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.

Categories
Technology Stocks

Enphase has generated approximately 80% of its revenue from the United States and has only served the residential market

Business Strategy & Outlook

Enphase is the world leader in micro-inverter technology for distributed solar systems. The inverter is often referred to as the brains of a solar system. Its purpose is to (1) convert direct current produced by solar panels into alternating current used by households/grid; and (2) optimize energy production. Broadly, there are three kinds of inverters serving the solar market: string inverter, central inverter with power optimizer, and microinverters. Simple string inverters typically serve the utility-scale market, while power optimizers and microinverters are more prevalent in rooftop markets. Enphase is in the midst of a transition from a microinverter company to selling home energy solutions. Enphase targets to create a one-stop shop for solar installers: microinverters, energy storage, EV charging, and digital services for installers and homeowners. This strategy is impressive as it leverages its existing position with installers to expand its total addressable market while maintaining the company’s core end market of distributed generation. Additionally, it aligns well with the macro view of increasing distributed generation and electrification of demand.

Furthermore, the company is focused on diversifying its end markets by geography and market segment. In recent years, Enphase has generated approximately 80% of its revenue from the United States and has only served the residential market. The company is looking to build on success domestically to expand internationally, notably in Europe, where the competitive landscape tends to be more fragmented. Enphase plans to introduce a microinverter for the small commercial segment in early 2023, its first product outside the residential market.

Financial Strengths

Following a period of distress in the 2017-time frame, the company has been instilled with a disciplined financial model under a new CEO and CFO. Enphase pursues a capital light strategy and seeks to avoid entering into long-term contracts with suppliers to ensure flexibility. The company has a heavily equity weighted capital structure in line with peers. Current outstanding debt of approximately $1 billion consists of convertible notes due in 2026 and 2028. 

Bulls Say

  • Enphase commands industry-leading gross margins and ROICs based on its high-tech product offering.
  • Enphase serves a growing rooftop solar market with an expanding total addressable market as more consumers adopt solar + storage.
  • Potential policy incentives to address climate change have the ability to meaningfully increase annual solar installations.

Company Description

Enphase Energy is a global energy technology company. The company delivers smart, easy-to-use solutions that manage solar generation, storage, and communication on one platform. The company’s micro-inverter technology primarily serves the rooftop solar market and produces a fully integrated solar-plus-storage solution. Geographically, it derives a majority of revenue from the United States.

(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

Boeing’s narrow-body business was severely battered by the extended grounding of its 737 MAX due to two fatal crashes of the plane

Young woman trading stock market by touching.

Business Strategy & Outlook

Boeing is a major aerospace and defense firm that makes money mostly by manufacturing large commercial airplanes. Its narrow-bodied planes are ideal for high-frequency, short-haul routes, and wide-bodied ones are used for long-haul and transcontinental flights. Worldwide sales of narrow-bodies have increased over the past 20 years with the rise of low-cost carriers and middle-class consumers in emerging markets. Boeing’s narrow-body business was severely battered by the extended grounding of its 737 MAX due to two fatal crashes of the plane before the COVID-19 pandemic. The pandemic cut air travel by two thirds between 2019 and 2020, and Boeing’s primary competitor, Airbus, saw a one-third drop in airplane deliveries while Boeing had to cease deliveries of its workhorse plane entirely for 20 months to rework the navigation and other systems on hundreds of jets. It can be seen that there’s a pent-up demand for air travel adding to the long-term increase in demand for air travel in emerging-market economies. It can be anticipated that Boeing will grow 737 MAX production to meet that demand. Critical to thesis is at least some normalization of U.S.-China trade relations, as it anticipates Chinese carriers will take up to a quarter of new airplanes in the next decade.

Boeing also supplies military products to governments and aftermarket services to its commercial customers. These businesses together generate just over a third of its operating income over a cycle. There’s a GDP-like growth in the defense business and expect the services business will regain profitability faster than Boeing as a whole because aftermarket revenue increases directly with flight activity.

Financial Strengths

Credit metrics are expected to deteriorate as debt costs rise. Interest cover of 5.4 times in fiscal 2022 was well above the 2 times covenant limit. However, interest cover is deteriorating to 2.3 times by 2025 (in the absence of an equity raising) as debt costs rise from extremely low levels, leaving slim headroom to the covenant limit. Some form of remedial action, like an equity raising, may be needed. Other credit metrics are also aggressive. For example, the net debt/ EBITDA of 8 times for the next few years. Nonetheless, the trust has a Baa2 issuer credit rating from Moody’s Investors Service and gearing of 33% is towards the bottom of the 30% to 40% target range and well below the 50% covenant limit. Average debt duration is reasonable at four years and the trust has only modest debt maturities in the next couple of years. But limited interest rate hedging means the trust is exposed to rising interest rates–weighted average hedge maturity is 2.1 years. The trust is to pay out close to 95% of funds from operations, which is aggressive as FFO ignores such things as maintenance capital expenditure, leasing incentives, and debt establishment costs. It is estimated current distributions exceed underlying earnings by about 10%, which could be unmaintainable if property values stop rising. The trust’s portfolio has grown rapidly via acquisitions, requiring substantial equity raisings. Units on issue have increased more than six-fold since 2014.

Bulls Say

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

Company Description

Boeing is a major aerospace and defense firm. It operates in four segments: commercial airplanes; defense, space & security; global services; and Boeing capital. Boeing’s commercial airplanes segment competes with Airbus in the production of aircraft ranging from 130 seats upwards. Boeing’s defense, space & security segment competes with Lockheed, Northrop, and several other firms to create military aircraft and weaponry. Boeing global services provides aftermarket support to airlines.

(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

Lear is well positioned with seating and electrical architecture to capitalize on global growth in premium vehicles

Business Strategy & Outlook

Lear’s revenue will grow in excess of increases in annual worldwide light-vehicle production. The company is well-positioned to capitalize on several trends in the global automotive industry, including automakers’ focus on high-quality interiors, premium-vehicle segment growth, the proliferation of automotive electronics, and battery electric vehicles. Lear competes in the markets for vehicle seating and automotive electrical and electronic architecture. A culture of continuous innovation, high switching costs for customers, highly integrated engineering relationships with customers, and lengthy vehicle programs provide Lear with sticky market share. The premium-vehicle segment leads the way in the proliferation of electrical circuits, electronic devices, and digitalization. All-electric and electric hybrid vehicles also contain higher power-management content, the production of which is being driven by more stringent fuel economy and emissions regulations. Additionally, premium-vehicle seating contains more features and uses higher-quality materials, commanding higher pricing. Lear is the global leader in premium seating.

Vehicle propulsion and dynamics, which at one time were mechanically, hydraulically, and vacuum-driven, have become electronic, requiring electrical power, computer processing, and signal processing to communicate and interact with other vehicle systems. Hybrid and all-electric powertrains require more robust electrical architecture to support the power consumption of the battery-driven electric motor. Vehicle autonomy exacerbates the need for more complex electrical and electronic architectures. Lear is the number-two company in the global automotive seating market, but management believes it is the global leader in luxury- and performance-vehicle seating. The company has the fourth-largest market share in the electrical segment. Even though there is limited synergy between the two sides, Lear is well positioned with seating and electrical architecture to capitalize on global growth in premium vehicles, bolstering the thesis that revenue should outpace global growth in worldwide vehicle production.

Financial Strengths

The company maintains a solid balance sheet and liquidity that, relative to many other parts suppliers, makes for strong financial health. From a credit perspective, the company did not reduce debt outstanding but made $705 million worth of share repurchases in 2018. Even so, Lear’s capital structure was slightly underleveraged. Given the company’s ability to generate solid free cash flow, Lear could take advantage of the benefits of modestly higher financial leverage without incurring the pitfalls of excessive debt in a cyclical industry. Lear entered and exited bankruptcy protection in 2009, prior to which, the company averaged total debt/total book capital of around 65%. Using the Morningstar method of calculating total debt/total capital where capital includes the equity market capitalization instead of the book value of equity, the pre-bankruptcy average was 46%. Since 2011, Lear has maintained much lower leverage with a 31% book total debt/total capital ratio and a 16% total debt/Morningstar total capital ratio. Using total debt minus cash to arrive at a net debt/total capital ratio, the average is 0.4% due to the company’s relatively large cash position. Lear funds its working capital needs with its free cash flow, cash balance, and revolving line of credit. As of the end of 2021, total liquidity including cash and available revolving credit facility was roughly $3.3 billion ($1.3 billion cash and $2.0 billion revolver availability). In the third quarter of 2021, Lear amended its revolver, increasing it to $2.0 billion from $1.75 billion and extending the maturity to October 2026 from August 2024. 

Bulls Say

  • Lear’s above-industry growth rates are supported by a growing global premium-vehicle segment and increasing penetration of automotive electrical and electronic content.
  • A culture of continuous innovation at Lear enables regular and consistent product and process development, commercializing technology that generates solid margins and returns on invested capital.
  • Automakers’ growing use of common architectures benefits Lear because of its global footprint.

Company Description

Lear designs, develops, and manufactures automotive seating and electrical systems and components. Seating components include frames and mechanisms, covers (leather and woven fabric), seat heating and cooling, foam, and headrests. Automotive electrical distribution and connection systems and electronic systems include wiring harnesses, terminals and connectors, on-board battery chargers, high voltage battery management systems, high voltage power distribution systems, domain controllers, telematics control units, gateway modules, vehicle positioning for automated and autonomous driving, embedded control software, cloud and mobile device software and services, and cybersecurity.

(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

Lear is well positioned with seating and electrical architecture to capitalize on global growth in premium vehicles

Business Strategy & Outlook

Lear’s revenue will grow in excess of increases in annual worldwide light-vehicle production. The company is well-positioned to capitalize on several trends in the global automotive industry, including automakers’ focus on high-quality interiors, premium-vehicle segment growth, the proliferation of automotive electronics, and battery electric vehicles. Lear competes in the markets for vehicle seating and automotive electrical and electronic architecture. A culture of continuous innovation, high switching costs for customers, highly integrated engineering relationships with customers, and lengthy vehicle programs provide Lear with sticky market share. The premium-vehicle segment leads the way in the proliferation of electrical circuits, electronic devices, and digitalization. All-electric and electric hybrid vehicles also contain higher power-management content, the production of which is being driven by more stringent fuel economy and emissions regulations. Additionally, premium-vehicle seating contains more features and uses higher-quality materials, commanding higher pricing. Lear is the global leader in premium seating.

Vehicle propulsion and dynamics, which at one time were mechanically, hydraulically, and vacuum-driven, have become electronic, requiring electrical power, computer processing, and signal processing to communicate and interact with other vehicle systems. Hybrid and all-electric powertrains require more robust electrical architecture to support the power consumption of the battery-driven electric motor. Vehicle autonomy exacerbates the need for more complex electrical and electronic architectures. Lear is the number-two company in the global automotive seating market, but management believes it is the global leader in luxury- and performance-vehicle seating. The company has the fourth-largest market share in the electrical segment. Even though there is limited synergy between the two sides, Lear is well positioned with seating and electrical architecture to capitalize on global growth in premium vehicles, bolstering the thesis that revenue should outpace global growth in worldwide vehicle production.

Financial Strengths

The company maintains a solid balance sheet and liquidity that, relative to many other parts suppliers, makes for strong financial health. From a credit perspective, the company did not reduce debt outstanding but made $705 million worth of share repurchases in 2018. Even so, Lear’s capital structure as slightly underleveraged. Given the company’s ability to generate solid free cash flow, Lear could take advantage of the benefits of modestly higher financial leverage without incurring the pitfalls of excessive debt in a cyclical industry. Lear entered and exited bankruptcy protection in 2009, prior to which, the company averaged total debt/total book capital of around 65%. Using the Morningstar method of calculating total debt/total capital where capital includes the equity market capitalization instead of the book value of equity, the pre-bankruptcy average was 46%. Since 2011, Lear has maintained much lower leverage with a 31% book total debt/total capital ratio and a 16% total debt/Morningstar total capital ratio. Using total debt minus cash to arrive at a net debt/total capital ratio, the average is 0.4% due to the company’s relatively large cash position. Lear funds its working capital needs with its free cash flow, cash balance, and revolving line of credit. As of the end of 2021, total liquidity including cash and available revolving credit facility was roughly $3.3 billion ($1.3 billion cash and $2.0 billion revolver availability). In the third quarter of 2021, Lear amended its revolver, increasing it to $2.0 billion from $1.75 billion and extending the maturity to October 2026 from August 2024. 

Bulls Say

  • Lear’s above-industry growth rates are supported by a growing global premium-vehicle segment and increasing penetration of automotive electrical and electronic content.
  • A culture of continuous innovation at Lear enables regular and consistent product and process development, commercializing technology that generates solid margins and returns on invested capital.
  • Automakers’ growing use of common architectures benefits Lear because of its global footprint.

Company Description

Lear designs, develops, and manufactures automotive seating and electrical systems and components. Seating components include frames and mechanisms, covers (leather and woven fabric), seat heating and cooling, foam, and headrests. Automotive electrical distribution and connection systems and electronic systems include wiring harnesses, terminals and connectors, on-board battery chargers, high voltage battery management systems, high voltage power distribution systems, domain controllers, telematics control units, gateway modules, vehicle positioning for automated and autonomous driving, embedded control software, cloud and mobile device software and services, and cybersecurity.

(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

Lam is poised to grow faster than the overall equipment industry, as it can capture a larger share of the market with technically superior tools

Business Strategy & Outlook

Lam Research is a major vendor of semiconductor fabrication tools. The firm is the leader in dry etch, a critical step in the chip making process where material is selectively removed. Lam has a wide economic moat as a result of cost advantages and intangible assets related to equipment design. Lam’s leadership position creates scale advantages that fuel research and development spending at levels only Applied Materials and Tokyo Electron can match. At the end of 2021, Lam had an installed base of 75,000 units, up from 40,000 in 2015. This large installed base creates stickiness and offers Lam an intimate look into problems faced by chipmakers, providing valuable information it can use to implement solutions and additional capabilities in future tools. Chipmakers that have continued along the trajectory prescribed by Moore’s law have endured significant challenges in terms of cost and complexity. Equipment providers are vital to making the pursuit more economical via advanced chip manufacturing tools. Lam has benefited from the sharp rise in etch, deposition, and clean steps required as a result of major inflections, including FinFET transistors and planar to 3D NAND, that feature multiple patterning and vertical layers well suited for Lam’s advanced etch and deposition offerings. 

Consequently, Lam is poised to grow faster than the overall equipment industry, as it can capture a larger share of the market with technically superior tools. The volatile nature of demand for semiconductors directly affects the cyclicality of the equipment market. Lam, along with its peers, has benefited from an increase in service revenue in recent years, which will mitigate the volatility of equipment orders. Specifically, maintenance and engineering costs and spare parts are tied into service contracts that deliver a stable revenue stream distinct from tool purchases. As traversing Moore’s law becomes increasingly difficult, the service segment will grow as chipmakers increase their reliance on field service engineers from Lam and its peers, while also helping entrench vendors’ installed base of tools at customer facilities.

Financial Strengths

Lam is in a solid financial position. As of March 27, 2022, the firm had $4.2 billion in cash and equivalents, versus $5.0 billion in long-term debt. The firm typically keeps a substantial cash position on its balance sheet, which is appropriate for chip equipment firms. During cyclical downturns, the cash cushion allows Lam to continue investing heavily in research and development in order to maintain its leading technology and competitive positions.

Bulls Say

  • Lam is a leader in the dry etch and deposition markets and counts major chipmakers, such as Samsung Electronics and Taiwan Semiconductor Manufacturing, as customers.
  • Lam has achieved superior share gains in recent years due to its strong equipment offerings in etch and deposition, combined with the 3D NAND and multiple patterning inflections that require more of those particular tools.
  • Demand is strong for advanced etch and deposition tools, because they help chipmakers continue down the path prescribed by Moore’s law. 

Company Description

Lam Research manufactures equipment used to fabricate semiconductors. The firm is focused on the etch, deposition, and clean markets, which are key steps in the semiconductor manufacturing process, especially for 3D NAND flash storage, advanced DRAM, and leading-edge logic/ foundry chipmakers. Lam’s flagship Kiyo, Vector, and Sabre products are sold in all major geographies to key customers such as Samsung Electronics, Micron, Intel, and Taiwan Semiconductor Manufacturing.

(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

Applied’s semiconductor system and services revenue from China is about 26% of revenue

Business Strategy & Outlook

Applied Materials is the top vendor of semiconductor fabrication tools. While competitors tend to specialize in a single core competency, Applied competes in almost every key equipment segment with the exception of photolithography. As a result, all major chip makers develop strong relationships with Applied that span multiple process steps of their chip production. The firm is the dominant player in the material deposition and removal areas, among others. Applied boasts an impressive global presence with an installed base of more than 43,000 tools and field service engineers stationed in nearly every leading-edge chip-manufacturing facility in the world. With semiconductor fabrication becoming increasingly complex, resulting in more process steps and new manufacturing technologies, collaboration between chipmakers and equipment providers is set to reach unprecedented levels. Applied is to leverage existing relationships and insights into future customer technology needs to take advantage of the proliferating demand for state-of-the-art chips. The company’s scale and resources allow a research and development budget in excess of $2.7 billion to serve cutting-edge technologies. Recent inflections such as 3D architectures (including 3D NAND and FinFET transistors in logic/foundry) have been enabled by more advanced tools in deposition and removal. As a result, these segments have grown faster than the broader market in recent years, and firms such as Applied have directly benefited, as they can outspend smaller chip equipment firms in R&D to develop relevant solutions and build on existing market leadership.

Beyond semiconductors, Applied is a leading supplier of manufacturing tools for flat-panel displays, including organic light-emitting diodes, or OLED, panels. The cyclical nature of the chip industry and the display market is a ubiquitous threat to equipment suppliers. However, Applied’s expansive product portfolio and large installed base will allow the firm to comfortably weather business cycles over time, and the company is to experience solid growth over the long term.

Financial Strengths

Applied Materials is in a solid financial position. At the end of fiscal 2021, the firm had $5 billion in cash and cash equivalents versus $5.45 billion in long-term debt. The firm typically keeps a substantial cash position on its balance sheet, which is appropriate for chip equipment firms. During cyclical downturns, the cash cushion allows Applied to continue investing heavily in research and development in order to maintain its leading technology and competitive positions. The firm also does share repurchases and dividends to modulate excess cash, which is positive. Specifically, Applied aims to return between 80% and 100% of free cash flow to shareholders.

Bulls Say

  • Applied Materials is the chip equipment industry’s standard bearer. The firm has the broadest product portfolio and offers customers the closest thing to a one-stop shop.
  • Applied has been streamlining operations to lower its cost structure and has reinvested some of the savings in R&D while bolstering operating margins.
  • Applied has benefited from the proliferation of OLED displays, which share manufacturing technologies with those used in semiconductor fabrication. As these displays have become more complex in recent years, demand for Applied’s relevant tools has risen.

Company Description

Applied Materials is the world’s largest supplier of semiconductor manufacturing equipment, providing materials engineering solutions to help make nearly every chip in the world. The firm’s systems are used in nearly every major process step with the exception of lithography. Key tools include those for chemical and physical vapor deposition, etching, chemical mechanical polishing, wafer- and reticle-inspection, critical dimension measurement, and defect-inspection scanning electron microscopes.

(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

AMD’s semi custom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles

Business Strategy & Outlook

Advanced Micro Devices designs an array of chips for various computing applications. These products include central processing units and graphics processing units tailored to PCs, game consoles, and servers. AMD operates in the x86-based duopoly with Intel that dominates the PC and server CPU markets. AMD benefits from intangible assets related to its x86 instruction set architecture license and chip design expertise, which gives us confidence that the firm will generate excess returns over its cost of capital over the next decade and thus warrants a narrow economic moat rating.AMD outsources its chip designs to third-party foundries such as Taiwan Semiconductor Manufacturing and GlobalFoundries. While AMD has historically been a smaller x86 chip supplier than Intel, it has recently offered materially more competitive products across all of its segments, thanks to a combination of strong execution in new innovative chip designs and Intel’s own manufacturing struggles, which allowed AMD’s chief foundry partner TSMC to leapfrog Intel in process technology.

The firm is well positioned to enjoy data center growth driven by the shift from on-premises to cloud computing. In the mature PC market, AMD will also gain share at Intel’s expense in the coming years. One potent risk for both AMD and Intel is the shift to ARM-based CPUs in PCs and servers, though x86-based chips is to remain dominant for the foreseeable future. AMD has focused on utilizing its CPU and GPU technology in semi custom processor applications, such as game consoles. AMD’s semi custom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles. AMD also competes against Nvidia in the discrete GPU market, though AMD isn’t as competitive in GPUs as it is in CPUs. In February 2022, AMD acquired Xilinx to bolster its product portfolio and better diversify its revenue. Xilinx is the leader in the field-programmable gate array niche of the chip industry. FPGAs can be reconfigured to address the unique needs of users. AMD is to leverage FPGAs in the data center alongside its CPUs.

Financial Strengths

At the end of June 2022, the firm reported $5 billion in cash and cash equivalents against total debt of $2.8 billion. The firm has been doing a nice job of paying down debt in recent years to create a more resilient capital structure. While it has generated solid cash flow in recent years, its longer-term competitiveness remains heavily dependent on its ability to retain healthy market share across the PC, server, and GPU segments.

Bulls Say

  • AMD’s recent CPU and GPU offerings have been more competitive with Intel’s and Nvidia’s products, respectively, and utilize TSMC’s leading-edge process technologies.
  • AMD’s GPUs are highly sought after in cryptocurrency mining. Should blockchain technology take off, AMD could be well positioned to take advantage.
  • AMD has its sights set on Intel’s dominant server CPU market share, and its EPYC server chips have proved to be comparable or even superior to certain Intel chips in many benchmark tests.

Company Description

Advanced Micro Devices designs microprocessors for the computer and consumer electronics industries. The majority of the firm’s sales are in the personal computer and data center markets via CPUs and GPUs. Additionally, the firm supplies the chips found in prominent game consoles such as the Sony PlayStation and Microsoft Xbox. AMD acquired graphics processor and chipset maker ATI in 2006 in an effort to improve its positioning in the PC food chain. In 2009, the firm spun out its manufacturing operations to form the foundry GlobalFoundries. In 2022, the firm acquired FPGA-leader Xilinx to diversify its business and augment its opportunities in key end markets such as the data center.

(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

Coupa’s ability to win customers from sticky SAP speaks for itself in terms of the strength of Coupa’s offering

Businesswoman pointing at diagram in her hands when explaining marketing trends to her team during online meeting

Business Strategy & Outlook

Coupa software is a moaty cloud-only platform in the business spending management, or BMS, space with significant market share gains to come. Coupa benefits from a narrow moat based on strong switching costs and a network effect. Coupa’s core platform allows users to procure indirect or direct spending for a company—including everything from bottled water to laptops. While these use cases vary in mission criticality, switching costs persist throughout the business from the significant implementation time and costs as well as risks involved in changing vendors. Coupa’s network effect is driven by the increased benefits each supplier and procurer gain when additional users are added to the platform. Since its founding, Coupa has enabled $3.3 trillion in spending through its platform—and such stickiness will allow cumulative spending to snowball, benefiting long-term investors. Once items are procured, Coupa’s platform enables invoicing, expense, and payment. By having all these functionalities within one system, users benefit from better visibility of their spending. Nonetheless, existing attach rates leave ample room to grow—which informs that a positive moat trend is at play—as Coupa customers continue to use more value-adding modules, which increases overall stickiness.

Coupa’s ability to win customers from sticky SAP speaks for itself in terms of the strength of Coupa’s offering, as customers are willing to forgo the synergies of having their ERP and procurement vendor all in one in order to gain benefits of Coupa’s user experience. In addition, while it can be considered Workday to be the greatest long-term threat to Coupa given its cloud-only architecture and reputation for highly intuitive human capital management and financial service software, Workday has admitted that it cannot compete effectively with Coupa. This is comforting that at least Coupa has a considerable head start, which will be protected in the long run by its hard-to-dismantle network effect.

Financial Strengths

Coupa is in good financial health. As of January 2022, Coupa had $730 million in cash and marketable securities with $1.6 billion in convertible debt. The firm is rightly focusing on growth of the business over allocating capital toward dividends or share repurchases. A large proportion of debt does not mature until 2025 and 2026, and the firm does not face material risk in terms of funding it, as it is capable of issuing $1.5 billion in additional debt if investors do not take the option to convert the debt to stock. Coupa has an ability to raise additional debt if needed, as the company boasts healthy adjusted free cash flow. Altogether, the 2025 notes have a conversion price of $159.60 while the 2026 notes have a conversion price of $296.45. While Coupa acquired Llamasoft for $1.5 billion in 2020, the large acquisition was well justified—as significant synergies can be seen between Coupa’s bread and butter, indirect spending, and direct spending-related offerings, like Llamasoft’s supply chain design functionality. Coupa will not make such hefty acquisitions over the next 10 years. While Coupa currently is not achieving excess returns on invested capital, or ROICs, the firm will be able to do so by fiscal 2026. While Coupa could be excess ROIC positive today, Coupa is making the right approach in funneling significant sales and marketing spending on new customer acquisition today to reap the long-term benefits later—as Coupa software is sticky, which informs a narrow moat rating.

Bulls Say

  • Coupa could take share within the direct spending and supply chain design market much faster than expected as frustration with other solutions nears a tipping point.
  • Coupa could be able to push boundaries further on price increases for existing offerings.
  • Regulation on reporting third-party liabilities in a timely manner could expand to other industries, further necessitating the Coupa platform.

Company Description

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)

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

BRP’s strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce

Young female explaining new idea to her colleague in creative office.

Business Strategy & Outlook

Fiscal 2023 should be another banner year for BRP’s sales given still robust consumer demand and high level of backfill units needed at its dealers. However, this will distract the team from its long-term product and operational priorities, which should improve the firm’s competitive positioning. BRP’s strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should capture efficiencies in its plants. Firmwide centres of expertise and excellence should allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product line-up (with electric vehicle offerings in all segments by 2026). Because BRP is exposed to many customer segments, acquisitions aren’t required for expansion. However, entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support margin improvement.

BRP has fiscal 2025 goals of CAD 12 billion-CAD 12.5 billion in sales and CAD 13.50-CAD 14.50 in EPS. Sales of CAD 12.4 billion and EPS of $14.68 in fiscal 2025. Demand has persisted despite economic uncertainty, and innovation should continue to drive sales, particularly in the marine segment where BRP has launched Project Ghost (altering placement of outboard engines) and the Sea Doo Switch (marine is expected to grow to CAD 1 billion by 2025, from CAD 513 billion in 2022, according to BRP, although less than CAD 800 million with current products). In the base case, BRP’s brand intangible asset and leading market share position result in competitive returns on invested capital and a narrow economic moat. With further improvements to the manufacturing process and scale, BRP could also develop a cost advantage over time.

Financial Strengths

BRP has been reducing its leverage ratio in recent years, taking debt/adjusted EBITDA down to 1.4 times at the end of fiscal 2022 from more than 4 times in 2011, as profitability has improved. It’s not surprising that significant leverage was taken on under the management of private equity partners, and leverage will continue to be contained now that the company is publicly held. The firm is comfortable operating below its targeted leverage ratio of 2 times EBITDA, and it could be around 1-1.5 times at the end of fiscal 2023.BRP has a $1.5 billion term loan set to mature in May 2027, a $100 million term loan due 2024, as well as a small euro-denominated term loan to support research and development projects in Austria (where Rotax engines are developed). The company has a CAD 1.5 billion revolving credit facility through May 2027 to access incremental liquidity. In normal operating periods, the company expects cash on hand, cash from operations, and utilization of the credit facility should allow it to meet capital expenditure, working capital, and debt service needs. The firm has agreements in place with companies like Wells Fargo and TCF to provide floor-plan financing for dealers. The company maintains flexibility in its capital structure through stock repurchases. BRP continued on its normal course issuer bid in fiscal 2023, repurchasing around 464,000 subordinate voting shares, and also executed a substantial issuer bid for 2.4 million shares in fiscal 2022 (for CAD 250 million). Additionally, the firm returns excess cash to shareholders via a quarterly dividend of CAD 0.16 per share, which could rise at a 20% clip over the long term.

Bulls Say

  • BRP has white-space opportunities to expand the business faster than expectations, particularly in the marine business and some niches (like electric) of the year-round lines.
  • Demand from underpenetrated international markets and expansion into new markets like China could lead to demand that is higher than the forecast, which could raise utilization and productivity, leading to higher profitability.
  • Marine is becoming a segment with higher priority to the company, which could generate a better-than-expected operating margin as the category scales, providing cash flow upside.

Company Description

BRP designs, develops, manufactures, distributes, and markets snowmobiles, all-terrain vehicles, and personal watercraft under the Ski-Doo, Sea-Doo, Can-Am, and Lynx brand names. It also builds engines under the Rotax brand (after discontinuing the Evinrude outboard engine business in 2020) and offers clothing, parts, and accessories that cater to its core consumers. In 2018, BRP created a marine group, acquiring boat manufacturers Alumacraft, Triton (which makes Manitou pontoon boats), and Telwater (in Australia). At the end of fiscal 2022, the company marketed its products through a network of more than 2,800 independent dealers and 170 distributors in about 120 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

NetEase maintains a high level of profitability above 30% operating margin for its gaming business, thanks to stable revenue from core titles

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy & Outlook

NetEase started as a Chinese internet portal in the late 1990s but has now become the second-largest mobile game company in the world. The firm owns one of the most well-known massively multiplayer franchises in China—Fantasy Westward Journey. Over the past decade, NetEase has capitalized on the industry shift toward mobile gaming and now focuses on developing innovative, high-quality, and long-cycle games with a mobile-first approach. Over the past years, the firm has established iconic titles such as Onmyoji, Knives Out, and Identity V. Every year, the company publishes dozens of games across almost every genre and game play. In addition, NetEase is also collaborating with firms such as Blizzard, Marvel, and Microsoft to release games based on famous global intellectual property like Diablo, Harry Potter, and Lord of the Rings. Over the foreseeable future, NetEase is to continue to leverage its in-house research and development team and user data to develop next-generation games. Like its global gaming peers, NetEase maintains a high level of profitability (above 30% operating margin) for its gaming business, thanks to stable revenue from core titles and the steady development of new franchises. The firm is positioned to not only continue capitalizing on the success of Westward Journey titles, but to also keep diversifying its revenue into new franchises.

While games will remain NetEase’s core cash flow driver, the firm’s investments in other areas (music streaming, online education, e-commerce) also offer long-term potential. Cloud Village, the group’s music streaming arm, had over 180 million monthly active users in 2021 and remained the second-largest music streaming platform in China. Youdao is the group’s attempt at cracking the online education market, but recent regulatory changes in China add uncertainty to this business model.

Financial Strengths

NetEase has a rock-solid balance sheet. At the end of December 2021, the company had CNY 98 billion in cash, cash equivalents, short-term investments, and time deposits under current assets. There was also a restricted cash balance of CNY 2.9 billion under current assets. This compares with only CNY 19.4 billion of short-term debt. Thanks to its strong net cash position and strong operating cash flow that amounted to 147% of net income in 2021, the firm should have no problem funding its gaming business and innovative businesses. NetEase’s capital structure is conservative but not uncommon among Chinese internet firms, given that the company needs to have abundant cash on hand to quickly seize opportunities in the fast-changing internet industry and give it a leg up on competition. Given the growth potential in the Chinese internet space, many of these companies under the coverage do not pay dividends. However, NetEase has returned capital to shareholders via dividends and has set quarterly dividends at 20%-30% of its anticipated net income after tax in each quarter starting in the second quarter of 2019. In addition, the company announced the expansion of its share-repurchase program in May 2020, from up to $1 billion worth of outstanding ADSs to $2 billion, this amount was maintained in 2021. At the end of December 2021, approximately $1.8 billion ADSs had been repurchased under such program.

Bulls Say

  • NetEase’s expertise in asymmetric multiplayer (Identity V and Dead by Daylight) would allow it to capitalize on future opportunities in this genre.
  • The firm has done an admirable job at organically expanding into Japan, and it is likely that it will be able to replicate same success in Europe and the U.S.
  • NetEase Music could see stronger user growth now that Tencent Music was told to end its exclusive licensing agreements with music labels on anti-trust grounds.

Company Description

NetEase, which started on an Internet portal service in 1997, is a leading online services provider in China. Its key services include online/mobile games, cloud music, media, advertising, email, live streaming, online education, and e-commerce. The company develops and operates some of the China’s most popular PC client and mobile games, and it partners with global leading game developers, such as Blizzard Entertainment and Mojang (a Microsoft subsidiary).

(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.

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