Category: Technology Stocks

Tech stocks refer to any stock involved in the technology sector, from semiconductor producers to software providers. Tech stocks are often a leading indicator for the economy and the stock market. Technology stocks generally follow the pattern of more innovation in the market & new development of product.

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Technology Stocks

Five9 Makes Investment In AI Technology And Public Cloud To Capitalize On Strong Operating Leverage

Business Strategy & Outlook:

Five9 provides cloud-native contact center software that enables digital customer service, sales, and marketing engagement. A long growth runway and massive market opportunity is projected but also expect no-moat Five9 to require a high degree of investment activity moving forward as it squares off against larger competitors. Five9’s Virtual Contact Center, or VCC, platform combines core telephony functionality, omnichannel engagement capabilities, and various software modules into a unified cloud contact-center-as-a-service, or CCaaS, platform. Five9’s artificial intelligence and automation portfolio supplements and enhances the firm’s core CCaaS offerings, including solutions for digital self-service, agent assist technology, and workflow automation. VCC is expected to become increasingly critical for enabling omnichannel interactions amid a secular acceleration of digital-first customer engagement. 

With only 15% to 20% of contact center agents in the cloud, the residual opportunity around uncaptured communication data is significant. The increasing automation of contact center labor also presents an additional opportunity for Five9 and expect the firm’s rapidly growing AI and automation portfolio to enable both scale and efficiency gains for customers’ call center operations. Attach rates for these solutions are rising within each tier of customers, and higher attach rates in incrementally larger enterprises have been observed, a positive as the company advances its penetration in the upmarket. Reflecting the high utility businesses derived from the firm’s offerings, Five9 reports a net retention rate in excess of 120%. This expansion reflects both an increasing monetization of existing customers as well as the capture of new customers— principally driven by the migration of contact centers to the cloud. Nonetheless, the positive outlook has been tempered as heightening competition in the cloud contact center space has been noticed, with the emergence of natively built CCaaS offerings from other industry titans such as Zoom, Twilio, and Amazon.

Financial Strengths:

Five9 is in a decent financial position. As of March 2022, Five9 held $477.7 million in cash and short-term investments versus $737.9 million in debt. In May 2018, Five9 issued $258.8 million in 0.125% convertible senior notes, due 2023 and convertible at $40.82 per share. As of March 2022, approximately $2.3 million of the 2023 notes remained outstanding. In June 2020, Five9 issued an additional $747.5 million in 0.5% convertible senior notes, due 2025, convertible at $134.34 per share, and entirely outstanding as of March 2022. While there are no material concerns about Five9’s ability to finance this debt, the firm is expected to require future financing given the liquidity imbalance. 

Five9 has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company, primarily on an organic basis, to build out the platform and enhance future growth prospects. Five9 has invested heavily in internal innovation in recent years, building a sophisticated AI and automation portfolio in sales and marketing to build an enterprise-specific direct sales team in its professional services organization to enable an enterprise-heavy go-to-market motion and its public cloud to enable international growth. Five9 does not pay a dividend, nor repurchase stock, and for a growing company within an increasingly competitive market, an appropriate strategy would be the company focusing capital allocation on reinvestments for growth. Healthy growth in free cash flow is expected as industry tailwinds around digital transformations lead to long-term growth for Five9. Five9 reached non-GAAP profitability in 2017, posting both a positive non-GAAP operating margin and positive non-GAAP earnings from then on. As the company scales, non-GAAP operating margins are expected to reach into the low-40% range at the end of the 10-year forecast period, up from 14% in 2021. These positive results should translate to profitability on a GAAP basis by 2025. 

Bulls Say:

  • Five9 has strong user retention metrics, with net dollar retention above 120%. 
  • As the firm continues to expand its growing AI and automation portfolio, Five9 should benefit as automation of contact center labor will enable a larger incremental market opportunity, and AI-based technology commands a higher ASP per seat.
  • Five9 has a large residual market opportunity, with only about 15% to 20% of contact center agents having moved to the cloud so far.

Company Description:

Five9 provides cloud-native contact center software that enables digital customer service, sales, and marketing engagement. The company’s Virtual Contact Center platform combines core telephony functionality, omnichannel engagement capabilities, and various software modules into a unified cloud contact-center-as-a-service, or CCaaS, platform. Five9’s artificial intelligence and automation portfolio supplements and enhances the firm’s core CCaaS offerings, including solutions for digital self-service, agent assist technology, and workflow automation. Five9 also offers workforce optimization products that optimize call center efficiency through workforce management solutions, manage interaction quality, and track agent performance.

(Source: Morningstar)

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

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

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

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

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

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

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

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Technology Stocks

Change of Analyst for Boral; Our FVE Decreased 9% but Shares Remain a Bargain

Business Strategy & Outlook

The broadly supportive of Boral’s strategy. Boral’s strategic priorities revolve around four key pillars. The first pillar is largely complete and involves refocusing Boral’s operations on its Australian construction materials business through divestments of noncore assets. Divestments include USG Boral, the North American building products and fly ash businesses, and Meridian Brick. Boral’s second strategic priority is its transformation program, which is aiming to add up to 250 million in annual EBIT to the Australian business net inflation. The third pillar involves decarbonizing Boral’s operations. The final pillar focuses on exploring and commercializing innovations over the long term. The Boral has divested noncore business units and is looking to remove inefficiencies from its Australian operations. Profitably decarbonizing Boral’s operations is likely to be a drawn-out effort but is appropriate give the increasing focus on environmental, social, and governance factors in investment appraisal.

The medium-term outlook for Boral is reasonably strong. Boral derives around two thirds of group revenue from infrastructure and nonresidential construction projects such as roads, highways, subdivisions, bridges, and commercial buildings. The remaining one third of revenue is largely from residential construction activity across detached housing, apartments, and renovations. Buoyed by relatively strong macroeconomic conditions and favorable monetary and fiscal policy, the pipeline of construction and building projects is healthy and should underpin solid demand for Boral’s construction materials.

 However, Boral’s outlook is not free of challenges. The combination of a strong construction pipeline and limited migration of skilled workers during the coronavirus pandemic is expected to result in raw material and labour shortages. These headwinds have the potential to exacerbate cost pressures while increasing lead times for existing projects and/or halting projects altogether.

Financial Strengths

Boral’s balance sheet is in a strong position. Divestments of noncore operations including USG Boral, the North American building products and fly ash businesses, Meridian Brick, and Australian Timber, generated more than USD 4 billion in proceeds. Following AUD 3.1 billion in capital returns to shareholders throughout fiscal 2022, a modest net debt position of approximately AUD 200 million at year-end (including lease liabilities).

The Boral’s targeted level of leverage is manageable. In the longer term, Boral is seeking to maintain a net debt range of 2 times to 2.5 times EBITDA. An average dividend payout ratio of 70% over our forecast horizon, at the upper end of management’s 50%-70% target. The Boral will appropriately determine ordinary dividend payments subject to its financial position and broader construction market conditions.

Bulls Say

  • A strong pipeline of construction projects will stimulate demand for Boral’s construction materials over the medium term.
  • Boral’s transformation program will expand the profitability of the Australian operations and increase return on invested capital.
  • Boral’s divestments of noncore businesses leave management free to focus on generating value from the core Australian operations.

Company Description

Boral is an Australian vertically integrated building materials company with operations across quarries, cement, concrete, and asphalt. Having recently divested its noncore operations including its North American building products and fly ash businesses, USG Boral, and Meridian Brick, Boral’s operations are now focused on the Australian construction market.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Magna International Is a Well-Diversified Auto Parts Supplier With an Entrepreneurial Culture

Business Strategy & Outlook

Magna International is one of the largest, most diversified auto parts suppliers in the world. However, large and diversified is no guarantee of better returns for investors. While breadth in product

and services can be advantageous with regard to cross-selling–commercial activities that bolster content per vehicle and market penetration the only limited evidence that Magna’s diversified strategy has benefited investors in the form of higher margins and returns on invested capital.

Many suppliers focus on a particular area of the vehicle. In sharp contrast, Magna’s capabilities are so broad that the firm could nearly design, develop, supply, and assemble vehicles all on its own. In 2021, the firm contract manufactured roughly 125,600 vehicles, generating $6.1 billion in revenue and $287 million in adjusted EBIT for a margin of 4.7%. While Magna’s Complete Vehicle segment has a growth opportunity with startup electric vehicle companies, the operation is highly capital intensive with limited margin, constraining return on invested capital. Diversifying into so many areas increases the risk that management resources become spread too thin, allocation of capital resources may be less

than optimal, and the firm becomes less effective at developing expertise in any one area

 Magna is able to generate long-term excess returns on invested capital if its product offering was more focused but its customer base and geographical manufacturing footprint were better diversified. Everyone would also like to see more disclosure regarding research and development, especially with certain parts of the business focused on powertrain electrification and autonomous technologies. Even though Magna will benefit from these industry disruptive technologies, the degree of Magna’s product diversity dampens consolidated top-line growth and ROIC expansion potential from electric powertrain and vehicle autonomy. Even so, the firm’s healthy liquidity and balance sheet are able to support operations through severe industry downturns, such is the case with the coronavirus pandemic and microchip shortage.

Financial Strengths

Magna has a clean balance sheet with limited debt and ample liquidity. With average total debt/total capital at 11% for the past decade, interest expense is low, reducing risk to profits during a customer production downturn like that of the COVID-19 pandemic and the microchip shortage. Even so, the company has an inefficient capital structure, not taking advantage of the tax benefit of interest expense. With limited leverage on the balance sheet, Magna could make a relatively large acquisition if the right opportunity were to present itself. Magna’s capital needs have been primarily funded through equity and cash flow. The company has a $750 million undrawn unsecured revolving line of credit that was amended in December 2021 to mature in December 2022. Magna has a $1 billion U.S.-dollar denominated and a EUR 500 million euro denominated commercial paper programs. Including 2021 year-end cash balance of $2.9 billion, total liquidity, excluding commercial paper programs, is $3.7 billion. Netting cash against debt, net debt/EBITDA at the end of 2021 was 0.3 times.

Bulls Say

  • High switching costs and significant barriers to entry enable sticky market shares.
  • Incremental revenue from contracted new business provides revenue growth slightly above global industry production volume and should bolster operating leverage in the near term.
  • As automakers consolidate purchases with fewer suppliers, large vendors such as Magna are in the best position to gain share because they can offer a wide range of parts, modules, and complete systems.

Company Description

Magna International prides itself on a highly entrepreneurial culture and a corporate constitution that outlines distribution of profits to various stakeholders. This automotive supplier’s product groups include exteriors, interiors, seating, roof systems, body and chassis, powertrain, vision and electronic systems, closure systems, electric vehicle systems, tooling and engineering, and contracted vehicle assembly. Roughly 46% of Magna’s revenue comes from North America while Europe accounts for

approximately 43%.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

United Rentals Benefits From Strong Rental Equipment Demand, Despite Tight Industry Supplies

Business Strategy & Outlook

The United Rentals will continue to be the top player in the equipment rental industry. As the industry leader, the company provides customers better equipment availability and reliability than smaller players. However, many of the equipment brands found in United Rentals’ product catalog can also be found at other competitors, such as Sunbelt Rentals (owned by Ashtead), Herc, and at thousands of other rental companies across North America.

United Rentals has employed an aggressive mergers and acquisitions strategy, completing hundreds of acquisitions over the past two decades. The company to continue rolling in smaller rental companies onto its rental platform, further expanding its geographical reach and fleet categories.  The equipment rental industry is ripe for consolidation and United Rentals will be a beneficiary, but so too will its competitors. The company will likely be competing with other players looking to build scale. In terms of its branch network, United Rentals operates approximately 1,300 rental locations throughout North America, significantly more than the next-largest player, Sunbelt Rentals, which operates over 900 locations in the region. The company is also increasingly extending into the specialty equipment vertical (28% of sales), which includes trench safety, power and HVAC, and fluid solutions.

Finally, the company has exposure to end markets with near-term, attractive tailwinds. The construction and industrial markets will continue to improve from their pandemic lows. Nonresidential construction spending has been depressed, but this trend will reverse over the next few years as economic growth will spur new project development for industrial, retail, hotel, and office markets. The total addressable market for the equipment rental industry will continue to expand as rental penetration increases. More and more contractors are electing to rent general equipment (aerial lifts, forklifts, generators) that are intermittently used on projects. This allows them to save on project costs.

Financial Strengths

United Rentals maintains a sound balance sheet. Total debt at the end of 2021 stood at $9.7 billion, which equates to a net debt/adjusted EBTIDA ratio of 2.2 times. The company can get its net leverage ratio under 2 times over the forecast. This will largely be not only led by the expectations of increasing rental penetration, but also thanks to improving macroeconomic factors, such as higher construction and industrial spending. These factors to boost United Rentals’ adjusted EBITDA. The company’s solid balance sheet gives management the financial flexibility to continue running its growth-focused capital allocation strategy going forward that mostly favors expanding its equipment fleet, particularly specialty equipment.

 United Rentals can generate solid free cash flow throughout the economic cycle. By the midcycle year, and the company to generate nearly $2.7 billion in free cash flow, supporting its ability to return free cash flow to shareholders. Similar to previous years, the United Rentals’ capital allocation strategy to be heavily focused on building out its equipment fleet and making tuck-in acquisitions. The management will continue to buy back shares, but there is no expected dividend to paid out in the near term. In terms of liquidity, the company can meet its near-term debt obligations given its access to credit facilities, approximately $2.6 billion in 2021. The company’s cash position stood at $144 million, which is lower than some of the other companies under the coverage, but the comfort in United Rentals’ ability to liquidate rental equipment on its balance sheet in the event of an economic downturn. In United Rentals maintains a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say

  • Increased equipment rental penetration in North America could result in more general equipment rentals, driving higher revenue growth for United Rentals.
  • Construction and industrial spending may begin to recover from pandemic lows, creating demand for United Rentals’ products.
  • United Rentals’ growing focus on building up its specialty fleet could lead to higher dollar utilization and increased profitability.

Company Description

United Rentals is the world’s largest equipment rental company, and principally operates in the United States and Canada, where it commands approximately 15% share in a highly fragmented market. It serves three end markets: general industrial, commercial construction, and residential construction. Like its peers, United Rentals historically has provided its customers with equipment that was intermittently used, such as aerial equipment and portable generators. As the company has grown organically and through hundreds of acquisitions since it went public in 1997, its catalog (fleet size of $16 billion) now includes a range of specialty equipment and other items that can be rented for indefinitely long time periods.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Smith & Nephew Seeks to Expand Presence in ASCs; Modestly Lowering Our Fair Value Estimate

Business Strategy & Outlook

Impressive innovation has allowed Smith & Nephew to carve out a slice of the orthopedic, sports medicine, and wound-care markets. Though the company is smaller than the dominant orthopedic competitors, it has punched above its weight in terms of introducing meaningful innovation with its pioneering hip resurfacing implant and knee replacements with Verilast technology, which it contends can last for 30 years. These are significant improvements that exceed the evolutionary innovation typically seen in orthopedics.

Nevertheless, as the competitive set consolidates, Smith & Nephew’s position as a midsize competitor leaves it vulnerable as the hospital customer base seeks to reduce vendors to save costs. The firm’s market share–about 10% of hips and knees–translates into a tenuous position. Share shifts in this market are glacial at best, thanks to significant switching costs, and new technology does not necessarily overcome those switching costs. Smith & Nephew’s strong show of meaningful innovation translated into a mere 200-basis-point gain in share over the past decade. This showdown between technical innovation and the stickiness of surgeon preference underscores how difficult it is to induce practitioners to switch. This dynamic and Smith & Nephew’s smaller user base mean the firm could find itself locked out of more hospitals and healthcare systems in the future.

The firm has been aggressively pivoting to reduce its reliance on large-joint replacement with the acquisition of ArthroCare for its arthroscopy and sports medicine presence, concerted efforts to penetrate emerging markets, and the new additions of Osiris Therapeutics for its regenerative products and Leaf Healthcare’s pressure sore-monitoring system. The jury is still out on whether this is enough to allow Smith & Nephew to compete effectively against competitors that continue to grow larger and remain independent. As the market moves gradually toward more vendor consolidation, Smith & Nephew eventually pair up with a larger rival, such as Stryker or Johnson & Johnson, in order to better compete.

Financial Strengths

Thus far, the little to make us nervous about Smith & Nephew’s financial flexibility. While the firm has periodically made acquisitions, it has also generated enough cash to deleverage in relatively quick fashion. For example, following the acquisitions of Osiris in 2019, debt/EBITDA rose to just over 4 times, but has moderated since then. Smith & Nephew can easily meet its interest obligations many times over. Prior to the pandemic, the firm consistently held net debt/EBITDA around 1 time. As with other med tech firms, Smith & Nephew issued debt in 2020 to enhance its cash cushion in the face of uncertainty. With procedure volume resuming, the firm to end the year with net debt/EBITDA around 2.3 times and for further deleveraging in the ensuing years. This still leaves plenty of flexibility for management to leverage up, if management decides to further round out Smith & Nephew’s portfolio in adjacent areas to its core markets. At this point, the firm can fund ongoing operations and support its intention to make regular share repurchases with its cash flow, but it may use debt financing for more large acquisitions.

Bulls Say

  • Smith & Nephew participates in the fast-growing sports medicine arena thanks to its extensive arthroscopy portfolio.
  • A strong arthroscopy presence in ambulatory surgical centers leaves Smith & Nephew well positioned to expand its large joint footprint in that setting.
  • Smith & Nephew has been building out its presence in emerging markets. Considering the obstacles in developed markets that keep it from transforming into a top-tier player, S&N may enjoy greater upside in developing markets.

Company Description

Smith & Nephew designs, manufactures, and markets orthopedic devices, sports medicine and arthroscopic technologies, and wound-care solutions. Roughly 42% of the U.K.-based firm’s revenue comes from orthopedic products, and another 30% is sports medicine and ENT. The remaining 28% of revenue is from the advanced wound therapy segment. Roughly half of Smith & Nephew’s total revenue comes from the United States, just over 30% is from other developed markets, and emerging markets account for the remainder.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Pegasystems’ Management sizes the market at $50 billion, which includes both customer engagement and BPM

Business Strategy and Outlook

It is alleged Pegasystems is well established in the business process management, or BPM, software niche and further benefits from related customer engagement applications. It is anticipated the company to remain a leading provider in the coming years as it moves customers to its new Pega Infinity platform, which unifies customer engagement with automation. It is held that, the model transition was complicated in the early going, but it is moving to the scaling phase where Pegasystems’ financials should begin to improve going forward. High retention and long customer relationships are testament to the company’s switching-cost-driven narrow moat. 

BPM software allows customers to streamline operations by automating business processes. Pegasystems’ no- and low-code platform allows the business user, rather than a software engineer, to automate the workflow in a way that matches the business need. There are a variety of templates for common uses that customers can draw from to further expedite the automation. Users can also draw from any previous work their company has done on the platform, employing chunks of code many times over. This allows for common processes to be written once and used repeatedly, thereby lowering costs and decreasing the time between process or application updates. The software was initially used in call centres. While customer engagement more broadly remains the primary driver, a wide variety of uses involving many complicated business processes have been brought into the fold. Lastly, the software allows for users to “build for change,” meaning once software-driven processes are in place, they can be changed quickly on the fly so that all similar uses are also updated. 

Pegasystems has long been considered a leader in BPM and a contender in other niches. Management sizes the market at $50 billion, which includes both customer engagement and BPM. It is renowned, that the Pega platform is a high-end solution that larger enterprises with a high level of customer interactions would undertake.

Financial Strength

It is probable Pegasystems is financially sound, perhaps with a negative bias in the short term. The model transition to the cloud is now near the halfway point, suggesting that margins either bottomed in 2021 or perhaps will bottom in 2022 and will recover from there, while revenue growth will similarly accelerate and remain more robust for the next several years. It is foreseen by now software investors have had a chance to observe this pattern many times and recognize it for the better model that it is. It is likely, margins will expand and growth will accelerate and return to a more fully formed financial model in 2024. Management, customers, and investors alike all prefer the predictable subscription model over the lumpy perpetual license model. That said, it is accredited that the uncertainty inherent in reinventing the business. As of Dec. 31, 2021, Pegasystems had $363 million in cash and equivalents, with $600 million in face value convertible notes. It is anticipated free cash flow margins will bottom in 2022 and will improve steadily over the next several years. At the heart of this is the familiar transition to a subscription model. No reason can be seen why operating margin will not expand to at least 20% over time, driving free cash flow margins higher as well. It is likely, that it is possible the company will need to complete a nominal capital raise—less than 1% of the market cap, within the next several years as the model normalizes. In terms of capital deployment, Pegasystems pays a dividend and occasionally makes acquisitions. Acquisitions are typically small technology-driven deals. The company pays a $0.03 per share quarterly dividend which totalled approximately $10 million in both 2020 and 2021. It is renowned it is unusual for a smaller publicly traded software company to pay a dividend. Management has repeatedly reiterated it is committed to paying the dividend.

Bulls Say’s

  • The company has long been a leader in BPM, where uses are proliferating in an effort to increase productivity and lower costs. 
  • Pegasystems has a differentiated product with a rule’s engine, process templates, a low-code development platform, robotics, and integrated customer engagement applications. 
  • Moving to a cloud-driven solution should allow for a yearslong path of margin improvement and much better revenue visibility.

Company Profile 

Founded in 1983, Pegasystems provides a suite of solutions for customer engagement and business process automation. The company’s key offering is the Pega Infinity platform, which combines business process automation with customer engagement applications. 

(Source: MorningStar)

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

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

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

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

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

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

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

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Technology Stocks

Alibaba Increased Its Share Buyback Program to USD 25 Billion From USD 15 Billion

Business Strategy & Outlook

Alibaba BABA is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and online-to-offline services. A strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba.

Alibaba’s internet services had annual active consumers of 953 million as of September 2021, versus the 1.2 billion online population in September 2021 per Quest mobile and the 1.4 billion population in China. This provides Alibaba with an unparalleled source of data that it can use to help merchants and consumer brands develop personalized mobile marketing and content strategies to expand their target audiences, increase click-through rates and physical store transactions, and bolster return on investment. Alibaba’s marketplace monetization rates have reduced recently, due to increased compliance of antitrust laws, more competition, and weak consumer sentiment. Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD.

While the Taobao/Tmall marketplaces as Alibaba’s core cash flow drivers, AliCloud and globalization offer long-term potential. While AliCloud will remain in investment mode in the medium term, accelerating revenue per user suggests a migration to value-added content delivery and database services that can drive segment margins higher over time. On globalization, third-party merchants are successfully reaching Lazada’s users across Southeast Asia, something that should continue as the company rolls out incremental personalized mobile marketing and content opportunities. While early, the management’s views about Ele.me offering incremental monetization opportunities from Alibaba’s user base.

Financial Strengths

Alibaba is in sound financial health. As of December 2020, the company had CNY 456 billion in cash and unrestricted short-term investments on its balance sheet against CNY 117 billion in short- and long-term bank borrowing and unsecured senior notes. Although Alibaba remains in investment mode, the strong cash flow profile of its e-commerce marketplaces offers it the financial flexibility to continue investing in technology infrastructure and cloud, research, marketing, and user experience

initiatives through its current balance sheet and strong cash flow profile. Additionally, the company has the capacity to add leverage to its capital structure, which could allow it to take advantage of low borrowing rates to fund growth initiatives, introduce a cash dividend when it sees limited investment opportunities with good returns on investment, or repurchase shares. The company to pursue acquisitions that could further improve its ecosystem, including online-to-offline, physical retail, and increased logistic capacity or capabilities.

Bulls Say

  • Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD.
  • Core annual active users on Alibaba’s China retail marketplaces had a retention rate of over 90% for the year ended September 2021.
  • Alibaba’s core commerce (which includes China marketplace-based businesses and other loss-making businesses) adjusted EBITA margin was 26.2%, higher than JD retail’s 2.3% non-GAAP EBIT margin and PDD’s 15.2% non-GAAP EBIT margin for the September quarter of 2021.

Company Description

Alibaba is the world’s largest online and mobile commerce company as measured by gross merchandise volume (CNY 7.5 trillion for the fiscal year ended March 2021). It operates China’s online marketplaces, including Taobao (consumer-to-consumer) and Tmall (business-to-consumer).

Alibaba’s China commerce retail division accounted for 63% of revenue in the September 2021 quarter. Additional revenue sources include China commerce wholesale (2%), international retail/wholesale marketplaces (5%/2%), cloud computing (10%), digital media and entertainment platforms (4%), Cainiao logistics services (5%), and innovation initiatives/other (1%).

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Solid Quarter as Blackbaud Progresses Towards Rule of 40 Goals; FVE Down to $74

Business Strategy & Outlook:  

Blackbaud is deeply entrenched in the social-good community and expect its leadership to continue to drive the space forward over the long term as it transitions to a subscription model. Such transitions tend to pressure near-term results, but the worst is behind the company and that results should naturally improve over the next couple of years. The company as among the most negatively affected from the pandemic within the software coverage, so as the world returns to normal, Blackbaud is benefiting. Blackbaud has employed an acquisition strategy to expand its addressable market. Its portfolio has grown to be the broadest in the nonprofit vertical, with Blackbaud becoming the leading software provider by virtue of its complete end-to-end platform, including a searchable database of charitable donors, customer relationship management, campaign management, grant management, payment processing, fund accounting, and other specialized enterprise resource planning functionality, as well as domain-specific solutions for education, healthcare, and faith-based institutions. 

Blackbaud has also re-engineered its once-on-premises solutions to be available via the Sky platform, which makes the portfolio more holistic and easier to add modules. Because existing clients drive the bulk of revenue, and the company’s business model transition to remain important over the next couple of years. That said, as a result of its thought leadership and strong portfolio, the company enjoys strong customer retention in the low to mid-90% area. With much of the product work complete, the company is focusing on adding sales reps and driving revenue. The market opportunity remains large. About 25% of charitable donations in 2020 were made on Blackbaud’s platform. With 1.6 million nonprofits in the U.S., and only 40,000 customers, there is clearly room to grow in its core, which will help pull along domain sales. Management pegs its addressable market at $20 billion. The growth is expected to come from both further penetration with additional products in larger clients, as well as the accumulation of new logos.

Financial Strengths: 

Blackbaud is a financially sound company. Revenue is growing in the mid-single-digit area, margins are low but expanding, and the balance sheet is in reasonable shape. The revenue slowdown from the high-single-digit range and the margin contraction to midsingle digits are explained by a business model transition to subscriptions. By now the investors have had a chance to observe this pattern many times and recognize it for the better model that it is. The margins will expand and growth will accelerate as the transition progresses over the next several years. Management, customers, and investors all prefer the predictable subscription model over the lumpy perpetual license model. As of Dec. 31, 2021, Blackbaud had $55 million in cash and equivalents, offset by $956 million in debt, which results in a net debt position of $901 million. The EVERFI acquisition added $300 million to debt. The credit facility was extended and expanded to $900 million in October of 2020. Nominal payments continue to be $8 million annually. The free cash flow margins shall improve materially over the next several years, however, driven by an increase in operating margins. At the heart of this is the familiar transition to a subscription model. There is no reason why operating margin will not expand to at least 20%. In terms of capital deployment, Blackbaud has debt to pay down and makes acquisitions. Blackbaud will have to refinance its debt, as there isn’t enough free cash flow to fully repay the entire amount. The debt balance is from various acquisitions over the last several years. It is expected the acquisitions to continue, but perhaps at a more muted pace over the next several years. In April 2020 the company eliminated its modest $0.12 quarterly dividend.

Bulls Say: 

  • Blackbaud is a clear leader in the niche fundraising and nonprofit market, with CRM, financial management, and a variety of other modules that combine to create a comprehensive software platform.
  • Blackbaud has largely eliminated its closest competitors by acquiring them, primarily through the Convio, MicroEdge, Smart Tuition, and JustGiving acquisitions over the past few years. 
  • Blackbaud’s commitment to the cloud is paying off, as most of the firm’s revenue is now generated by subscriptions, which boast strong lifetime value from customers.

Company Description: 

Founded in 1981, Blackbaud provides a suite of software solutions targeted at the “social good” community, including nonprofits, foundations, corporations, education institutions, healthcare institutions, and individual activists. Through mergers, acquisitions, and organic product development, the company has also moved into related areas outside of core fundraising, notably into K-12 schools. Blackbaud enables more than $100 billion in donations annually across a customer base in excess of 40,000 customers in at least 50 countries.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Visa Inc – The Board declared a quarterly cash dividend of $0.375 per share

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Investment Thesis

  • Stands to benefit from the increased digitization of money with the global amount of payments made via card or digitally exceeding physical cash for the first time in 2016.
  • Expansion of new flows and use cases. 
  • Visa stands to benefit from the improving momentum in Europe and India.
  • Strong partnerships with first class financial institutions including increased ease in working with fintech partners (as Visa opens up its APIs to fintechs).
  • Continued investment in technology and cyber security.
  • Strong management team.
  • Solid fundamentals with recurring revenues, high incremental margins, low capital expenditure and high free cash flow.

Key Risks

  • Cyber security attacks.
  • Increased regulatory environment and government-imposed restrictions on payment systems. Antitrust remains a hot topic in the market. 
  • Margin deterioration due to intense competition from alternative payment processing providers.
  • Higher expenses and incentives.
  • Deterioration in global growth or consumption.

Key Highlights

  • 3Q22 net revenues to grow at the upper end of the mid-teens range (in CC – FX to be -2.5% drag) including +0.5% contribution from Tink and Currencycloud, incentives to be 26.5-27.5% of gross revenues, non-GAAP operating expenses to grow in the mid-teens (in CC – FX to be a tailwind of 1.5%) including expense savings from Russia and +3% of added expense from Currencycloud and Tink and tax rate to be 19-19.5%, with 4Q22 trends to be generally in line with 3Q22.
  • FY22 net revenue growth in in the high-teens to 20% range (in CC – FX to be a headwind of 2%) including +0.5% from contribution from Tink and Currencycloud (vs prior guidance of high-end or mid-teens net revenue growth in CC), incentives as a percent of gross revenues of 25.5-26.5% (vs prior guidance of 26-27%), non-GAAP operating expense growth at the upper end of mid-teens (in CC – FX to be tailwind of 1.5%), including savings from the suspension of Russian operations and +2% of added expense from Currencycloud and Tink (vs prior guidance of low teens YoY operating expenses growth), and tax rate of 19-19.5%. 
  • Starting March 2022, the Company has suspended its operations in Russia (for FY21 and 1H22, Russia amounted for ~4% of total consolidated net revenues) and deconsolidated its Russian subsidiary and is no longer generating revenue from domestic and cross-border activities related to Russia. V expects the exit to reduce 2H22 revenues by -4% YoY. 
  • The Board declared a quarterly cash dividend of $0.375 per share of class A common stock, flat QoQ and up +17% YoY. 
  • The Company repurchased a total of 33.3 million shares of class A common stock in 1H22, at an average price of $210.11 per share, using $7bn of cash on hand, leaving $9.7bn of remaining authorized funds for share repurchase. 

Company Description

Visa Inc. is the world’s leader in digital payments and one of the most recognized brands around the world, with a mission to connect the world through innovative, reliable and secure payment network, enabling individuals, businesses and economies to thrive. The Company’s advanced global processing network, VisaNet, facilitates authorization, clearing and settlement of payment transactions, providing secure and reliable payments across borders and within countries. The Company operates in party models, which include card issuing financial institutions, acquirers and merchants. The Company’s products/services include core products, processing infrastructure, transaction processing services, digital products, merchant products, and risk products and payment security initiatives. Its relentless focus on innovation is a catalyst for the rapid growth of connected commerce on any device, and a driving force behind the dream of a cashless future for everyone, everywhere.

(Source: Banyantree)

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

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

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

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

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

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

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

Categories
Technology Stocks

Jacobs will continue to expand its critical mission solutions business

Business Strategy & Outlook

Since taking the helm in 2015, CEO Steve Demetriou has transformed Jacobs’ portfolio to increase recurring revenue and reduce cyclicality. In 2017, Jacobs acquired CH2M for $3.3 billion to bolster its presence in the transportation, water, nuclear, and environmental services end markets. In April 2019, Jacobs completed the sale of its energy, chemicals, and resources (ECR) business to WorleyParsons for $3.3 billion. Jacobs operates three business segments: critical mission solutions, people & places solutions, and PA Consulting.

Jacobs’ portfolio transformation favorably. As the ECR segment had high exposure to volatile oil and gas prices, and its operating margins have long lagged those of the firm’s other segments, the divestment will lower the risk and boost the margins of Jacobs’ portfolio. Furthermore, the strategic fit of the CH2M acquisition, as the deal has bolstered the firm’s nuclear business, allowing it to become a Tier 1 nuclear services provider, and increased Jacobs’ exposure to end markets that will benefit from favorable long-term trends, including water and transportation.

 Jacobs will continue to expand its critical mission solutions business through strategic M&A, particularly focusing on opportunities that would allow the firm to enhance its capabilities in cybersecurity, IT, and predictive analytics. In the long-run, the company is poised to capitalize on multiple favorable secular drivers, including infrastructure modernization, space exploration, intelligence analytics, energy transition, supply-chain investments (particularly in the semiconductor and life sciences end markets), and the 5G buildout. Jacobs is well-positioned to benefit from the $1.2 trillion infrastructure bill in the U.S., given the firm’s strong position in areas such as water and transportation infrastructure.

Financial Strengths

Jacobs maintains a sound capital structure. As of December 2021, the firm owed approximately $3.1 billion in long-term debt, while holding roughly $1.2 billion in cash and cash equivalents. The company will have a debt/adjusted EBITDA ratio of roughly 2 times in fiscal 2022. At the recent Investor Day, management indicated that it would be willing to increase the leverage ratio up to around 3 times to fund M&A but would generally reduce leverage following any potential acquisitions. Jacobs’ financial health is satisfactory, considering the firm’s ability to generate cash flows throughout the business cycle.

Bulls Say

  • Management has shifted Jacobs’ portfolio toward sectors with favorable long-term prospects, including transportation and water.
  • The sale of the ECR business to WorleyParsons should reduce the risk of Jacobs’ remaining portfolio by lowering its exposure to volatile oil and commodity prices. Additionally, following the divestment, roughly two thirds of the remaining segments’ revenue is recurring.
  • The operating margins to expand due to synergies from the CH2M acquisition, SG&A cost reductions, and favorable mix shift.

Company Description

Jacobs Engineering is a global provider of engineering, design, procurement, construction, and maintenance services as well as cyber engineering and security solutions. The firm serves industrial, commercial, and government clients in a wide variety of sectors, including water, transportation, healthcare, technology, and chemicals. Jacobs Engineering employs approximately 55,000 workers. The company generated $14.1 billion in revenue and $1.2 billion in adjusted operating income in fiscal 2021.

(Source: Morningstar)

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