments during our forecast period. Hunt posted more than $350 million in cash at the end of 2021, up from $313 million at the end of 2020. Historically, Hunt has held modest levels of cash, in part because of share-repurchase activity and its preference for organic growth (including investment in new containers and chassis, for example) over acquisitions. For reference, it posted $7.6 million in cash and equivalents at the end of 2018 and $14.5 million in 2017. The company generates consistent cash flow, which has historically been more than sufficient to fund capital expenditures for equipment and dividends, as well as a portion of share-repurchase activity. It is expected that the trend will persist. Net capital expenditures will jump to $1.5 billion in 2022 as the firm completes its intermodal container expansion efforts, but after that it should also have ample room for debt reduction in the years ahead, depending on its preference for share buybacks. Overall,  Hunt will mostly deploy cash to grow organically, while taking advantage of opportunistic tuck-in acquisitions (a deal in dedicated or truck brokerage isn’t out of the question, but it is  suspected that the final mile delivery niche is most likely near term). 

Bulls Say’s

  • Intermodal shipping enjoys favorable long-term trends, including secular constraints on truckload capacity growth and shippers’ efforts to minimize transportation costs through mode conversions (truck to rail). 
  • It is believed intermodal market share in the Eastern U. S. still has room for expansion, suggesting growth potential via share gains from shorter-haul trucking. 
  • J.B. Hunt’s asset-light truck brokerage unit is benefiting from strong execution, deep capacity access, and tight market capacity. It’s also moved quickly in terms of boosting back-office and carrier sourcing automation.

Company Profile 

J.B. Hunt Transport Services ranks among the top surface transportation companies in North America by revenue. Its primary operating segments are intermodal delivery, which uses the Class I rail carriers for the underlying line-haul movement of its owned containers (45% of sales in 2021); dedicated trucking services that provide customer-specific fleet needs (21%); for-hire truckload (7%); heavy goods final-mile delivery (6%), and asset-light truck brokerage (21%).

(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.

Categories
Global stocks Shares

Rollins well positioned to fend off mounting inflationary pressures in 2022

Business Strategy and Outlook

Rollins’ strategy aims to further reinforce the density benefits afforded to its market-leading operations in the highly localized pest-control services markets, which it competes in, across North America. Ever-improving unit costs are offered by economies of density in each regional market in which Rollins operates. Rollins seeks to continue to amass these benefits via organic growth and continued focus on tuck-in acquisitions aimed at rolling up the fragmented North American pest-control service market. Recent investments in route optimization technology exemplify Rollins’ cost-out strategy, the continued roll-out of which is likely to widen EBIT margins. 

A sustainable cost advantage has accrued to Rollins as result of execution of the business’ strategy, leading to our wide-moat designation. Pest-control acquisitions and continuing focus on cost-out initiatives are key to the strategy. Nonetheless, Rollins remains equally focused on the defense of its leading North American market positions, noting the loss of customers quickly unwinds the operating-margin-widening benefits of density. Rollins requires annual training of all of pest-control technicians, while also limiting its own organic market share gains to maintain strong service levels and customer satisfaction.

Financial Strength

Rollins’ typically conservative balance sheet is in good health, sitting in a net debt position of $50 million at the end of 2021, or 0.1 times net debt/EBITDA. Rollins takes a highly prudent approach to the use of debt, typically using it only to act opportunistically when a quality acquisition target is in play and using subsequent operating cash flow to promptly retire debt. Alternatively, returning surplus capital to shareholders could also be considered. Rollins maintains $425 million in debt facilities, which provide the group with an additional source of liquidity. The facilities carry a leverage covenant of 3.0 times net debt/EBITDA and matures in April 2024.

Wide-moat Rollins capped off an already impressive 2021 performance with a strong fourth-quarter showing. 2021 adjusted EBITDA of $546 million tracked 2% ahead of our full-year expectations. On a constant-currency basis, full year organic sales grew at an elevated 8.7%, aligning with our expectations for a strong cyclical recovery in pest control demand in 2021. Tuck-in acquisitions added 2.7% in additional top-line growth in 2021 and drove the business’ modest outperformance relative to our revenue and earnings forecasts. Otherwise, Rollins’ late 2021 performance tracked in line with our long-term expectations for the U.S. pest control industry leader. 

Bulls Say’s 

  • The recent uptick in capital allocated to tuck-in acquisitions is likely to continue, supporting economies of scale and boosting operating margins. 
  • Phase 2 of the route optimization technology rollout looks to further widen Rollins’ EBIT margin. 
  • Increasing per-capita spending on pest control should support Rollins’ organic growth at a mid-single-digit clip.

Company Profile 

Rollins is a global leader in route-based pest-control services, with operations spanning North, Central and South America, Europe, the Middle East and Africa and Australia. Its portfolio of pest-control brands includes the prominent Orkin brand, market leader in the U.S.–where it boasts near national coverage–and in Canada. Residential pest and termite prevention predominate the services provided by Rollins, owing to the group’s ongoing focus on U.S. and Canadian markets. 

(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.

Categories
Dividend Stocks

Citigroup Remains a Complex and Developing Story

Business Strategy and Outlook

Citigroup has large trading, investment banking, international corporate banking, and credit card operations. The bank’s best performing business is its Institutional Clients Group, or ICG, unit, where the bank’s commercial banking and capital markets operations have scale and a unique global footprint that few can replicate. Citigroup is currently in the middle of a major strategic shift and remains a complex story. The bank is selling off multiple consumer units throughout APAC, will eventually sell its consumer unit in Mexico, and is refocusing on its core ICG unit, North American Consumer, and global wealth. At the end of this process, Morningstar analysts think the bank will be easier to understand, structurally more focused, and will likely have a marginally better return profile, however Morningstar analysts think the bank will still structurally trail its peers from a profitability standpoint.

The bank also has operational issues to solve, which the Revlon payment fiasco and resultant regulatory scrutiny highlighted once again. New CEO Jane Fraser has promised to redouble efforts to clean up internal regulatory issues. In the meantime, the bank has less sensitivity to interest rates than peers and expenses are on the rise as the bank invests in its ICG unit and in regulatory initiatives. Morningstar analysts see Citigroup taking some time before returns are better optimized.

After updating  projections with the latest quarterly results, Morningstar analysts are maintaining a fair value estimate of $83 per share. Morningstar analysts had initially thought to raise its fair value estimate due to no longer incorporating a tax rate hike, however a reevaluation of revenue growth assumptions largely balanced out the benefit of the lower tax rate. Thus, fair value is equivalent to just over 1 times tangible book value per share as of December 2021.

Financial Strength 

As per Morningstar analyst, Citigroup is in sound financial health. Its common equity Tier 1 ratio stood at 12.2% as of December 2021. The bank’s supplementary leverage ratio was 5.7%, in excess of the minimum of 5%. Citigroup’s liabilities are prudently diversified, with just over half of its assets funded by deposits and the remainder of liabilities made up of long-term debt, repurchase agreements, commercial paper, and trading liabilities. Roughly $19 billion in preferred stock was outstanding as of December 2021.

The capital allocation plan for Citigroup is now fairly standard, with the bank generally targeting for roughly 25% of earnings to be devoted to dividends, with share buybacks being flexible in response to the investment needs of the business. As the bank sells off businesses and frees up capital, there could be more room for repurchases, however how much the bank requires for further investment into the business remains an open question.

Bulls Say

  • Citigroup is in the middle of a strategic repositioning, taking major moves such as selling off its consumer business in Mexico and reinvesting in its strong points, ICG and wealth. Citigroup may finally emerge as a structurally improved franchise. 
  • Citigroup remains uniquely exposed to card loan growth and global transaction and trade volumes. As card loans hopefully eventually rebound and as the global economy recovers, these should drive revenue growth for the bank. 
  • Citigroup’s stock is not expensive, trading at less than tangible book value, not a hard hurdle to clear.

Company Profile

Citigroup is a global financial services company doing business in more than 100 countries and jurisdictions. Citigroup’s operations are organized into two primary segments: the global consumer banking segment, which provides basic branch banking around the world, and the institutional clients group, which provides large customers around the globe with investment banking, cash management, and other products and services.

 (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.

Categories
Dividend Stocks

Heavier Than Expected Content Investment Dents AT&T’s 2022 Outlook; FVE Down to $35

Business Strategy and Outlook

AT&T is the third largest wireless carrier in the U.S. Morningstar analyst believe that AT&T management is now putting the firm on the right path, shedding assets and refocusing on the telecom business, investing aggressively to extend its fiber and 5G networks to more locations, which will build on the firm’s core strengths. The complexity of the Warner transaction and the intensity of this investment will likely create a bumpy ride over the next couple years, but it is  believed that patience will be rewarded.

AT&T also benefits from its ownership of deep network infrastructure across much of the U.S. and its ability to provide a range of telecom services, particularly among enterprise customers. The plan to extend fiber to at least 3 million homes and businesses annually through at least 2025 builds on this position and should allow it to serve those locations directly and enhance wireless coverage in the surrounding areas.

Also, Morningstar analysts believe that the T-Mobile merger greatly improved the industry’s structure, leaving three players with little incentive to price irrationally in search of short-term market share gains. We don’t believe Dish Network presents a credible threat to the traditional wireless business. AT&T is also positioned to benefit as Dish builds out a wireless network as the firm recently signed a 10-year wholesale agreement that generates revenue for AT&T and gives it access to Dish spectrum.

Heavier Than Expected Content Investment Dents AT&T’s 2022 Outlook; FVE Down to $35

AT&T posted mixed fourth-quarter results and 2022 expectations. The wireless business continues to perform well, attracting customers at a solid clip. Management still expects to deliver at least 3% wireless service revenue growth in 2022, in line with Verizon’s forecast. Overall, the firm expects to generate $23 billion of free cash flow this year, down from $27 billion in 2021, reflecting heavy investments in networks and content, which as per Morningstar analysts believe are necessary to protect and build on its narrow economic moat. Thus, lowering fair value estimate to $35 from $36 but still believe the shares are substantially undervalued.

Financial Strength 

AT&T ended 2020 with net debt of $148 billion, down from $177 billion immediately after the Time Warner acquisition closed in mid-2018. The firm’s purchase of C-band spectrum for $23 billion, partially offset by the proceeds from assets sales, pushed the net debt load back up to $156 billion as of the end of 2021, taking net leverage to 3.2 times EBITDA from 2.7 times. This load is far higher than the firm has operated under in the past.In addition, the firm has issued more than $5 billion of general preferred shares. The WarnerMedia spin-off will take $43 billion of debt with it. Coupled with an additional $9 billion spectrum purchase in early 2022, AT&T will carry about $120 billion in net debt after the deal closes, which management expects will shake out in the range of 2.6 times EBITDA. That debt load compares favorably versus Verizon and reasonably well against T-Mobile. The firm plans to continue repaying debt, pulling net leverage below 2.5 times by the end of 2023, a year sooner than it had previously expected. The firm will use the Warner spin-off to adjust its dividend policy, targeting a payout of around 40% of free cash flow, down from more than 70% in 2021 (by our calculation), leaving substantial excess cash to reduce leverage or take advantage of opportunities, including share repurchases. In total, management will target a payout of around $8 billion-$9 billion annually, down from $15 billion in 2021. Morningstar analysts consider this policy makes sense, as it contemplates a sizable increase in network investment, notably in fiber infrastructure, which we believe is important to AT&T’s long-term health.

Bulls Say

  • AT&T has pulled together assets no telecom company can match. The firm has direct contact with more than 170 million customers across various products, providing an opportunity to build deeper relationships. 
  • Within the wireless business, AT&T holds the scale needed to remain a strong competitor over the long term. With Sprint and T-Mobile merging, industry pricing should be more rational going forward.
  • WarnerMedia holds a broad array of content rights and has a strong reputation with content creators. Shareholders will own 71% of this firm after it merges with Discovery

Company Profile

Wireless is AT&T’s largest business, contributing about 40% of revenue. The firm is the third-largest U.S. wireless carrier, connecting 66 million postpaid and 17 million prepaid phone customers. WarnerMedia contributes a bit less than 20% of revenue with media assets that include HBO, the Turner cable networks, and the Warner Brothers studios. AT&T plans to spin Warner off and merge it with Discovery to create a new stand-alone media firm. The firm recently sold a 30% stake in its traditional television business, which serves 15 million customers and generates about 17% of sales. This business will be removed from AT&T’s financials going forward. Fixed-line telecom services provided to businesses and consumers account for about 20% of revenue, serving about 15 million broadband customers.

 (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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LICs LICs

Cadence final quarter performance for the calender year 2021

On 17 November 2021, CDO listed on the ASX. The Company raised $15.55m as part of the IPO Offer, issuing 5.6m shares at a price of $2.7716 per share (the mid-point of the of the NTA at 31 October 2021). The Company has 15.06m shares on issue and a market cap of $41.9m as at 30 November 2021.

The average stock in the ASX 200 is down over 15% whilst the index is down only 1%. Generally speaking, larger capitalization value-style stocks have held up well whilst smaller capitalisation and growth-style stocks have experienced significant retracement and a reversal in trend.

CDO provides exposure to an actively managed long/short portfolio, with a long bias, of Australian and international securities. Cadence Asset Management Pty Limited (Cadence) is the Manager of the portfolio. Cadence manages the portfolio of Cadence Capital Limited, which listed in 2006, using a similar investment philosophy and process that is used for the CDO portfolio.  The Company has two stated investment objectives: (1) provide capital growth through investment cycles; and (2) provide fully franked dividends, subject to the Company having sufficient profit reserves and franking credits and it being within prudent business practices.

Cadence Opportunities Fund was down 2.1% in December, compared to the All Ordinaries Accumulation Index which was up 2.7% for the month. The Company has had a strong start to FY22 with the fund up 21.1% over the first six months of the year, outperforming the All Ordinaries Accumulation Index by 16.5%.

The Board has declared a 7.5 cents fully franked half year dividend, an annualised increase of 25% on last year’s ordinary dividends, reflecting the strong performance of the company over the current year. The current share price is $2.92 and interim dividend equates to a 5.1% annualised fully franked yield or a 7.3% gross yield. 

 (Source: FN Arena)

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.