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

Snowflake Inc shifting to subscription model from a usage-based model for boosting its Monetization of products

Business Strategy and Outlook

In the past 10 years, Snowflake has culminated into a force that is far from melting, in our view. As enterprises continue to migrate workloads to the public cloud, significant obstacles have arisen, compromising performance of data queries, creating hefty data transformation costs, and yielding erroneous data. Snowflake seeks to address these issues with its platform, which gives all of its users access to its data lake, warehouse, and marketplace on various public clouds. Snowflake has a massive runway for future growth and should emerge as a data powerhouse in the years ahead. 

Traditionally, data has been recorded in and accessed via databases. Yet, the rise of the public cloud has resulted in an increasing need to access data from different databases in one place. A data warehouse can do this, but still does not meet all public cloud data needs–particularly, in creating artificial intelligence insights. Data lakes solve this problem by storing raw data that is ingested into AI models to create insights. These insights are housed in a data warehouse to be easily queried. Snowflake offers a data lake and warehouse platform, which cuts out significant costs of ownership for enterprises. Even more valuable, in our view, is that Snowflake’s platform is interoperable on numerous public clouds. This allows Snowflake workloads to be performant for its customers without significant effort to convert data lake and warehouse architectures to work on different public clouds. 

The amount of data collected and analytical computations on such data in the cloud will continue to dramatically increase. These trends should increase usage of Snowflake’s platform in the years to come, which will, in turn, strengthen Snowflake’s stickiness and compound the benefits of its network effect. While today Snowflake benefits from being unique in its multicloud platform strategy, it’s possible that new entrants or even public cloud service providers will encroach more on the company’s offerings. Nonetheless, Snowflake is well equipped with a fair head start that will keep the company in best-of-breed territory for the long run.

Financial Strength

Snowflake is financially stable, given the early stages of the company, analyst is confident it will generate positive free cash flow in the long term. Snowflake had cash and cash equivalents of $3.9 billion at the end of fiscal 2021 with zero debt on its balance sheet. Undergoing its IPO in the 2020 calendar year, Snowflake raised over $3 billion from the offering. The cash generated from its IPO will act as ample buffer for Snowflake to keep its cash and cash equivalents positive without taking on debt over the next 10 years. It is forecasted that Snowflake will become free cash flow positive in 2026, after which it is believed, it will continue to invest heavily back in its business rather than distributing dividends or completing major repurchases of its stock. 

Bulls Say’s

  • Snowflake could remain the only multicloud offering of its kind for much longer than anticipated, allowing it to increase its top line more with minimal pricing pressure. 
  • Snowflake could move to a subscription model from a usage-based model, boosting its monetization of its products. 
  • Snowflake could expand to other multicloud data needs, pushing spending per customer to greater heights.

Company Profile 

Founded in 2012, Snowflake is a data lake, warehousing, and sharing company that came public in 2020. To date, the company has over 3,000 customers including nearly 30% of the Fortune 500 as its customers. Snowflake’s data lake stores unstructured and semi structured data that can then be used in analytics to create insights stored in its data warehouse. Snowflake’s data sharing capability allows enterprises to easily buy and ingest data almost instantaneously compared with a traditionally months-long process. Overall, the company is known for the fact that all its data solutions that can be hosted on various public clouds.

(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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REA reports solid revenue up by 25%, EBITDA up by 27%

Investment Thesis:

  • Clear no. 1 market position in online property classifieds, with consumers spending over more time on realestate.com.au app than the number two website. 
  • Growth opportunities via expansion into Asia and North America.
  • Recent strategic partnerships with National Australia Bank (property finance) could potentially be positive in the long term. 
  • Upside in key markets – particular in areas where REA is under-penetrated and could potentially win market share from competitors. 
  • New product developments to increase customer experience. 
  • Regular price increases help offset listing pressure. 

Key Risks:

  • Competitive pressures lead to a further de-rating of the PE-multiple.
  • Volume (listings) outlook remains subdued in the near term. 
  • Execution risk with Asia/North America strategy.
  • Failing to get an adequate return on the recent acquisition of iProperty.
  • Value/EPS destructive acquisitions. 
  • Decline in Australian property market.
  • Given REA trades on a very high PE-multiple, underperforming to market estimates can exacerbate a share price de-rating.
  • Recent tightening of lending practices by banks would affect Financial services business.

Key highlights:

  • REA reported a strong 1H22 result which was largely in line with expectations. 
  • Relative to the previous corresponding period (pcp), group underlying revenue was up +25% to $590m, operating earnings (EBITDA) of $368m (incl. associates) was up + 27% and NPAT of $226m was up +33%. 
  • The core Australian residential business did the heavy lifting, with revenue up +31%, driven by solid residential buy listings growth of +17% over the half (up +11% in 1Q & up +22% in 2Q despite lockdowns in Melbourne & Sydney).
  • Management did note that listings in Jan-22 had been unusually high which may lead to a decent 3Q performance, however 4Q is likely to be lower.
  • The current negative sentiment towards technology stocks in an increasing interest rates environment also adds further pressure to REA’s share price.
  • Relative to the previous corresponding period (pcp), group underlying revenue was up +25% to $590m, operating earnings (EBITDA) of $368m (incl. associates) was up + 27% and NPAT of $226m was up +33%.
  • REA delivered positive operating jaws over the half = revenue up +25% – operating expenses growth +17%, with growth in costs driven by higher headcount and salaries in a tight labour market.

Company Description: 

REA Group (REA) provides online property listings, web management, financial services and data analytics to the real estate industry via advertising services. For consumers, REA offers the largest online real estate search engine in Australia. The Company also has operations and growing presence in Asia and other parts of the world.

(Source: Banyantree)

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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Technology Stocks

Netflix Inc Subscriber Growth Slows Down; while Reported Improved profitability in 4Q21

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Investment Thesis

  • Trades on multiples which are susceptible to de-rating should growth rates miss expectations.
  • An increase and escalation of intense competition by rivals such as Walt Disney (Disney+) and Apple Inc (Apple TV+).
  • NFLX is transitioning from solely content distribution to content creation which presents execution risk.
  • Significant existing user base, which is continuing to grow strongly, particularly in the International market. 
  • Competitive positioning globally, as a market leader not only in the industry but starting to carve a leading position against cable television.  
  • International expansion opportunities across emerging markets as well as solidified position in established markets (US). 
  • Exclusive contracts with best producers including Sony Entertainment, Warner Bros and Universal Pictures. 
  • Growing demand for Netflix exclusives.
  • Flexibility to pick up content driven away by TV to customize viewing according to user tastes and preferences. 

Key Risk

  • High valuation and trading multiples which are susceptible to de-rating should growth rates miss expectations.
  • Escalation of intense competition and streaming wars, especially with Walt Disney(DIS) who own a strong content portfolio covering Disney, Pixar, Marvel, Star Wars, and National Geographic brands and sports streaming service ESPN+. DIS also holds a majority stake in Hulu, which is an online streaming service provider.
  • Execution risks around content creation versus content distribution.
  • Increasing competition based on price or exclusive content contracts.
  • Investment into original content creation fails to live up to the success of exclusive contract deals of existing content. 
  • Bandwidth issues in emerging economies posing difficulties in penetrating these markets.
  • The long-term and fixed cost nature of content commitments hinder NFLX’s operating flexibility.

FY Q21 Results Summary

  • Revenue grew +16% over pcp with a +8.9% increase in average paid memberships and +7% increase in ARM (average revenue per membership) on both a reported and FX neutral basis. The Company ended the quarter with 222million paid memberships with 8.3million paid net adds in the quarter, with UCAN region adding 1.2million paid memberships (vs 0.9million in pcp), marking strongest quarter of member growth in this region since the early days of Covid-19 in 2020. APAC grew paid memberships by 2.6million (vs 2million in pcp) with strong growth in both Japan and India. EMEA was the largest contributor to paid net adds adding 3.5million vs 4.5million in pcp and LATAM delivered paid net adds of 1million vs 1.2million in pcp. 
  •  Operating margin of 8.2% was down -620bps over pcp driven by large content slate in the quarter (margin was above beginning of quarter forecast of 6.5% due to slightly lower than forecasted content spend), resulting in FY21 operating margin of 20.9%, above management’s 20% guidance forecast. 
  • EPS increased +11.8% over pcp to $1.33 and included a $104m non-cash unrealized gain from FX remeasurement on Euro denominated debt. 
  •  Net cash generated by operating activities was an outflow of $403m vs outflow of $138m in pcp resulting in FCF of negative $569m vs negative $284m in pcp (for FY21, FCF amounted to negative $159m, in-line with management’s expectation for approximately break-even).

Company Profile

Netflix Inc (NASDAQ: NFLX) is an American company operating a global entertainment streaming service, which provides subscription video on demand to movies and television episodes over the Internet. The Company operates in three different segments, Domestic Streaming (US market comprising almost half of the business), International Streaming and Domestic DVD (1% of revenue). These businesses generate membership fees as well as revenues from DVD by mail. Netflix provides its services in over 190 countries with over 150 million members, distributing user focused content that fits consumer tastes and preferences.

(Source: Banyantree)

  • Relative to the pcp: (1) 

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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ResMed reported 2Q22 results reflecting strong revenue growth to US$894.9m, up +12%, or +13%

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.

Investment Thesis

  • Global leader in a significantly under-penetrated sleep apnea market. 
  • High barriers to entry in establishing global distribution channels. 
  • Strong R&D program ensuring RMD remains ahead of competitors.
  • Momentum in new masks releases. 
  • Bolt-on acquisitions to supplement organic growth.
  • Leveraged to a falling Australian dollar. 

Key Risks 

  • Disruptive technology leading to better patient compliance.
  • Product recall leading to reputational damage.
  • Competitive threats leading to market share loss.
  • Disappointing growth (company and industry specific).
  • Adverse currency movements (AUD, EUR, USD).
  • RMD needs to grow to maintain its high PE trading multiple. Therefore, any impact on growth may put pressure on RMD’s valuation.

Key Highlights 2Q22 Results

  • Revenue increased 12% (13% in constant currency) to US$894.9m driven by higher demand for sleep and respiratory care devices and a major product recall by one of the Company’s largest competitors. Across geographies, revenue in the Americas climbed +14%, in Europe, Asia, and other markets it increased +12%, and RMD’s software-as-a-service business saw +8% revenue growth. By product segment, globally in constant currency terms device sales increased by 16%, while masks and other sales increased by 10%.  
  • Non-GAAP operating income of $267.7m, up +5%. This equated to US$1.47 per share, up 4%.
  • Net income was up +12% to US$201.8m. 
  • Gross margin declined 230 basis points to 57.6%.
  • Diluted earnings per share was up +11% to US$1.37.
  • The Board declared quarterly dividend of US42cps. 
  • RMD’s balance remains strong with cash balance of $194m, $680m in gross debt and $496m in net debt, whilst debt levels remain modest, and the Company retains ~$1.6bn for drawdown under its existing revolver facility.

Company Profile 

ResMed Inc (RMD) develops, manufactures, and markets medical equipment for the treatment of sleep disordered breathing. The company sells diagnostic and treatment devices in various countries through its subsidiaries and independent distributors. RMD reports two main segments – Americas and Rest of the World (RoW) – with US its largest market. The company is listed on the Australian Stock Exchange (ASX) via CDIs (10:1 ratio). 

(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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Technology Stocks

Coupa’s Opening Strategy in Business Spend Management Paying Off as it Plays the Long Game

Business Strategy and Outlook

Coupa Software is a cloud-based business spend management, or BMS, platform that allows firms to monitor, control, and analyze expenditures to lower costs and improve operational efficiency. Morningstar analyts believe Coupa has a long growth runway ahead as it continues to make strategic investments to expand its platform and spend management use-cases. In a go-to-market model that focuses on co-selling deals with system integrators, Coupa has been able to expand its market reach significantly. As back-office digital transformations are accelerating and Coupa remains the market-leading cloud BSM vendor, morningstrar analysts expect Coupa’s partners to increasingly advance Coupa’s adoption throughout businesses as they guide their clients through digital transformation initiatives. As Coupa has long focused on a broader source-to-pay strategy, offering solutions that far exceed the functionality of its original transactional core, the company has made a high level of investments to build out its platform into a more holistic spend management tool. As the firm introduces new modules,  Morningstar analysts believe Coupa will benefit from alignment with a larger number of spend use-cases, greater suite synergies, and more cross-selling opportunities. Further, analysts also  believe a growing community will reinforce Coupa’s AI-based community intelligence offering, providing higher value prescriptive insights to optimize spend decisions.

Coupa’s Opening Strategy in Business Spend Management Paying Off as it Plays the Long Game

Coupa Software is a cloud-based business spend management, or BSM, platform that allows companies to monitor, control, and analyze expenditures to lower costs and improve operational efficiency.  Coupa has built a broad-reaching self-reinforcing ecosystem of AI-informed spend management and Morningstar analysts believe the firm will benefits from a strong network effect and high switching costs. Morningstar anlaysts fair value estimate for Coupa is $152 per share, down from $232, as they model more muted long-term growth. As Coupa has long focused on a broader source-to-pay strategy, offering solutions that far exceed the functionality of its original transactional core, the company has made a high level of investments to build out its platform into a more holistic BSM tool. As the firm introduces new modules, Morningstar analysts believe Coupa will benefit from alignment with a larger number of spend use-cases, greater suite synergies, and more cross-selling opportunities. Further, Morningstar analyst also  believe a growing community will reinforce Coupa’s AI-based community intelligence offering, providing higher value prescriptive insights to optimize spend decisions.

Financial Strength

Coupa is in a decent financial position. As of January 2021, Coupa had $606.3 million in cash and marketable securities versus $1.5 billion in convertible debt.Coupa has yet to achieve GAAP profitability, as the company remains focused on reinvesting excess returns back into the company, both on an organic and inorganic basis, to build out the platform and enhance future growth prospects. Coupa does not pay a dividend, nor repurchase stock, and for a young company pioneering a novel offspring under the ERP umbrella,  it can be considered as  appropriate that the company focuses capital allocation on reinvestments for growth. Even so, the firm has historically demonstrated strong cash flows, with free cash flow margins averaging 13% over the last three fiscal years. While cash flows were pressured in fiscal 2021 as a result of the COVID-19 pandemic, Morningstar analysts expect healthy free cash flows in later years. Coupa reached non-GAAP profitability in 2019, posting both a positive non-GAAP operating margin and positive non-GAAP earnings from then on. The company has averaged a non-GAAP operating margin of 9.1% since 2019, and as the company scales, we expect non-GAAP operating margins to reach into the low-30% range at the end of our 10-year forecast period. These positive results should translate to profitability on a GAAP basis in the future as well.

Bulls Say 

  • Coupa has strong user retention metrics, with gross retention above 95% and net dollar retention north of 110%. 
  • As Coupa expands its platform both organically and inorganically, we expect increasing suite synergies to accelerate cross-selling activity, further entrenching customers within Coupa and creating greater monetization opportunities. 
  • Continual annual subscription price point increases reflect the stickiness of Coupa’s modules and suggest significant competitive differentiation in winning new deals over less expensive alternatives.

About the Company

Coupa Software is a cloud-based provider of business spend management, or BSM, solutions. Coupa’s BSM platform provides visibility into all spend, allowing companies to gain control over their spending, optimize their supplier network and supply chains, and manage liquidity. The platform’s transactional core consists of procurement, invoicing, expense management, and payment solutions, while supporting modules ranging from strategic sourcing solutions to supply chain design and planning solutions round out the comprehensive spend management ecosystem.

(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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Aptiv Sees Q4 Results Take Chip Crunch Hit, Sets New Revenue Growth Target

Business Strategy and Outlook:

Aptiv’s average yearly revenue growth is expected to exceed average annual growth in global light-vehicle demand by high-single-digit percentage points. The company provides automakers with components and systems that are in high demand from consumers and that government regulation requires to be installed. Aptiv’s high-growth technologies include advanced driver-assist systems, autonomous driving, connectivity, data services, and high-voltage electrical distribution systems for hybrids and battery electric vehicles.

Aptiv’s ability to regularly innovate and commercialize new technologies bolsters sales growth, margin, and return on investment. A global manufacturing presence enables Aptiv to serve customers around the globe, capitalizing on the economies of scale inherent in automakers’ plans to use more global vehicle platforms. Lean manufacturing discipline and a low-cost country footprint enable more favorable operating leverage as volume increases. Aptiv enjoys relatively sticky market share, supported by integral customer relationships and long-term contracts. The design phase of a vehicle program can last between 18 months and three years depending on the complexity and extent of the model redesign. The production phase averages between five and 10 years. Engineering and design for the types of products that Aptiv provides necessitate highly integrated, long-term customer relationships that are not easily broken by competitors’ attempts at market penetration.

Financial Strength:

Aptiv’s financial health is in good shape. Total debt/total capital has averaged 16.9% while total debt/EBITDA has averaged 2.9 times. Most of Aptiv’s capital needs are met by cash flow from operations. However, the COVID-19 pandemic necessitated the drawdown of the company’s $2.0 billion revolver on March 23, 2020. The revolver was repaid after the company raised capital through share issuance and a mandatory convertible preferred in June 2020. Aptiv’s liquidity remains healthy at $5.2 billion, with around $2.8 billion in cash and equivalents at the end of December 2020. The company was also granted covenant relief, with a debt/EBITDA ratio of 4.5 times through the second quarter of 2021, up from 3.5 times. With the exception of the credit line that includes the revolver and a term loan, which expires in August 2021, the company has no other major maturities until 2024. The company has approximately $4.1 billion in senior unsecured note principal outstanding with maturities that range from 2024 to 2049, at a weighted average stated interest rate of 3.2%. Aptiv issued $300 million in 4.35% senior notes due in 2029 and $300 million 4.4% notes due in 2046 in March 2019 to redeem senior notes due in 2020 with an interest rate of 3.15%. The bonds and bank debt are all senior unsecured, pari passu, and have similar subsidiary guarantees.

Bulls Say:

  • Owing to product segments with better-than-industry average growth prospects like safety, electrical architecture, electronics, and autonomous driving, we expect Aptiv’s revenue to grow mid- to high-single digit percentage points in excess of the percentage change in global demand for new vehicles. 
  • The ability to continuously innovate and commercialize new technologies should enable Aptiv to generate excess returns over its cost of capital. 
  • A global manufacturing footprint enables participation in global vehicle platforms and provides penetration in developing markets.

Company Profile:

Aptiv’s signal and power solutions segment supplies components and systems that make up a vehicle’s electrical system backbone, including wiring assemblies and harnesses, connectors, electrical centers, and hybrid electrical systems. The advanced safety and user experience segment provides body controls, infotainment and connectivity systems, passive and active safety electronics, advanced driver-assist technologies, and displays, as well as the development of software for these systems. Aptiv’s largest customer is General Motors at roughly 13% of revenue, including sales to GM’s Shanghai joint venture. North America and Europe represented approximately 38% and 33% of total 2019 revenue, respectively.

(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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Arrow Stands Out Among Distributors for Efficiency and Profitability

Business Strategy and Outlook:

Arrow Electronics is one of the premier global value-adding distributors of electronics. Arrow uses its excellent sales, marketing, and net working capital management expertise to provide its supplier partners with a long tail of small customers while using its partnerships to service customers with a broad semiconductor selection—increasing profits for both ends of the supply chain in the process. Arrow is a more efficient operator than many of its distributor peers, which, along with its differentiated engineering expertise and design generation, leads to it holding among the best operating margins in the business.

Arrow is such an effective and streamlined operator that it earns an economic moat, while none of its peers under our coverage do. Arrow’s cash conversion cycle and average inventory days lead other top global distributors, which allows it to earn slim, but reliable, excess returns on invested capital. A focus on high-value semiconductors for transportation and industrial applications augments its returns. Its proficiency in chip distribution has led to it offering the broadest line card of any global chip distributor and the top market share in North America, including several high-profile exclusive supplier relationships, like with Texas Instruments and Analog Devices.

Financial Strength:

Arrow Electronics to remain leveraged and to use its available capital to invest in working capital and returning capital to shareholders. As of Dec. 31, 2021, Arrow had $222 million in cash and $2.6 billion in gross debt. The firm will easily service its obligations over the next five years, with an average of roughly $350 million maturing each year through 2025 while forecast has been on an average of over $1 billion in free cash flow over the same period. If the firm runs into a liquidity crunch, it has an untapped $2 billion revolver. Arrow will eventually finance more debt to remain leveraged and invest in the business. The firm needs to maintain a debt/EBITDA ratio under 3 times to keep its debt investment-grade and currently sits comfortably below 2 times. The firm’s greatest investment over the next five years will be in working capital. Finally, Arrow is a strong generator of cash, though it exhibits modest countercyclical cash flow generation. In semiconductor upcycles, the firm will invest heavily in inventory and extend more credit, trimming free cash flow. In downcycles, these activities get reined in and the firm can see over 100% free cash flow conversion. Still, when looking at operating cash flow as a proportion of non-GAAP net income (management’s preferred metric) over a cycle, Arrow has averaged 79% conversion, cumulatively, over the last five years. 

Bulls Say:

  • Arrow is one of the most efficient and value additive distributors in the world, resulting in some of the highest operating margins of its peer group. 
  • Arrow is entrenching its competitive advantage with exclusive supplier relationships that give it the broadest semiconductor selection of any distributor—covering over a third of global chipmakers. 
  • Arrow returns a significant amount of capital to shareholders in the form of repurchases, for which it used 95% of its free cash flow between 2017 and 2021.

Company Profile:

Arrow Electronics is a global distributor of electronics, connecting suppliers of semiconductors, components, and IT solutions to more than 180,000 small and midsize customers in 85 countries. Arrow is the second-largest semiconductor distributor in the world, and the largest for North American chip distribution, partnering with a third of global chipmakers.

(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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Fortive Delivers Solid Margin Expansion in Q4 Despite Cost Inflation and Supply Chain Challenges

Business Strategy and Outlook

Fortive, spun off from Danaher in 2016, has followed in its former parent’s footsteps and adopted the philosophy underpinning the proven Danaher Business System, which has its roots in the Toyota Production System. The Fortive Business System essentially involves acquiring moatworthy companies, expanding operating margins through Lean manufacturing principles, and redeploying cash flows into further mergers and acquisitions. 

Fortive targets companies with reputable brand names, large installed bases, and strong cash flows. Management has focused particularly on boosting recurring revenue in its portfolio, which has already increased from roughly 18% at the time of the spin-off to 38% in 2021, and we think it could reach 50% over the next five years. Driving this trend are acquisitions, divestments and the increasing importance of the firm’s software-as-a-service business. 

Management has pursued acquisitions to bolster its digital capabilities. Fortive seeks to leverage its large installed base and combine connected devices with software to offer customers an integrated package. We expect management’s focus on recurring revenue and digitalization to reinforce Fortive’s moat by increasing customer switching costs and enhancing its intangible assets. 

Under the leadership of CEO James Lico, who brings two decades of experience at Danaher, Fortive has delivered impressive midteens returns on invested capital as a stand-alone company. Given its impressive legacy of prudent capital allocation and driving operational improvement at acquired companies through FBS, Morningstar analysts believe that Fortive has solid prospects to continue compounding cash flows and creating value for shareholders.

Fortive Delivers Solid Margin Expansion in Q4 Despite Cost Inflation and Supply Chain Challenges

Despite ongoing supply-chain constraints, Fortive grew its fourth-quarter core sales 1% from the prior-year period. Fortive’s fourth-quarter core revenue was up 0.8% in intelligent operating solutions, up 2.6% in precision technologies, and down 0.8% in advanced healthcare solutions. Morningstar analysts think that Fortive’s ability to expand its margins despite supply-chain disruptions and cost inflation is a testament to its moat as well as strong execution. Morningstar analysts have increased its fair value estimate for Fortive to $88 from $86, which reflects slightly more optimistic near-term revenue growth and operating margin projections as well as time value of money. 

Financial Strength 

 Fortive is on solid financial footing. As of December 2021, Fortive owed roughly $4 billion in long-term debt and held approximately $0.8 billion in cash and equivalents. Additionally, the company had $2 billion available under its revolving credit facility. Morningstar analysts estimate that Fortive will have a net debt/adjusted EBITDA ratio of around 1.1 times in 2022, and  believe that the company will work toward reducing its leverage in the near term to protect its investment-grade credit rating.

Bulls Say

  • Management has an impressive record of capital allocation and improving operating margins of acquired companies. 
  • Fortive’s digital strategy can help reinforce its moat by combining its large installed base of equipment with complementary software to offer a comprehensive package and enhance customer loyalty.
  • Growth in recurring revenue and SaaS-based offerings, as well as the recent divestment of the automation and specialty unit, has reduced the cyclicality of Fortive’s portfolio.

Company Profile

Fortive is a diversified industrial technology firm with a broad portfolio of mission-critical products and services that include field solutions, product realization, health, and sensing technologies. The company serves a wide range of end markets, including manufacturing, utilities, medical, and electronics. Fortive generated roughly $5.3 billion in revenue and $1.2 billion in adjusted operating income in 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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Spirit AeroSystems Reports Improved Fourth Quarter and Is Confident in Pandemic Efficiency Gains

Business Strategy and Outlook

Spirit AeroSystems is the largest independent aerostructures manufacturer. The firm produces fuselages, wing structures, as well as structures that house and connect engines to aircraft. Spirit’s revenue has traditionally been almost entirely connected to the original production of commercial aircraft, but Spirit has a growing defense segment and recently acquired Bombardier’s maintenance, repair, and overhaul business. As commercial aerospace manufacturing is highly consolidated, it is unsurprising that Spirit has customer concentration. Historically, 80% of the company’s sales have been to Boeing and 15% have been to Airbus. Management targets a 40% commercial aerospace, 40% defense, and 20% commercial aftermarket revenue exposure. The firm acquired Fiber Materials, a specialty composite manufacturer focused on defense end markets, and Bombardier’s aftermarket business in 2020 to diversify revenue.

Financial Strength

Spirit AeroSystems has raised and maintained a considerable amount of debt since the grounding of the 737 MAX began in 2019. The company has $1.9 billion of cash on the balance sheet and about $3.9 billion of debt at the end of 2020, and access to another $950 million of debt if it so needs. The firm has $300 million debt coming due in 2021 and 2023, as well as $1.7 billion of debt coming due in 2025, and $700 million of debt coming due in 2028. Revenue of $1.1 billion and adjusted loss per share of $0.84 beat FactSet consensus by 0.1% and missed the same estimates by 29.9%, respectively, though much of the earnings miss was due to a forward loss associated with 787 production. 

Revenue increased 22.1%, primarily due to increased 737 MAX production increasing OE production-related revenue. Although we slightly lowered our long-term outlook for 737 MAX production in the third quarter, we continue to expect that increasing 737 MAX production will be the primary value driver for the firm. Management continues to expect it can generate 16.5% gross margins (including depreciation) at 737 MAX production of 42 per month from efficiencies achieved during the pandemic.

Bulls Say’s 

  • Commercial aerospace manufacturing has a highly visible revenue runway, despite COVID-19, from increasing flights per capita as the emerging market middle class grows wealthier. 
  • Spirit has restructured to become more efficient when aircraft manufacturing recovers. 
  • Spirit is diversifying its customer base, which we anticipate will make it less susceptible to customer specific risk.

Company Profile 

Spirit AeroSystems designs and manufactures aerostructures, particularly fuselages, for commercial and military aircraft. The company was spun out of Boeing in 2005, and the firm is the largest independent supplier of aerostructures. Boeing and Airbus are the firms and its primary customers, Boeing composes roughly 80% of annual revenue and Airbus composes roughly 15% of revenue. The company is highly exposed to Boeing’s 737 program, which generally accounts for about half of the company’s 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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Technology Stocks

Trane’s Record Backlog Positions the Narrow-Moat Firm for Another Strong Year in 2022

Business Strategy and Outlook:

In early 2020, Ingersoll Rand spun off its industrial segment, which immediately merged with Gardner Denver. This new entity assumed the Ingersoll Rand name and stock ticker. Legacy Ingersoll Rand’s climate segment was renamed Trane Technologies. It has been viewed legacy Ingersoll Rand’s climate business as more attractive than its industrial segment because the former has generally been more profitable and less cyclical.

Trane Technologies is a leading supplier of climate control products and services; it is a dominant player in commercial and residential heating, ventilating, and air conditioning systems (approximately 80% of sales) with its Trane and American Standard brands, as well as in transportation refrigeration (20% of sales) with its Thermo King brand. The leading HVAC manufacturers have all embraced a pure-play model. Johnson Controls sold its automotive battery business and Carrier spun off from United Technologies. Lennox is already a pure-play climate control company, although it has rid itself of some underperforming domestic and foreign refrigeration businesses.

Financial Strength:

Trane Technologies has a sound balance sheet, and its consistent free cash flow generation supports its debt service obligations, capital expenditure requirements, and dividend, while also providing financial flexibility for opportunistic share repurchases and acquisitions. Trane Technologies ended its fourth-quarter 2021 with $4.8 billion of outstanding debt and $2.2 billion of cash, which equates to a net debt/2021 adjusted EBITDA ratio of about 1.1. Besides its 4.25% senior notes ($700 million) due in 2023, the 3.75% senior notes ($545 million) due in 2028, and the 3.8% senior notes ($750 million) due in 2029, no more than $500 million is due in any one fiscal year. In 2021, Trane Technologies generated almost $1.4 billion of free cash flow.

Bulls Say:

  • Trane should benefit from secular trends in global urbanization and increased demand for energy efficient building solutions. 
  • With a company mission to address climate change and energy efficiency challenges with its products and services, Trane Technologies has become a popular ESG play. 
  • Trane Technologies generates significant aftermarket and replacement sales on its large installed base, which helps damp cyclicality.

Company Profile:

Trane Technologies manufactures and services commercial and residential HVAC systems and transportation refrigeration solutions under its prominent Trane, American Standard, and Thermo King brands. The $14 billion company generates approximately 70% of sales from equipment and 30% from parts and services. While the firm is domiciled in Ireland, North America accounts for over 70% 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.