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Dividend Stocks

AstraZeneca’s Continual Focus on Innovative Drug Development Increasingly Sets Up Strong Growth

Business Strategy and Outlook

AstraZeneca has built its leading presence in the pharma and biotech industry on patent-protected drugs. The replenishment of new drugs is offsetting the past patent losses on gastrointestinal drug Nexium and cholesterol reducer Crestor, and the company is well positioned for growth.

AstraZeneca’s pipeline is emerging as one of the strongest in the drug group, and we think the company is developing several key products that hold blockbuster potential. These drugs should also carry strong pricing power, driving the potential to expand Astra’s margins. In addition to internal development, AstraZeneca has aggressively pursued acquisitions, with mixed results. 

As Astra’s next generation of drugs launch, Morningstar analysts expect operating margins to improve based on the strong pricing power of the new drugs and the operating leverage the firm should attain as the new drugs reach critical mass. Also, as the new drugs launch, Astra is reducing the asset divestiture strategy it employed to help bridge the massive patent losses facing the firm over the past few years until the newer drugs were ready. While the asset sales helped prop up earnings and support the dividend during a challenging time, the strategy is not sustainable. As new drugs gain traction, Astra will likely continue to reduce the asset sales, which is strategically sound but will likely create a headwind to earnings growth.

AstraZeneca’s Continual Focus on Innovative Drug Development Increasingly Sets Up Strong Growth

After a deep dive review of several of AstraZeneca’s current and pipeline products, Morningstar analysts have increased their projections for several drugs leading to a fair value estimate increase to $64 from $60. Analysts have continued to view the company with a wide moat, supported by a strong pipeline and a relatively secure current portfolio with limited near-term patent losses.

In looking at the pipeline, we are increasingly bullish on several next generation drugs. In particular, the recent approval of severe asthma drug Tezspire looks like a potential new blockbuster. Also, breast cancer drug camizestrant holds significant potential despite an increasingly crowded area of competitive SERD drugs in development but so far, the data  for the drug looks increasingly solid. 

Financial Strength

Astra continues to generate robust cash flows, and the firm’s balance sheet is in solid shape, closing 2020 with debt/EBITDA of close to 2.4 times. However, the firm needs to offset lost cash flows from products losing patent protection over the next couple of years to generate enough cash flow to fund the dividend. Morningstar analysts expect the recently announced acquisition of Alexion to add close to $16 billion in debt on the balance sheet, but it is expected that the strong acquired drugs will produce robust cash flows to quickly pay down the acquisition-related debt.

 Bulls Say 

  • The company is expanding its oncology presence with several important pipeline products. In particular, the company’s EGFR drug Tagrisso holds major blockbuster potential in lung cancer. 
  • The management team is focusing the pipeline toward unmet medical need, which should increase the odds of success and being strong pricing power for the new drugs. 
  • AstraZeneca has a large presence in emerging markets and should benefit from these markets’ fast growth prospects, especially in China

Company Profile

A merger between Astra of Sweden and Zeneca Group of the United Kingdom formed AstraZeneca in 1999. The firm sells branded drugs across several major therapeutic classes, including gastrointestinal, diabetes, cardiovascular, respiratory, cancer, and immunology. The majority of sales come from international markets with the United States representing close to one third of its revenue.

 (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

Corporate Action: Subscribe to Corporate Travel’s Share Purchase Plan

Morningstar analysts recommend eligible shareholders subscribe to Corporate Travel’s Share Purchase Plan, or SPP. It is the AUD 25 million component of a total AUD 100 million underwritten capital raising to fund the AUD 175 million acquisition of Hello World Travel’s corporate and entertainment travel business in Australia and New Zealand. An institutional placement has already raised AUD 75 million (at AUD 21.00 per share) and the remaining AUD 75 million of the purchase price will be funded by an issue of new shares (also at AUD 21.00) to the vendor when the deal completes in the March quarter of 2022.

Morningstar analysts support the SPP which will be priced at least 11% below our fair value estimate as well as  lifted  fair value estimate on Corporate Travel by 7% to AUD 23.50 per share on Dec. 15, 2021 when the deal was first announced. The SPP offer price will be the lower of AUD 21.00 and the five-day average price of Corporate Travel shares during the five trading days up to the SPP closing date (likely Jan. 20, 2022). As this SPP price will be lower than morningstar intrinsic assessment (and the current stock price), Morningstar analyst see value in subscribing to the offer.

Further, Morningstar analysts see the acquisition as opportunistic, struck amid a pandemic. It is a playbook that was used by no-moat-rated Corporate Travel with the October 2020 AUD 275 million buy of Travel & Transport in North America. The Helloworld unit is bite-size (6% of Corporate Travel’s enterprise value), operates in the group’s home market of Australia and New Zealand (with two thirds of business in domestic travel), and synergies are likely to be easier to extract than from the Travel & Transport purchase. As such, management’s projected AUD 8 million synergy is conservative, at just 36% of Helloworld’s pre pandemic EBITDA. This compares with Travel & Transport where the projected AUD 25 million synergy is 61% of the unit’s prepandemic EBITDA, with its extraction making good progress to-date.

Company Profile

Corporate Travel Management provides travel services mainly for corporate customers across the Americas, Australia and New Zealand, Europe, and Asia. The company has built scale and breadth through both organic growth and acquisitions. As of 2021, Corporate Travel is the world’s fourth-largest corporate travel management company based with pro forma, pre-COVID-19 total transaction volumes of AUD 11 billion, but it remains a relative minnow in the highly fragmented USD 1.5 trillion global market. The company offers expertise and personalized service to corporate clients spanning several industries such as government, healthcare, mining, energy, infrastructure, and construction. Before the pandemic, more than 60% of the group’s client travel was domestic (within the country) in nature.

(Source: Morning Star)

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 Expert Insights

AbbVie’s Next Generation Drugs Are Poised to Help Mitigate Upcoming Humira Biosimilar Pressures

Business Strategy and Outlook:

While AbbVie holds a strong portfolio of marketed and pipeline drugs, the increasing competition to the company’s key drug Humira should slow the growth for the company. At close to 40% of total sales and a higher portion of earnings (due to higher margin revenue), Humira is a key determinant of AbbVie’s earnings performance over the next three years.

Beyond immunology, cancer drug Imbruvica is the next-biggest sales contributor. Imbruvica’s strong clinical data in several forms of blood cancer should lead to peak sales above $6 billion. Additionally, the recent acquisition of Allergan brings several new products, including Botox for both cosmetic and therapeutic uses. Botox’s strong entrenchment bodes well for the treatment as new competition is emerging. Also, AbbVie holds several mature drugs with patent expirations long past, but with manufacturing or specific dosing complexities, which make generic competition less likely. Looking forward, AbbVie’s pipeline is weighted more toward new cancer and immunology drugs. The company should be able to leverage its solid entrenchment with Humira and Imbruvica to launch the new drugs.

Financial Strength:

AbbVie’s acquisition of Allergan significantly increased its debt level. The firm’s net debt position to peak at close to $70 billion in 2020, but given the strong cash flows of AbbVie’s base business and the acquired cash flows from the Allergan deal, the firm is expected to rapidly pay down debt while still financing the dividend. However, it is not expected that AbbVie will have much room to make any other significant acquisitions for several years while capital is tied up paying down debt and funding the robust dividend.

Bulls Say:

  • AbbVie supports a strong dividend yield, which should act as valuation support, as the cash flows to support the dividend look secure over the next few years. 
  • AbbVie’s increasing entrenchment in blood cancers should bode well for growth as pricing power remains solid in this therapeutic area of the pharmaceutical market. 
  • AbbVie’s next generation immunology drugs targeting the IL23 and JAK pathways should help mitigate the competitive threats facing Humira.

Company Profile:

AbbVie is a pharmaceutical company with a strong exposure to immunology and oncology. The company’s top drug, Humira, represents close to half of the company’s current profits. The company was spun off from Abbott in early 2013. The recent acquisition of Allergan adds several new drugs in aesthetics and women’s health.

(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

BioNTech growth is projected following additional COVID-19 contracts and Shingles collaboration

Business Strategy and Outlook:

BioNTech, founded in 2008 in Germany, has become a key player in the development of personalized mRNA cancer treatments. The emerging biotech’s first commercial vaccine, for COVID-19, received its first authorization in December 2020, and its early-stage pipeline and mRNA technology platforms have caught the eye of several large pharmaceutical companies, resulting in collaborations and partnerships.

BioNTech’s internal discovery platform is focused on mRNA, including off-the-shelf and personalized mRNA drugs, but opportunistic acquisitions have brought in targeted antibodies and cell therapies as well. As such, BioNTech is not overly reliant on any one key drug candidate or drug class at this point, and it is poised to tackle cancer via many different mechanisms. Further, the company has a burgeoning vaccine pipeline for infectious diseases. In partnership with the Bill & Melinda Gates Foundation, BioNTech is developing vaccines for HIV and tuberculosis, and the company’s COVID-19 program in partnership with Pfizer and Fosun Pharma was built off an existing partnership with Pfizer for an influenza vaccine.

Financial Strength:

The fair value estimate of the stock is USD 200.00 per ADR from $177, after incorporating Europe’s recent COVID-19 vaccine option exercise for 2022, Pfizer’s latest update on contracted COVID-19 vaccine sales for 2023, and a small placeholder for potential profit share on an mRNA-based shingles vaccine.

Like most of its emerging biotech peers, BioNTech has historically burned through cash to fund research and development of its pipeline. The company has minimal debt on its balance sheet, as it has funded discovery and development with equity issues and collaboration payments from partnerships with large pharmaceutical firms.

The company is expected to continue to rely on these two avenues for cash for the next several years as well as a large inflow of cash from Comirnaty gross profits in 2021 and 2022. Outside of BioNTech’s COVID-19 vaccine candidates, we think the earliest approval could arrive in 2023, which would put the company on a path toward steady profitability. Management has taken advantage of a couple of opportunities to acquire early-stage assets and expand its geographic footprint to establish a U.S. research hub at low prices.

Bulls Say:

  • BioNTech’s pipeline, which relies on expertise in mRNA and bioinformatics, will be difficult to replicate by competitors. 
  • BioNTech will be able to command a premium price with its personalized cancer therapies, if successful. 
  • The rapid development of COVID-19 vaccine Comirnaty bodes well for the rest of BioNTech’s pipeline and the future of its mRNA research platform.

Company Profile:

BioNTech is a Germany-based biotechnology company that focuses on developing cancer therapeutics, including individualized immunotherapy, as well as vaccines for infectious diseases, including COVID-19. The company’s oncology pipeline contains several classes of drugs, including mRNA-based drugs to encode antigens, neoantigens, cytokines, and antibodies; cell therapies; bispecific antibodies; and small-molecule immunomodulators. BioNTech is partnered with several large pharmaceutical companies, including Roche, Eli Lilly, Pfizer, Sanofi, and Genmab. Comirnaty (COVID-19 vaccine) is its first commercialized product.

(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

Smucker Continues to Benefit From At-Home Food Consumption but Struggles to Stabilize Market Shares

Business Strategy and Outlook

Despite having leading positions in many categories (fruit spreads, peanut butter, dog treats, coffee, and cat food) Morningstar analysts believe that Smucker lacks an economic moat, either via its brand intangible assets or entrenched retail relationships. Morningstar analysis shows that for most of its sales base, Smucker does not possess pricing power and its market shares are slipping. This dilemma cannot be attributed to a lack of support, as Smucker’s brand investments exceed that of its peers and suspected that these expenditures are not as productive as its competitor.

Morningstar analysts expect that Smucker’s organic sales growth will average 2% annually over the long term, and it is also expected that market share in coffee and dog food will persist as Smucker struggles to compete with strong brands such as Starbucks  and BLUE. As per Morningstar analyst perspective, Smucker will be one of the few packaged food companies to realize lasting benefits from the pandemic, given the high-single-digit increase in pets adopted during the crisis and the likelihood that more flexible work arrangements should result in higher consumption of at-home coffee. This impact will not be immaterial, as collectively, pet food and coffee compose nearly 70% of Smucker’s sales. Further, Smucker’s sales trajectory should improve as Uncrustables (5% of fiscal 2021 sales) becomes a greater portion of the mix, as the brand has grown double-digits in each of the past several years. In addition, recent and pending divestitures of slower-growing brands (Crisco, Natural Balance, private label dry pet food, juices, and grains) should further improve Smucker’s ability to accelerate its top-line growth.

Financial Strength

After years of a conservatively leveraged balance sheet, with net debt/adjusted EBITDA consistently below 2 times, the Big Heart Pet Brands acquisition in 2015 increased the ratio to above 6. Net debt to adjusted EBITDA was 2.4 times in fiscal 2021. Smucker’s free cash flow as a percentage of revenue has averaged high single digits to low double digits historically and similar results are expected forward also. Smucker seeks to invest half of its capital in growth initiatives (capital expenditures and acquisitions) and return half to stakeholders via dividends, share repurchase, and debt reduction. Morningstar analysts expect that Smucker will invest 3.5% of annual sales in capital expenditures over the long term. Analysts also expect that Smucker will continue to reshape its portfolio through acquisitions and divestitures. The estimated dividend payout ratio will range between 40% and 50%, in line with management’s long-term targets, with forecasts anticipating 2%-6% annual dividend increases. Morningstar analysts also expect Smucker to repurchase 0%-5% of shares annually, which we view as a prudent use of capital if the share price remains below our fair value estimate.

Bulls Say

  • Smucker’s sales trajectory should improve over time due to the divestiture of slow-growing brands and the increasing mix of Uncrustables, which grows at a double-digit pace. 
  • During the pandemic, consumers adopted 11 million pets and purchased 3 million coffee machines, which should provide a lasting benefit for categories representing nearly 70% of Smucker’s fiscal 2021 sales. 
  • Executive leadership changes (newly created chief operating officer role, leadership changes for the U.S. sales organization and the pet food segment) should improve execution and enhance accountability.

Company Profile

J.M. Smucker is a packaged food company that primarily operates in the U.S. retail channel (88% of fiscal 2021 revenue), but also in U.S. food-service (5%), and international (7%). Its largest segment is pet food and treats (36% of 2021 revenue), with popular brands such as Milk-Bone, Meow Mix, 9Lives, Kibbles ‘n Bits, Nature’s Recipe, and Rachael Ray Nutrish. Its second-largest category is coffee (33% across channels) with the number-two brand Folgers and number-six Dunkin’. Other large categories are peanut butter (10%), with number-one Jif, fruit spreads (5%) with number-one Smucker’s, and frozen hand-held foods (5%) with number-one Uncrustables.

 (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

Raising Tesla FVE to $700 on Higher Near-Term Vehicle Volumes; Shares Remain Overvalued

Business Strategy and Outlook

Tesla is the largest battery electric vehicle automaker in the world. In less than a decade, the company went from a startup to a globally recognized luxury .Tesla also plans to sell multiple new vehicles over the next several years. These include a platform that will be used to make an affordable sedan and SUV, a light truck, a semi truck, and a sports car.

Tesla’s strategy is to maintain its market leader status as EVs grow from a niche auto market to reaching mass consumer adoption. To do so, the company is undergoing a massive capacity expansion to increase the number of vehicles it can produce. Tesla also invests around 5% of its sales in research and development, focusing on improving its market-leading technology and reducing its manufacturing costs. For EVs to see mass adoption, they need to reach cost and function parity with internal combustion engines. To reduce costs, Tesla focuses on automation and efficiency in its manufacturing process.To reach functional parity, EV will need to have adequate range, reduced charging times, and availability of charging infrastructure.Tesla continues to grow its supercharging network, which consists of fast chargers built along highways and in cities throughout the U.S., EU, and China. The company is attempting to take a larger share of its customers’ auto-related spending, which includes selling insurance and offering paid services such as autonomous driving functions.

Tesla also sells solar panels and batteries used for energy storage to consumers and utilities. As the solar generation and battery storage market expands, Tesla is well positioned to grow.

Raising Tesla FVE to $700 on Higher Near-Term Vehicle Volumes; Shares Remain Overvalued

On Jan. 2, Tesla reported strong fourth-quarter and full-year vehicle delivery numbers. On the year, Tesla reported 936,172 vehicles delivered, which is up over 87% year on year versus 2020. Morningstar analyst have updated our model to incorporate higher 2021 sales volumes and have raised our outlook for 2022 as well as forecasted that Telsa will deliver a little over 1.5 million vehicles in 2022, which represents over 60% year-on-year growth. Separately, Morningstar analyst have decreased  2022 gross margin forecast for Tesla as they increased production costs associated with the opening of the two new production plants in Austin, Texas, (U.S.) and in Berlin, Germany. Our long-term outlook is largely unchanged as we continue to expect Tesla’s sales growth will slow. Having updated model to reflect these changes, Morningstar analyst have increased Tesla fair value estimate to $700 per share from $680.

Financial Strength

Tesla is in solid financial health as cash and cash equivalents exceeded total debt as of Sept. 30. Total debt was roughly $8.2 billion; however, total debt excluding vehicle and energy product financing (nonrecourse debt) was around $2.1 billion. Cash and cash equivalents stood at $16.1 billion as of Sept. 30.To fund its growth plans, Tesla has used credit lines, convertible debt financing, and equity offerings to raise capital. In 2020, the company raised $12.3 billion in three equity issuances. Morningstar analyst thinks this makes sense as funding massive growth solely through debt adds near-term risk in a cyclical industry.Management has stated a preference to pay down all debt over time and continues to make progress on this goal. Regardless, with positive free cash flow generation and a clean balance sheet, we think Tesla could maintain its current levels

Bull Says

  • Tesla has the potential to disrupt the automotive and power generation industries with its technology for EVs, AVs, batteries, and solar generation systems. 
  • Tesla will see higher profit margins as it achieves its plan to reduce battery costs by 56% over the next several years. 
  • Through the combination of its industry-leading technology and unique supercharger network, Tesla offers the best function of any EV on the market, which should result in its maintaining its market leader status as EV adoption increases.

Company Profile

Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. The company sells solar panels and solar roofs for energy generation plus batteries for stationary storage for residential and commercial properties including utilities. Tesla has multiple vehicles in its fleet, which include luxury and midsize sedans and crossover SUVs. The company also plans to begin selling more affordable sedans and small SUVs, a light truck, a semi truck, and a sports car. Global deliveries in 2020 were roughly 500,000 units.

 (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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Shares Technology Stocks

Reinitiating Coverage of Ceridian HCM With Narrow Moat, Stable Trend Rating and $80 FVE

Ceridian offers payroll and human capital management solutions via its flagship Dayforce platform, secondary platform Powerpay targeting small businesses in Canada, and remaining legacy Bureau products such as tax services. The company benefits from high customer switching costs, allowing it to retain clients, upsell add-on modules, and earn a steady stream of recurring revenue at a low marginal cost, underpinning our narrow moat rating. Morningstar analysts expect Ceridian’s growing record of performance should help to attract new business, increase market share, and expand into new global markets. The shares currently screen as overvalued, trading at a 30% premium to our fair value estimate.

Ceridian has disrupted incumbent providers and taken share of the expansive and growing HCM market through the appeal of its agile, cloud-based solutions that offer an alternative to legacy on-premises solutions or solutions cobbled together using multiple databases or platforms. The company derives most of its revenue from Dayforce, which is geared to larger enterprises wishing to streamline complex human resources operations across multiple jurisdictions on a unified platform and leverage the platform’s scalable infrastructure. Dayforce offers real-time continuous payroll calculation and, as a natural extension, on-demand pay. Leveraging this functionality, Ceridian introduced Dayforce Wallet in 2020, which allows clients’ employees to load their net earned wages to a prepaid Mastercard, generating interchange fee revenue for Ceridian when purchases are made. While this innovation is being replicated by competitors, we expect it will create a promising new high-margin revenue stream for Ceridian that leverages the firm’s exposure to millions of employees and their earned wages.

Morningstar analysts estimate revenue to grow at an 18% compound annual rate over the five years to fiscal 2025, driven by mid-single digit industry growth, market share gains, and mid-single digit group revenue per client growth. As per Morningstar analyst perspective, 12% average annual growth in Dayforce recurring revenue per client due to an increasing skew to larger businesses and greater module uptake. This growth will be offset by low single-digit revenue growth per Powerpay client due to minimal price increases and modest module uptake. Across both platforms, Morningstar expects fierce competitive pressures to limit like-for-like pricing growth to low single digits. Over the same period,  expect operating margins to increase to about 14% from less than 1% in a COVID-19-affected 2020 and 9% in a pre-COVID 2019. We anticipate this uplift will be driven by operating leverage from increased scale and higher interest on client funds.

Ceridian has made a tactical shift to target larger businesses and move further upmarket into the large enterprise and global space. While this drives higher revenue per client and exposes the company to a larger pool of client funds, we expect fierce competitive pressures and powerful clients will lead to increased pricing pressure, limiting margin upside potential over the long run. Morningstar analysts assume Ceridian will achieve midcycle operating margins around 31% in 2030, which is comparable with our forecast for wide-moat Workday, which also targets large enterprises with its cloud-based HCM software. By comparison, morningstar analyst forecast wide-moat Paychex, which targets small and midsize clients with significantly lower bargaining power, will achieve mid cycle operating margins of 43%. Ceridian operates in a highly competitive market, and  expect it will need to maintain high levels of investment to ensure that the functionality of its product suite is comparable with peers’ and meets clients’ needs.

Company profile

Ceridian HCM provides payroll and human capital management solutions targeting clients with 100-100,000 employees. Following the 2012 acquisition of Dayforce, Ceridian pivoted away from its legacy on-premises Bureau business to become a cloud HCM provider. As of fiscal 2020, nearly 80% of group revenue was derived from the flagship Dayforce platform geared toward enterprise clients. The remaining revenue is about evenly split between cloud platform Powerpay, targeting small businesses in Canada, and legacy Bureau products.

(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

Erkan resigns as co-CEO of First Republic Bank; however, future is projected to be strong

Business Strategy and Outlook:

First Republic Bank is one of the more unusual banks. It has a uniquely focused business model, with a high service offering aimed at wealthy clients concentrated in costal urban areas. The bank is still led by its founder, Jim Herbert, and has been able to churn out remarkably high organic growth year after year, resulting in compounded asset growth of roughly 20% over the past 10 years compared with an industry growth rate of closer to 5%.

The great strength of First Republic Bank’s approach is the strict adherence to its strategy of retaining and attracting high-net-worth clients through uniquely personal service. This strategy requires retaining talent, which the bank accomplishes through its culture and compensation structure. As such, the bank’s efficiency levels tend to be middling compared with peers. However, this model has worked, and the bank is able to generate substantially lower client attrition rates and higher client satisfaction levels as measured through Net Promoter Score. The bank is also a conservative underwriter, with losses consistently coming in below peers through the cycle.

Financial Strength:

The fair value of this stock is $195 per share, which equates to 2.9 times tangible book value as of September.

First Republic Bank is in sound financial health. The bank reported a common equity Tier 1 capital ratio of 9.8% as of September 2021 and given its low appetite for risk and excellent underwriting record. The bank has consistently delivered superior performance in past recessions with very low credit costs and has also performed admirably through the pandemic-driven downturn. The banks loan book is conservatively positioned with more than 50% of mortgages and approximately 80% of loans collateralized by real estate. The bank has a favorable liability mix with total deposits making up approximately 90% of total liabilities with the remainder of liabilities made up of FHLB advances and long-term debt. The bank also had roughly $2.1 billion in preferred stock outstanding. The capital-allocation plan for First Republic Bank is quite atypical in our banking coverage as it regularly raises additional capital through share issuances to fund its aggressive growth. The bank does not engage in share buybacks and maintains a relatively low dividend pay-out ratio.

Bulls Say:

  • First Republic is a rare, high-growth bank in a mature industry that tends to see GDP-like asset growth levels. The bank is also a conservative underwriter. This is a valuable and powerful combination that should drive peer-beating earnings growth for years. 
  • First Republic’s wealth management business is growing assets at a solid double-digit percentage rate, further cementing switching costs and revenue growth. 
  • First Republic’s culture and structure are difficult to replicate, meaning, its business model should continue to take share and see success for years to come.

Company Profile:

First Republic offers private banking and wealth management services to high-net-worth clients. Services are primarily offered in the San Francisco, New York City, and Los Angeles markets. The bank was founded in 1985.

(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

Nordson Crop Is Poised to Deliver Strong Organic Growth Fueled by Advanced Technology Solutions

Business Strategy and Outlook

Nordson is a leading manufacturer of equipment used for dispensing adhesives, coatings, sealants, and other materials. The company enjoys strong market share across its business lines, and its products are often used in niche applications where competition is limited. Nordson differentiates itself by offering highly engineered and customizable solutions which perform a mission-critical role in a customer’s manufacturing process. Nordson thrives in times of change, as innovation in its end markets drives demand for new and improved solutions. In the long run, Nordson is poised to capitalize on favorable secular trends such as increasing adoption of 5G and autonomous vehicles, which we expect to create new opportunities for its dispensing business.

Financial Strength

Nordson’s financial health is satisfactory, which should help the firm navigate uncertainty due to the coronavirus outbreak. As of Oct. 31, 2021, the company owed $782 million in long-term debt while holding $300 million in cash and equivalents. Additionally, Nordson can tap into its $850 million revolving credit facility, which remains undrawn. It is estimated that Nordson will have a debt/adjusted EBITDA ratio of roughly 1.0 times in fiscal 2022, which is roughly in line with many of its industrial peers. Its generate that average annual cash flow of around $750 million over the next five years, sufficient to meet its debt obligations and maintain its dividend. After updating our model following Nordson’s 10-K release, its increase fair value estimate to $231 from $224. 

Bulls Say’s 

  • Nordson is poised to benefit from innovation in its end markets, including autonomous vehicles, 5G, and 3D wafer stacking, as new technologies drive demand for the firm’s dispensing solutions. 
  • Over half of Nordson’s revenue is recurring, which helps mitigate the firm’s exposure to cyclical end markets. 
  • Nordson has a large installed base of equipment and strong market share across a number of niche end markets.

Company Profile 

Nordson is a manufacturer of equipment (including pumps, valves, dispensers, applicators, filters, and pelletizers, among other equipment) used for dispensing adhesives, coatings, sealants, and other materials. The firm serves a diverse range of end markets including packaging, medical, electronics, and industrial. Nordson’s business is organized into two segments: industrial precision solutions (53% of sales in fiscal 2021) and advanced technology solutions (47% of sales in fiscal 2021). The company generated approximately $2.4 billion in revenue and $615 million in operating income in its fiscal 2021.

(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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Shares Technology Stocks

Gentex’s Balance Sheet Gives the Firm Strength to Handle the Unexpected

Business Strategy and Outlook

Gentex manufactures auto-dimming rear- and side-view mirrors that use electrochromic technology. These mirrors automatically darken to eliminate headlight glare for drivers and have many other applications. With over 1,700 patents worldwide, some valid through 2044, and a dominant 94% market share, up from 77% in 2003, Gentex has a narrow economic moat it should be able to protect for a long time, in our opinion. 

The growth prospects for auto-dimming mirrors look strong. Gentex estimates that in 2018, about 31% of all cars had interior auto-dimming mirrors, and about 13% had at least one exterior auto-dimming mirror. Demand remains healthy with annual revenue growth often exceeding industry vehicle production growth. Growth will come from increased vehicle penetration as more original-equipment manufacturers make the safety benefit of auto-dimming technology available and as Gentex’s research leads to new, advanced-feature mirrors that ultimately become standard products.

Financial Strength

Gentex is in excellent financial shape, with no debt and $270 million of cash on its balance sheet at the end of third-quarter 2021. Cash and investments were about 28% of total assets at that time. The company has ample cash on hand to fund more R&D or a higher dividend if the board chooses. Total cash and investments was $481.6 million, or $2.03 per diluted share. Gentex has been paying a dividend since 2003. Gentex took on $275 million of debt for the HomeLink acquisition which it finished paying off in 2018. In October 2018, Gentex obtained a new $150 million unsecured credit facility that expires in October 2023. 

Gentex can request an additional $100 million on the credit limit under certain conditions. The investments mostly consist of short-term government obligations, blue-chip stocks, and mutual funds. As of March 2018, the company targets cash and investments of $525 million, down from its previous target of $700 million. Management will often just speak in loose terms and say it targets around $500 million.

Bulls Say’s 

  • Auto-dimming technology has applications to other parts of the car like headlights, as well as outside autos such as airplane windows. Although small now, markets outside the auto industry could prove to be very large businesses down the road. 
  • The company’s financial health is so strong that we think Gentex can survive any downturn in the U.S. easier than other auto suppliers can. 
  • Biometrics, surgical room utlraviolet lighting, and electronic toll payments could open up new revenue streams for the company.

Company Profile 

Gentex was founded in 1974 to produce smoke-detection equipment. The company sold its first glare-control interior mirror in 1982 and its first model using electrochromic technology in 1987. Automotive revenue is about 98% of total revenue, and the company is constantly developing new applications for the technology to remain on top. Sales from 2020 totaled about $1.7 billion with 38.2 million mirrors shipped. The company is based in Zeeland, Michigan. 

(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.