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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Tradeweb benefits from long-term tailwinds as bond markets become increasingly electronic

which tend to focus on a particular bond type or market segment, Tradeweb operates with a broad scope, offering trading in just about anything related to fixed income, including derivatives, as well as some equity exchange-traded funds. That said, Tradeweb’s interest-rate and credit segments are the heart of the company, making up 77% of its revenue in 2020, and are responsible for much of its growth.

Fixed-income markets globally are increasingly moving away from voice-negotiated trading toward electronic platforms because the liquidity and workflow enhancement of these electronic networks promise to lower implicit and explicit trading costs for increasingly expense-conscious firms. Tradeweb has been a major beneficiary of this trend, as its largest competitor is the implicit competition represented by traditional voice-based trading. As bond and derivative markets have shifted, Tradeweb has enjoyed significant tailwinds to its business and has steadily taken overall market share, with its interest-rate swap and U.S. investment-grade bond trading volumes in particular rising rapidly. With most fixed-income trading still primarily voice-based, this transition is still in its early days and Tradeweb has a long runway of growth ahead of it. While revenue growth is likely to decelerate somewhat from an impressive CAGR of 21% over the last three years, Tradeweb is expected to enjoy double-digit revenue growth in the mid- to low teens for years to come.

Financial Strength:

Tradeweb is in an excellent financial position, with more than $821 million in cash and investment securities at the end of September 2021 and no outstanding long-term debt. Tradeweb enjoys wide margins and strong cash flow, and there are no any real prospect of the company being placed under financial pressure in the foreseeable future, particularly given the countercyclical behavior its revenue generation exhibits. Tradeweb’s business has high upfront costs but requires little incremental capital to support growth once a trading platform has been developed, limiting the firm’s capital needs. With no debt to pay down, analysts expect that Tradeweb will continue to use its incoming cash flow to pay dividends, buy back shares, or invest back into its business, either in the form of internal development or external acquisitions.

Bulls Say:

  • Tradeweb benefits from the secular transition away from voice negotiations toward its electronic trading platforms in fixed-income markets, providing the firm with an easy path for continued market share and revenue growth. 
  • Tradeweb’s business features upfront costs and low variable expenses, creating an easy path for operating margin expansion as its revenue base grows. 
  • Tradeweb interest-rate swap and U.S. investment grade corporate bond trading platforms have enjoyed sharp market share gains in recent years, with the pandemic an additional catalyst to ongoing industry trends.

Company Profile:

Founded in 1998 and headquartered in New York City, Tradeweb Markets is a leading fixed-income trading platform. While it does offer electronic processing for some voice-negotiated trades, the company focuses primarily on providing electronic trading networks that connect broker/dealers, institutional clients, and retail customers. While the company offers trading in a wide variety of products, the bulk of its business is in U.S. and European government debt, mortgage-backed securities, interest-rate swaps, and U.S. and international corporate bonds. The firm also sells fixed-income trading and price data, primarily through a deal with Refinitiv’s Eikon service.

(Source: Morningstar)

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

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Vivo Is Turning the Corner on Growth as Network Investments Bear Fruit

But the market faces several challenges, including stiff competition, a fragmented fixed-line industry, and general economic weakness that has also hurt the value of the Brazilian real. The plan to carve up Oi’s (Brazilian mobile network operator) wireless assets promises to significantly improve the industry’s structure, cutting the number of wireless players to three. Vivo also holds the largest, and fastest growing, fiber network footprint in Brazil, which should allow the firm to stabilize and ultimately grow broadband market share. While results will likely remain volatile, it is expected that Vivo will prosper as Brazilians continue to adopt wireless and fixed-line data services.

Vivo is the largest wireless carrier in Brazil by far, holding 34% of the wireless market, including 38% of the more lucrative postpaid business. The firm generated about 60% more wireless service revenue in 2020 than America Movil or TIM, its closest rivals. The three carriers have agreed to split up the wireless assets of Oi, the distant fourth-place operator that has been in bankruptcy protection. If successful, the transaction could remove a sub-scale player from the industry.

Financial Strength:

The fair value estimated is USD 11.00, which is mainly because revenue growth will average about 5% annually over the next five years.

Vivo’s financial health is excellent, as the firm has rarely taken on material debt. The net debt load increased to BRL 4.4 billion following the acquisition of GVT in 2015, but even this amounted to less than 0.5 times EBITDA. Cash flow has been used to allow leverage to drift lower since then. At the end of 2020, the firm held BRL 3.0 billion more in cash than it has debt outstanding, excluding capitalized operating leases. Even with the capitalized value of operating lease commitments, net debt stands at BRL 7.4, equal to 0.4 times EBITDA. Parent Telefonica has control of Vivo’s capital structure. While Telefonica’s balance sheet has improved markedly in recent years, the firm still carries a sizable debt load and faces growth challenges in its core European operations. The dividend is set to decline another 2% in 2021 based on 2020 earnings. These cuts have come despite ample free cash flow generation.

Bulls Say:

  • Vivo is the largest telecom carrier in Brazil and benefits from scale-based cost advantages in both the wireless and fixed-line markets. 
  • The firm is well-positioned to benefit as consumers demand increased wireless data capacity. Its network in Brazil is first-rate and its reputation for quality is second-to-none. 
  • Owning a high-quality fiber network enables Vivo to offer converged services throughout much of the country, while buttressing its wireless backhaul, improving network speeds and capacity.

Company Profile:

Telefonica Brasil, known as Vivo, is the largest wireless carrier in Brazil with nearly 80 million customers, equal to about 34% market share. The firm is strongest in the postpaid business, where it has 45 million customers, about 38% share of this market. It is the incumbent fixed-line telephone operator in Sao Paulo state and, following the acquisition of GVT, the owner of an extensive fiber network across the country. The firm provides Internet access to 6 million households on this network. Following its parent Telefonica’s footsteps, Vivo is cross-selling fixed-line and wireless services as a converged offering. The firm also sells pay-tv services to its fixed-line customers.

(Source: Morningstar)

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

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Technology Stocks

Netflix Beats Low Subscriber Guidance; Competition Appears to Be Weighing on Net Adds

It is believed that lower subscriber growth reflects not only saturation in its largest markets but strong competition in the regions with the most potential growth remaining, including Latin America and India. 

Netflix posted 4.4 million net subscriber adds during the quarter, up only 2% sequentially and up 9% from 195 million a year ago. Growth was slower in the U.S., with fewer than 100,000 net additions–only the third time below that mark since the start of 2012. Latin America has also seen anemic growth in 2021, with only 330,000 net adds in the quarter and only 1.45 million year to date, which is well below the same periods in 2019 (3.3 million) and 2018 (4.4 million).

Revenue of $7.5 billion, up 16%.U.S. revenue improved by 11% year over year, largely due to the price hike in 2020 as the subscriber base only increased 1% versus last year. Average revenue per customer for the region was up 10% versus a year ago to $14.68, implying that most customers are on the standard HD plan at $14 with a growing share on the 4K plan at $18. The 4K plan remains the most expensive streaming option in the U.S. marketplace right now, potentially capping Netflix’s ability to continually raise prices as subscriber growth dwindles.

Europe, Middle East and Africa, Netflix’s second-largest region by revenue and subscribers, posted continued strong revenue growth of 21% as the region continues to benefit from price hikes along with a large influx of new subscribers. The region now has over 70 million subscribers with almost 19 million net adds over the last seven quarters, 5 million more than any other region. 

Asia-Pacific, Netflix’s supposed long-term growth engine, increased revenue year over year by an impressive 31% in the quarter but ARPU remained under $10 and actually declined sequentially. It is expected that ARPU will decline going forward as the firm rolls out low-price plans in more countries across the region. These lower priced plans will be necessary to compete with both Amazon and Disney in emerging markets like India and Indonesia. 

Company Profile

Netflix’s primary business is a streaming video on demand service now available in almost every country worldwide except China. Netflix delivers original and third-party digital video content to PCs, Internet-connected TVs, and consumer electronic devices, including tablets, video game consoles, Apple TV, Roku, and Chromecast. In 2011, Netflix introduced DVD-only plans and separated the combined streaming and DVD plans, making it necessary for subscribers who want both to have separate plans.

 (Source: Morningstar)

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

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Microsoft Flexes Cloud Muscle

Additionally, Microsoft has largely transitioned from a traditional perpetual license model to a subscription model. Finally, Microsoft exited the low-growth, low-margin mobile handset business and is driving Gaming to be more cloud-based. These factors have combined to drive a more focused company that offers impressive revenue growth with high and expanding margins. 

Azure is the centerpiece of the new Microsoft. It is already an approximately $30 billion business, it grew at a staggering 50% rate in fiscal 2021. Azure also is an excellent launching point for secular trends in AI, business intelligence and Internet of Things, as it continues to launch new services centered around these broad themes. 

Microsoft is also shifting its traditional on-premises products to become cloud-based SaaS solutions. Critical applications include LinkedIn, Office 365, and Dynamics 365, with these moves now beyond the halfway point and no longer a financial drag.Lastly, the company is also pushing its gaming business increasingly toward recurring revenues and residing in the cloud. We believe that customers will continue to drive the transition from on-premises to cloud solutions, and revenue growth will remain robust with margins continuing to improve for the next several years.

Microsoft Continues to Impress with All Around Strength and Another Positive Guide; FVE Up to $345

Wide-moat Microsoft continues to benefit from digital transformation efforts at enterprise customers. Azure and commercial related demand was robust by any measure, and gaming and Windows were strong even as supply constraints for PCs and Surface tablets remain challenging. We see a slowdown in remaining performance obligation, or RPO, growth and commercial bookings, two forward-looking metrics, as driven by large Azure deals in the prior year period and not a reflection of deteriorating demand

For the second quarter, revenue growth accelerated by 22% year over year to $45.32 billion. All segments were ahead with more personal computing driving the most upside.Operating margin was 44.7%, compared with 42.7% last year, driven by improved scale, upside to quarterly results, and lower operating expenses generally resulting from COVID-19-related dampening of travel, entertainment, and related expenses. Gross margins were down 50 basis points year over year, with a prior change in depreciable life assumption serving as a headwind, offset by growing Azure margins. 

Financial Strength 

Microsoft enjoys a position of excellent financial strength arising from its strong balance sheet, growing revenue, and high and expanding margins. As of June 2020, Microsoft had $136.5 billion in cash and equivalents, offset by $63.3 billion in debt, resulting in a net cash position of $73.2 billion, or nearly $10 per share. Gross leverage is at 1.0 times fiscal 20202 EBITDA. Free cash flow margin has averaged 30% over the last three years and the company has generated more than $32 billion in free cash flow in each of the last three years.

Bulls Say 

  • Public cloud is widely considered to be the future of enterprise computing, and Azure is a leading service that benefits the evolution to first to hybrid environments, and then ultimately to public cloud environments. 
  • Shift to subscriptions accelerates growth after the initial growth pressure, and the company has passed the margin inflection point now such that margins are increasing again and have returned to pre-Nokia and pre-“cloud” levels. 
  • Microsoft has monopoly-like positions in various areas (OS, Office) that serve as cash cows to help drive Azure growth.

Company Profile

Microsoft develops and licenses consumer and enterprise software. It is known for its Windows operating systems and Office productivity suite. The company is organized into three equally sized broad segments: productivity and business processes (legacy Microsoft Office, cloud-based Office 365, Exchange, SharePoint, Skype, LinkedIn, Dynamics), intelligence cloud (infrastructure- and platform-as-a-service offerings Azure, Windows Server OS, SQL Server), and more personal computing (Windows Client, Xbox, Bing search, display advertising, and Surface laptops, tablets, and desktops).

 (Source: Morningstar)

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

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Secular Tailwinds Within Electronic Design Automation and IP Drive Cadence’s Strong Growth

Stock market graph with screen

Over the years, there has been a demand for faster, smaller, and more-efficient chips to keep pace with the rapid evolution of modern technology. Many companies are also placing increasing importance on chip customization as a point of differentiation. These trends have provided a boon for Cadence, as the firm’s tools are essential for designers needing to keep pace with growing demands. Such developments in chip design will benefit narrow-moat Cadence and support healthy long-term growth.

There are additional secular tailwinds in the industry buoying Cadence and other EDA vendors. Technologies such as cloud computing, 5G, Internet of Things, AI, and autonomous vehicles will support demand for new, more advanced chip designs. This is reflected in the advent of systems companies such as Tesla designing more chips in-house, thus expanding Cadence’s customer base beyond traditional semiconductor designers. As a result, we expect higher demand for Cadence’s EDA and IP offerings.

Cadence has been a pioneer in the cloud EDA space and has made significant investments in developing its cloud offerings, ranging from hosted cloud to hybrid cloud. While the pace of cloud adoption in the EDA space has been slow, it offers customers a broad range of options with regard to tool deployment. This service also poses a point of differentiation for Cadence relative to chief competitor Synopsys.

Cadence’s moat is supported by strong user metrics. Per company insiders, Cadence has relationships with approximately 100% of chip design companies in the U.S. today, that is if a company is involved in the chip design process, it uses Cadence tools at some stage of its design process. Furthermore, churn is negligible, with customer retention consistently at approximately 100%, showcasing the stickiness of Cadence’s offerings.

Financial Strength 

Cadence is in a very healthy financial position. As of April 2021, Cadence had $743 million in cash and cash equivalents versus $347 million in long-term debt due in fiscal 2024.Approximately 85%-90% of the firm’s revenues are of a recurring nature, given that the firm primarily sells time-based licenses.Cadence is profitable on both a GAAP and non-GAAP basis and demonstrates strong cash flows; free cash flow margin has averaged 25% over the last five fiscal years. A healthy growth in free cash flow is expected as industry tailwinds lead to long-term growth for Cadence. On a non-GAAP basis, Cadence has exhibited an operating margin of approximately 30% over the last five fiscal years. Expected this to continue to expand and believe the company will hit 38% non-GAAP operating margins by the end of our explicit forecast period. In the long term, Cadence will be able to exhibit healthy free cash flows while continuing to support both organic and inorganic investments.

Bull Says

  • Cadence enjoys a leadership position in the EDA space that has helped the firm develop strong relationships with chip designers, enhancing switching costs. This is reflected in retention rates of approximately 100%. 
  • Secular tailwinds in chip design such as 5G, Internet of Things, AI/ML, and others should increase demand for EDA tools and support growth for Cadence. 
  • Cadence Cloud can support a growing total addressable market as systems companies and small/ medium enterprises may take advantage of more flexible and cost-effective chip design capabilities

Company Profile

Cadence Design Systems was founded in 1988 after the merger of ECAD and SDA Systems. Cadence is known as an electronic design automation, or EDA, firm that specializes in developing software, hardware, and intellectual property that automates the design and verification of integrated circuits or larger chip systems. Historically, semiconductor firms have relied on the firm’s tools, but there has been a shift toward other nontraditional “systems” users given the development of the Internet of Things, artificial intelligence, autonomous vehicles, and cloud computing. Cadence is headquartered in Silicon Valley, has approximately 8,100 employees worldwide, and was added to the S&P 500 in late 2017.

(Source: Morningstar)

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

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HP Capitalizing on Record Demand for Hybrid Work PC and Printing Necessities

in our view. Industry shifts toward using mobile devices as computer supplements or replacements and fewer printing tasks being performed for economic and environmental reasons may create headwinds for HP. HP’s growth initiatives will expand its market share within the PC and printing industries as consolidation occurs, but we expect cost competitiveness among the remaining vendors to limit potential upside. HP’s personal systems business, containing notebooks, desktops, and workstations yields a narrow operating margin that we do not foresee expanding. 

The company’s growth focus areas of device-as-a-service, or DaaS, and expanding its gaming and premium product offerings should help stem losses from its core expertise of selling basic computer systems. HP’s contractual managed print services, in additional to focusing on graphics, A3, and 3D printers are moves in the correct direction, but the overarching trend of lower printing demand should stymie revenue growth within printing, in our view. HP is combatting the challenge of lower-cost generic ink and toner alternatives in the marketplace. The company is innovating in a mature market, but competitors can mimic HP’s successes or cause price disruption. HP’s scale may enable success within the 3D printing market; even though HP is late entrant, its movement into printing metals could cause customer adoption.

Financial Strength

Raising fair value estimate for no-moat HP Inc. to $27 from $25 after its 2021 analyst day provided fiscal 2022 earnings and free cash flow guidance that was higher. HP also confirmed its previously stated fiscal fourth-quarter guidance. HP’s commitment to returning at least 100% of free cash flow to investors through dividends and share repurchases. For fiscal 2021, HP’s dividend was increased by 29% year over year to $1 per share and modest increases in future years. HP will continue to rapidly repurchase shares, with over $8 billion authorized for buybacks remaining, which will help achieve HP’s stated earnings targets. For fiscal 2022, HP is targeting adjusted earnings of $4.07-$4.27 and at least $4.5 billion in free cash flow.

HP’s leverage to decrease as retained earnings increase and the company pays off debt on schedule. HP spends about 8%-9% of its revenue on SG&A and about 2%-3% of its revenue on R&D, the expenditure trends to remain consistent. HP has a solid track record of repurchasing shares, and the company will continue to invest in buybacks. Additionally, as part of thwarting Xerox’s 2020 takeover attempt, HP targeted $16 billion in shareholder returns, with the majority being share repurchases. At the end of fiscal 2020, the defined benefit plans and post-retirement plan were underfunded by $1.6 billion.

Bulls Say’s

  • Expected challenges within the printing and PCs markets may be overstated. Enterprises adopting managed print services and Device-as-a-Service over hardware purchases could expand HP’s margins.
  • HP’s innovation in notebooks and tablets could moderate concerns about a lengthening computer upgrade cycle. With an invigorated brand, HP is making inroads with premium and gaming PC buyers.
  • Existing 3D and A3 vendors could be disrupted via HP’s scale. HP’s 3D materials open platform could make HP the preferred choice while offering A3 products opens up a $55 billion market.

Company Profile 

HP Inc. is a leading provider of computers, printers, and printer supplies. The company’s three operating business segments are its personal systems, containing notebooks, desktops, and workstations; and its printing segment which contains supplies, consumer hardware, and commercial hardware; and corporate investments. In 2015, Hewlett-Packard was separated into HP Inc. and Hewlett Packard Enterprise and the Palo Alto, California-based company sells on a global scale.

(Source: Morningstar)

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Facebook faster growth in cash flow during the next five year by owning to operating leverage after 2022

along with the valuable data that they generate, makes Facebook’s platforms attractive to advertisers. The combination of these valuable assets and our expectation that advertisers will continue shift their spending online bodes well for Facebook, as the firm generates strong top-line growth and cash flow. Facebook has attracted users and increased engagement by providing additional features and apps within the Facebook ecosystem. 

The firm’s Facebook app, along with Instagram, Messenger, and WhatsApp, is among the world’s most widely used apps on both Android and iPhone, smartphones. Facebook is taking steps to further monetize its various apps, such as providing interactive video ads and tapping into e-commerce. It is also applying artificial intelligence and virtual and augmented reality technologies to various products, which may increase Facebook user engagement even further, helping to further generate attractive revenue growth from advertisers in the future.

Financial Strength

In an industry where continuing investments are required to remain competitive and maintain market leadership, we believe Facebook is well positioned in terms of access to capital. The firm has a very strong balance sheet with $62 billion in cash, cash equivalents, and marketable securities and no debt. The firm generated $39 billion cash from operations in 2020, 7% higher than the prior year. Facebook’s strong operational and financial health is demonstrated by the 28% average free cash flow to equity/revenue during the past three years. We project average annual FCFE/sales to be in the 35%-40% range through 2025, as a result of strong top-line growth and slight operating margin expansion beginning in 2022. The firm may use some portion of its cash, as it remains active on the merger and acquisition front.

Bulls Say’s

  • With more users and usage time than any other social network, Facebook provides the largest audience and the most valuable data for social network online advertising.
  • Facebook’s ad revenue per user is growing, demonstrating the value that advertisers see in working with the firm.
  • The application of AI technology to Facebook’s various offerings, along with the launch of VR products, will increase user engagement, driving further growth in advertising revenue.

Company Profile 

Facebook is the world’s largest online social network, with 2.5 billion monthly active users. Users engage with each other in different ways, exchanging messages and sharing news events, photos, and videos. On the video side, the firm is in the process of building a library of premium content and monetizing it via ads or subscription revenue. Facebook refers to this as Facebook Watch. The firm’s ecosystem consists mainly of the Facebook app, Instagram, Messenger, WhatsApp, and many features surrounding these products. Users can access Facebook on mobile devices and desktops. Advertising revenue represents more than 90% of the firm’s total revenue, with 50% coming from the U.S. and Canada and 25% from Europe. With gross margins above 80%, Facebook operates at a 30%-plus margin.

(Source: Morningstar)

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IBM’s Q3 Disappoints With Weak Software and Kyndryl Sales

even when omitting its poor-performing Kyndryl business to be spun off soon. As IBM nears the spinoff of its managed infrastructure business, to be known as Kyndryl, we think that the real drivers for the remaining company lie in IBM’s consulting and software businesses. While consulting revenue surpassed our expectations (and consensus’), IBM’s software revenue missed—leaving us wary of the remaining company’s performance after the spin-off.

IBM reported revenue of $17.6 billion in the quarter, marking flattish year-over-year growth. While IBM’s global business services segment was a standout, growing at 12% year over year, the rest of IBM’s businesses disappointed. The cloud & cognitive software segment grew only 3% year over year. And while global technology services, part of which will be spun off as Kyndryl, with revenue down by 5% year over year.

IBM reported operating margins of 9% in the quarter, down 310 basis points from the prior year period. Non-GAAP earnings per share for the quarter was $2.52.

It is expected that Kyndryl will continue its downward top line trajectory as mass migration of workloads to the cloud have enterprises opting for cloud vendors to manage their cloud infrastructure, rather than traditional IT services providers, like IBM. This makes the worst performance in the quarter a matter of only acceleration of such decline. For software, on the other hand, we believe it, along with consulting (known as global business services) are the main growth drivers for IBM post spinoff. . We formerly expected a stronger relation between consulting and software sales—with the former driving the latter.

We’re maintaining our fair value estimate of $125 per share for narrow-moat IBM. Shares are down 4% upon results, which has moved IBM into fair value territory. As a reminder, IBM plans to spin off shares of Kyndryl after market close on Nov. 3, so our $125 fair value estimate reflects the value of IBM’s stock pre spin-off.

Company profile

IBM looks to be a part of every aspect of an enterprise’s IT needs. The company primarily sells infrastructure services (37% of revenue), software (29% of revenue), IT services (23% of revenue) and hardware (8% of revenues). IBM operates in 175 countries and employs approximately 350,000 people. The company has a robust roster of 80,000 business partners to service 5,200 clients–which includes 95% of all Fortune 500. While IBM is a B2B company, IBM’s outward impact is substantial. For example, IBM manages 90% of all credit card transactions globally and is responsible for 50% of all wireless connections in the world.

(Source: Morningstar)

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Omnicom’s Q3 Results Display Growing Demand for Ad Holding Firms Services

the firm has attained that position less through acquisitions and more through organic growth. With very well-recognized creative agencies and sub-holding companies such as BBDO and DDB, we expect Omnicom to maintain its market position as it generates competitive organic growth, continues to make acquisitions, and increases focus on the faster-growing emerging markets and the overall digital ad markets.

Through various acquisitions, the firm has transitioned from traditional advertising toward becoming a complete solution provider with digital (including online video, social media, and mobile), along with other services such as public relations. Compared with its peers, Omnicom has been relatively quiet on the acquisition front since it ended merger talks with Public is in 2014. However, top-line growth has been in line with or above the other ad-holding firms.

Financial Strength

Omnicom reported mixed third-quarter results as revenue slightly missed the FactSet consensus estimates while the firm beat bottom-line expectations. With strong double digit organic revenue growth, the revenue miss was mainly due to Omnicom’s disposition of ICON in June. Solid organic growth of 11.5% and favorable foreign currency exchange rates were only partially offset by negative impact from agency divestitures (negative 5.9%). Management guided to 2021 full-year organic revenue growth of 9%, which is slightly below our 9.5% projection. Operating margin of 15.8% during the quarter was slightly higher than last year’s 15.6% due to top line growth and lower costs associated with less occupancy and lower travel expenses. The firm expects full-year 2021 operating margin above 15.1% compared with our 15.1% assumption.

Omnicom has a net debt of $210 million, with debt/EBITDA and interest coverage averaging 2.5 and 9, respectively, during the past three years. These ratios will average around 2 and 14 during the next five years. While Omnicom has not been nearly as aggressive in pursuing the acquisition route as some of its peers, cash allocated toward acquisitions and dividends during the past three years has been equivalent to 4% and 32%, respectively, of the firm’s free cash flow.

Bulls Say’s 

  • Omnicom’s management team is very experienced and has delivered solid results over an extended period through a variety of economic environments.
  • Omnicom’s agencies, such as BBDO and DDB, are some of the most acclaimed in the business.
  • The strength of Omnicom’s three major global networks allows the firm to retain even dissatisfied clients by switching them from one award-winning network to another.

Company Profile 

Omnicom is the world’s second-largest ad holding company, based on annual revenue. The American firm’s services, which include traditional and digital advertising and public relations, are provided worldwide, with over 85% of its revenue coming from more developed regions such as North America and Europe.

(Source: Morningstar)

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Aristocrat outspends rivals on research and development improving its competitive position

Aristocrat’s research and development expenditure is unmatched by peers. This investment is the lifeblood of any electronic gaming manufacturer, especially given rapidly changing technology, and allows Aristocrat to maintain game quality, differentiate products from lower-end competitors, and defend its narrow economic moat.

Aristocrat is among the top three global competitors in the highly competitive EGM market, alongside International Game Technology and Scientific Games. EGM sales have been particularly hard-hit as coronavirus-induced shutdowns, social distancing measures, and travel restrictions weigh on the firm’s customers. With less turnover likely up for grabs in the near-term, heavy discounting could weigh on Aristocrat’s profitability in the fiercely competitive electronic gaming machine industry. Aristocrat operates in a market protected from new entrants as stringent regulatory licensing requirements in major markets create barriers to entry for new players.

Financial Strength:

The fair value of Aristocrat has been increased by the analysts by 9% to AUD 36.00 following the announcement of a AUD 5 billion acquisition of U.K.-listed Playtech, AUD 1.3 billion equity raising, and virtual release of fiscal 2021 results.

Aristocrat Leisure is in strong financial health. At March 31, 2021, the company had AUD 1.3 billion net debt, equating to net debt/EBITDA of 1.2- down from AUD 1.6 billion in net debt, equating to net debt/EBITDA of 1.4 at Sept. 30, 2020. EBITDA interest cover is comfortable at over 9 times. With the AUD 1.3 billion capital raising, Aristocrat’s balance sheet is well-capitalised to absorb the AUD 5 billion acquisition of U.K.-listed Playtech, with pro forma net debt/EBITDA of 2.6. Aristocrat is expected to return to paying out dividends from approximately 30% of underlying earnings from fiscal 2021, ramping back up to 40% by fiscal 2022.

Bulls Say:

  • Aristocrat operates in a market protected from new entrants as stringent regulatory licensing requirements in major markets create barriers to entry for new players. 
  • Unlike the mature electronic gaming machine industry, the fast-growing mobile gaming market provides an avenue of strong growth for Aristocrat. 
  • Already boasting a portfolio of highly regarded electronic gaming machines, Aristocrat outspends rivals on research and development allowing the firm to improve its competitive position and protect its narrow economic moat.

Company Profile:

Aristocrat Leisure is an electronic gaming machine manufacturer, selling machines to pubs, clubs, and casinos. The firm is licensed in all Australian states and territories, North American jurisdictions, and essentially every major country. Aristocrat is one of the top three largest players in the space along with International Game Technology and Scientific Games. Through acquisitions of Plarium and more recently Big Fish, Aristocrat now derives a significant proportion of earnings from the faster growing mobile gaming business.

(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.