Category: Technology Stocks

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

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Technology Stocks

Despite a large year-over-year improvement, Gentex’s second quarter was hampered by parts shortages

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, but sales fell by nearly 9% versus second-quarter 2019. Gentex shipped about 2 million less units than it expected at the start of the quarter, which caused diluted EPS of $0.36 to miss the Refinitiv consensus of $0.45.

The industry’s supply chains are in turmoil due to the semiconductor shortage impacting chip availability, but other disruptions unrelated to Gentex, such as foam shortages following Texas winter storms, caused automakers to change production at the last minute or refuse shipment of mirrors because other non-Gentex parts never arrived at the automakers’ assembly plants. This supply problem in our view will improve throughout 2021, and the worst of it is occurring in second quarter and early third quarter.

Gentex’s Revenue Growth

The lost production caused management to issue second-half 2021 guidance that implies lower full-year guidance than given in April. Revenue guidance is now $1.88 billion to $1.98 billion, instead of $1.94 billion to $2.02 billion, and we believe that second-half gross margin guidance of 37.5%-38.5% means April’s full-year guidance of gross margin between 39%-40% is not possible. We agree with management’s optimism around 2022 revenue growth being 10%-15%. Gentex’s cash-loaded and debt free balance sheet make times like this easier to get through management seems to be willing to continue share repurchases and spent $115.9 million on that in the second quarter.

Company Profile

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

(Source: Factset)

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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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Coke implementing post-pandemic ambitions: leveraging process, innovation, and technology

The runway for growth is supported by ample room for share gains as well as geographic tailwinds. We estimate Coke derives more than 40% of sales from developing or emerging economies with burgeoning middle classes and low per-capita CSD consumption. We expect commercial drinks will become a larger portion of beverage consumption globally, and see the company executing against each of its market-specific strategies.

In developed markets, where Coke has firmly established the resonance of its brands, its strategies are geared toward profit growth driven by innovation. In developing markets, where its trademarks are visible but competition is rife, differentiation and eventual migration into higher-margin offerings is key. In emerging markets where the firm is less established, it is focused on driving volume growth even at the expense of modest margin dilution. We view these approaches as prudent and believe the decision to cull peripheral brands (going from 400 master brands to 200) will facilitate execution.

Financial Strength

We believe Coca-Cola is in stellar financial health. The firm deliberately skews its capital structure toward debt, on the premise that the lower-cost financing ultimately increases returns to shareholders. Coke regularly generates free cash flow above $8 billion (in the high teens to low 20s range as a percentage of sales), even amid the disruption caused by COVID-19. Even higher levels are driven by improving margins and working capital initiatives. Management has made commendable strides toward top-tier receivable and payable management, and the supply chain initiatives combined with a reworked bottler system should yield modest improvements in inventory management.

Moreover, Coca-Cola boasts strong coverage ratios above its peers. Coke’s financial strength is its ability to operate one of the larger domestic commercial paper programs. Issuing commercial paper is an integral part of the company’s cash management strategy, and the fact that investors and financial institutions are consistently willing to finance the company at such low rates lends credence to the reliability of its cash flows.

Bull Says

  • By volume, Coke is almost 3 times the size of its next largest competitor in the global nonalcoholic ready to- drink market, which begets scale benefits.
  • Despite a greater focus on marketing efficiency, its ad budget is still unparalleled and should help maintain consumer awareness and brand relevance.
  • The recently established platform services group should allow Coke to more effectively leverage data and improve technological capabilities across its mammoth production and go-to-market system.

Company Profile

Coca-Cola is the largest nonalcoholic beverage entity in the world, owning and marketing some of the leading carbonated beverage brands, such as Coke, Fanta, and Sprite, as well as nonsparkling brands, such as Minute Maid, Georgia Coffee, Costa, and Glaceau. Operationally, the firm focuses its manufacturing efforts early in the supply chain, making the concentrate (or beverage bases) for its drinks that are then processed and distributed by its network of more than 100 bottlers. Concentrate operations represent roughly 85% of the company’s unit case volume. The firm generates most of its revenue internationally, with countries like Mexico, Brazil, and Japan being key markets outside of the U.S.

(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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Hardwire Positions in the Project Long-Term Benefits for Harley, but Near-Term Risks Remain Pervasive

While still a significant market player, Harley’s market share fell roughly 800 basis points, to 42.1% in 2020 from above 50% in 2019 (although it has recovered 2.5% of share through June). With the launch of “The Hardwire” strategy, CEO Jochen Zeitz is chasing the highest ROI opportunities for Harley. This is versus the firm’s goal calling for 7%-9% motorcycle operating margins in 2021 (in line with our 9% forecast, if it can mitigate EU tariffs).

Financial Strength

Harley-Davidson carries more debt on its balance sheet than as leverage is required to finance its HDFS arm and offer loans to customers. HDFS generates increased financial risk and weaker profitability when credit standards tighten or credit markets become less liquid. The firm had $1.7 billion in cash and equivalents at the end of June; it has historically strived to hold enough liquid assets to cover its liquidity needs for 12 months.

However, with the consolidation of securitization interests, that ratio jumped to 73% in 2009. The company worked this down to 64% at the end of 2013, but the ratio has risen again above 75% since 2015 with the issuance of incremental debt. The company still has financial flexibility thanks to a $707.5 million revolver (expiring in 2023), a $707.5 million revolver (expiring in 2025), as well as its $350 million facility, which helps address the seasonality of production and shipments. Additionally, Harley maintains flexibility in its capital structure through stock repurchases and dividends (currently at $0.15 per share per quarter).

Harley’s Brand Awareness

  • Harley-Davidson’s brand is more than 115 years old and resonates globally with a wide consumer base, particularly its core market (men over 35). Efforts to reconnect with its core consumer could lead to a unit demand uptick faster than we anticipate.
  • The firm has historically generated strong free cash flow, and we expect it to continue doing so after the pandemic, generating a mid-single-digit average FCF yield over the next decade.
  • Harley has high brand awareness and robust market share in custom and touring segments domestically, two of the most profitable motorcycle categories.

Company Profile

Harley-Davidson is a global leading manufacturer of heavyweight motorcycles, merchandise, parts, and accessories. It sells custom, cruiser, and touring motorcycles and offers a complete line of Harley-Davidson motorcycle parts, accessories, riding gear, and apparel, as well as merchandise. Harley-Davidson Financial Services provides wholesale financing to dealers and retail financing and insurance brokerage services to customers. Harley has historically captured about half of all heavyweight domestic retail motorcycle registrations, a metric it has ceded in 2020 as it has repositioned the business. The firm recently expanded into the middleweight market with the launch of the Pan America model.

(Source: The Motley Fool)

General Advice Warning

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

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Quest Diagnosis Moving to Normal: Result of Less Demand of COVID-19 PCR

Our top- and bottom-line projections for full-year 2021 remain bounded by management’s 2021 outlook, and the slight adjustments we’ve made to reflect strong cost containment were largely offset by our incorporation of a rise in the U.S. corporate tax rate starting in 2022.

In the absolute, Quest’s second-quarter results look impressive, with revenue up 40% and operating margin at 21% (compared with 16% in the year-ago period). Nonetheless, Quest’s second quarter demonstrated slower growth than seen in the last three quarters as vaccinations have rolled out across the U.S.

Fortunately, as COVID-19 tests wane, the resumption of growth in non pandemic tests has been strong. This has resulted in mix shift gradually driving quarterly gross margin down to 39% versus 43% in the second half of 2020. Profitability in the second quarter remains significantly higher than Quest’s historical levels.

Company’s Future Outlook

It is expected that the demand for COVID-19 molecular tests will settle into a lower, but ongoing level into 2022, considering the significant level of Americans who have not yet been fully vaccinated and the rise of new, more contagious variants. Management indicated that COVID-19 PCR test volume has recently stabilized and begun to grow slightly as viral spread and hot spots have grown. It is further predicted that the margin erosion as volume further shifts toward non pandemic tests.

Company Profile

Quest Diagnostics is a leading independent provider of diagnostic testing, information, and services in the U.S. The company generates over 95% of its revenue through clinical testing, anatomic pathology, esoteric testing, and substance abuse testing with specimens collected at its national network of nearly 2,300 patient service centers, as well as multiple doctors’ offices and hospitals. The firm also runs a diagnostic solutions segment that provides clinical trials testing, risk assessment services, and information technology solutions.

(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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The Semiconductor Shortage Is Holding Back Ford’s June Sales

The semiconductor shortage ravaging the auto industry should bottom out in mid-2021, so gradual inventory improvement throughout the year, though a full recovery to take until 2022 or even 2023. The good news is that demand is excellent, with many consumers ready to spend money after holding back vehicle spending last year due to the pandemic.

Ford reported June sales on July 2 that showed the semiconductor shortage is hurting it notably worse than the rest of the industry. Management has repeatedly cited the impact of the Renesas plant fire in Japan as a major problem for Ford. June sales fell year over year by 26.9%, which far underperformed the industry’s 17.8% growth. We don’t see Ford having poor demand. The problem is low supply caused by the semiconductor shortage. With time Ford’s sales to be stronger in the second half of 2021 than the first half. First-half sales rose by 4.9% versus first-half 2020 (which is an easy comparable due to the pandemic), with about equal growth at the Ford and Lincoln brands. The 4.9% lags GM’s first-half 2021 growth of 19.8%. Ford’s first-half volume is down by about 20% from the first half of 2019. The best bright spot in Ford’s June sales is the Lincoln Navigator SUV, which grew volume by 15.5%. Lincoln’s SUVs had a first half of the year sales record, with retail channel sales up 23.3% year over year. June F-Series sales fell by 29.9%, and the company now has over 100,000 reservations for the all-electric F-150 Lightning due next year.

Company Profile

Ford Motor Co. manufactures automobiles under its Ford and Lincoln brands. The company has about 14% market share in the United States and about, 7% share in Europe. Sales in North America and Europe made up 69% and 19.5% of 2020 auto revenue, respectively. Ford has about 186,000 employees, including about 58,000 UAW employees, and is based in Dearborn, Michigan.

(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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Sustainalytics Rated Weibo – Medium ESG Risk

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Weibo’s recent content enhancements include video accounts (similar to Weixin’s), video pages with both professionally generated content and user-generated content (similar to YouTube channels), the discovery zone (where users can find the popular discussion topics at the main entrance of Weibo), and vertical videos focused on user-generated content.

With the increasing importance of more focused marketing and return on investment for advertisers, Weibo has started to catch up. For example, Weibo introduced optimized cost per x model in 2019. Advertisers can also evaluate their sales conversion on Tmall from the fans accumulated through advertising campaigns on Weibo in collaboration with Alibaba through the uni-marketing program. We expect to see increasing product development costs in the next few quarters. We believe investment in research and development is vital for Weibo even if that means near-term margin compression.

To improve small and medium-size enterprise ad revenue, Weibo is expanding into untapped and faster-growing verticals such as Taobao merchants, online education, and online gaming by restructuring its sales team since 2019. For example, it has enhanced cooperation between sales and technical teams to provide customized services to top SMEs of key verticals. The success of the new model is unclear because of the disruption from COVID-19.

Financial Strength

Weibo has a strong balance sheet with a net cash position of $1.06 billion as of December 2020. The company started to make a profit in the second quarter of 2015. Operating leverage has increased significantly in recent years; the operating margin improved from 7.8% in 2015 to 25.5% in 2018 and 30.0% in 2020. This has helped the company to generate free cash flow from 2015 to 2020. The company has significantly beefed up its cash war chest through operating activities and note issuances in the past few years. The balance sheet displayed an increase in long-term investments from $695 million in December 2018 to $1,179 million in December 2020, while generating operating cash flow of $742 million during 2020. We expect Weibo to continue to make long-term strategic investments with its cash. We do not expect it to pay dividend in the next few years. As of March 30, 2021, Moody’s assigned a Baa2 (previously Baa1) issuer rating to Weibo with a stable outlook (previously negative). Moody’s been concerned about using Weibo’s assets and cash to service or repays the privatization debt of Sina.

Bulls Say

  • Weibo has been able to sustain its status as the go to platform for following top trends and topics and celebrities.
  • Weibo puts more focus on return on investment for advertisers and now provides optimized cost per x.
  • Weibo upgraded its ad platform to enhance marketing scenarios, ad formats, algorithms, and Big Data analysis to increase its competitiveness.

Company Profile

Weibo is the largest social media platform in China. As of 2020, Weibo had 521 million monthly active users and 225 million daily active users, many of whom are drawn there by the millions of key opinion leaders in entertainment, sports, and business circles. Sina is the major shareholder, holding 44.7% of shares and with 70.8% voting power; Alibaba holds 29.8% of shares and 15.7% voting power

(Source: Morningstar)

General Advice Warning

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

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Asbestos Ringfence Doesn’t Alter Our Long-Term View of ITT, but it simplifies the business

After reviewing the terms of the deal and modeling it in the background based on pro-forma, we don’t expect to materially alter our FactSet consensus low fair value estimate of $89 per share (the math in our model currently suggests a reduction in the intrinsic value of about $1).

However, we await further details in order to re-publish our model. While the company estimates an after-tax loss of $27 million in the second quarter, according to the 8-K filing, it’s still evaluating the accounting for the transaction.

At a high level, the terms of the deal are rather simple. The deal effectively ringfences ITT from further asbestos-related and other product liabilities, as the indemnification provisions aren’t subject to any cap or time limits. ITT contributed approximately $398 million of cash to InTelCo, which is the subsidiary that holds these liabilities, in order to adequately capitalize the entity. As part of the deal, ITT’s balance sheet removes all asbestos obligations and related insurance and deferred tax assets as of July 1. Delticus, Warburg Pincus’ investment vehicle, will assume the operational management of InTelCo, including the administration of all asbestos claims.

While the deal may negligibly reduce our fair value, we like that it allows ITT to close a chapter on having to manage this legacy liability. The transaction simplifies the balance sheet, removes a layer of investor uncertainty, including “known unknowns,” and allows ITT to focus on its core operations. From that standpoint, the deal is a win

Company Profile

ITT is a diversified industrial conglomerate with nearly $3 billion in sales. After the spin-offs of Xylem and Exelis in 2011, the company’s products primarily include brake pads, shock absorbers, pumps, valves, connectors, and switches. Its customers include original-equipment and Tier 1 manufacturers as well as aftermarket customers. ITT uses a network of approximately 700 independent distributors, which accounts for about one third of overall revenue. Nearly three fourths of the company’s sales are made in North America and Europe. ITT’s primary end markets include automotive, rail, oil and gas, aerospace and defense, chemical, mining, and general industrial.

(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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Shaw and Roger’s Merger is Expected to Close in 2022, But Regulatory Approval is Not Certain

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Shaw has made significant efforts to improve its wireless network and is now bundling wireless with wireline service to customers in its cable footprint, enabling it offer even better value and enhancing service when offloaded onto its Wi-Fi network. Between the ends of fiscal years 2016 and 2020, Shaw more than doubled its postpaid wireless subscriber base, increased average billings per user (ABPU) by 20%, and expanded its wireless EBITDA margin by 900 basis points. The firm continues to invest heavily to improve its wireless network, and we think the firm is a legitimate competitor for new wireless customers and will continue seeing wireless results trend upwards.

Shaw ended fiscal 2020 with 5.3 million wireline revenue generating units, or RGUs, down from 6.4 million RGUs in 2012. The losses are attributable to television and voice customers, which face secular challenges for all competitors, but even Internet customer growth has been anemic (up 2% since 2017, including customer losses in 2020). Shaw has materially underperformed Telus across all types of RGUs. Telus has grown its Internet customer base by 22% since 2017 while also adding television customers. Its RGU base has grown from to 4.5 million from 3.8 million in 2012.

Shaw’s total revenue was up 5% year over year, though growth would’ve been only 3% excluding a benefit from a recent regulatory decision. The firm’s EBITDA margin was up 30 basis points year over year but was significantly better. Average billings per user, or ABPU, was down to CAD 40.56 from CAD 44.27 in the year-ago period. We’ve expected significant ABPU compression as the firm pushes Shaw Mobile, where Shaw’s wireline customers can add wireless service for extraordinarily low prices, but the 8.5% drop was more than we anticipated, especially given that net additions were muted. The firm added fewer than 47,000 postpaid wireless subscribers.

Financial Strength

Shaw is currently in a good financial position, which we think is critical, as it will need the flexibility in the coming years. At the end of fiscal 2020, Shaw had over CAD 700 million in cash and CAD 4.5 billion in long-term debt, which represented 1.6 times net debt to adjusted EBITDA—below its target ratio of 2.0-2.5 and well below those of Shaw’s big competitors in its industry. Shaw’s coverage ratio (adjusted EBITDA to interest expense) ended 2020 at 8.7, and the company has CAD 1.5 billion available on a revolving credit facility. Shaw has no long-term debt maturing until the end of 2023.

Wireless competition

  • Shaw is doing all the right things to build up its wireless business, acquiring and building out sufficient assets and luring customers by offering great deals.
  • The Canadian government is keen on bringing wireless competition to the big three incumbents. Unlike previous national upstarts, Shaw’s strong financial position and family control afford it the time and money to stick with a long-term strategy to succeed.
  • Shaw’s move to bundle wireless and wireline service with Shaw Mobile could expedite its wireless share gains and stem wireline losses it has seen recently.

Company Profile

Shaw Communications is a Canadian cable company that is one of the biggest providers of Internet, television, and landline telephone services in British Columbia, Alberta, Saskatchewan, Manitoba, and northern Ontario. In fiscal 2020, more than 75% of Shaw’s total revenue resulted from this wireline business. Shaw is also now a national wireless service provider after acquiring Wind Mobile in 2016. Shaw has upgraded its wireless network, undertaken an aggressive pricing strategy, and significantly enhanced its spectrum holdings. As a smaller carrier, Shaw has favored bidding status in spectrum auctions, giving it a further boost in enhancing its wireless network. At the 2019 auction, Shaw added significant amounts of 600 MHz spectrum to the 700 MHz spectrum it is currently deploying.

(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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Texas Instruments Deserves the Benefit of the Doubt With its Lehi Fab Acquision

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TI is already building a new 300mm wafer fab, RFAB2, which should come online in the second half of 2022 and have enough capacity for $5 billion of incremental annual revenue (as compared with roughly $18 billion in sales for the company expected in 2021).

Investors have questioned whether TI will generate enough future revenue to fill RFAB2, so acquiring the Lehi fab might be deemed excessive. However, TI’s exemplary management team should be given the benefit of the doubt for now, as Micron noted that it is selling the fab at less than book value.

Given TI’s $6.7 billion of cash on hand as of March 2021, as well as a low-interest rate environment if TI wanted to fund the deal with debt, TI isn’t putting its financial future at risk by buying another fab, even if Lehi were to sit underutilized for an extended amount of time. It also appears to us that the market for used fab equipment has been rather tight, so buying an additional fab and more equipment might make sense, even if the timing is less than ideal since the RFAB2 opening is on the way.

The economics of a merger might not make sense if TI has to build new facilities to take on chip orders from the acquired business, but if TI has already made the necessary fab investments and has underutilized 300mm facilities on hand, the return on investment on future deals might make more sense for TI in the long run.

Company Profile

Dallas-based Texas Instruments generates about 95% of its revenue from semiconductors and the remainder from its well-known calculators. Texas Instruments is the world’s largest maker of analog chips, which are used to process real-world signals such as sound and power. Texas Instruments also has a leading market share position in digital signal processors, used in wireless communications, and microcontrollers used in a wide variety of electronics applications.

(Source: Morningstar)

General Advice Warning

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

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Revenue Reaching for the Sky but Earnings to Remain Grounded

Unfortunately, the bright revenue picture is blurred by an uncertain outlook for costs snapping back from COVID-19 related rights relief, and investments needed to execute the strategic plan. EBITDA is projected to fall for two to three years from management’s projected NZD 180 million-plus in fiscal 2021. The trajectory is in line with our current expectation, but the key mystery is where Sky’s fiscal 2024 EBITDA will end up relative to our NZD 110 million forecast.

The current guidance for fiscal 2021 implies second-half EBITDA of NZD 66 million, or roughly NZD 130 million annualised. Our current fiscal 2024 EBITDA forecast of NZD 110 million would then equate to an average decline of 16% from fiscal 2021. It may be tempting to blindly input management’s financial targets into the model, but details from the investor day warrant a longer deliberation. In any case, our unchanged NZD 0.30 fair value estimate (AUD 0.28 at current exchange rates) already implies material upside from Sky’s current stock price. And the no-moat-rated group has attracted “a number of unsolicited approaches around potential transactions” over the past year according to management.

Management View to Launch Broadband Service

Management’s clear rationale for launching the broadband service is also sound (to improve the value and bundle proposition for existing Sky customers), while a continued focus on staking its ground in the fast-growing streaming space is not only positive but necessary. As with all strategic plans, the proof is in the execution. Its degree of difficulty is high, especially the objective of stabilising core pay TV subscriber base while growing streaming customers–a Goldilocks scenario that may be easier said than done. Still, with a pristine balance sheet, management is equipped with ample firepower to continue Sky’s transformation. The group ended December 2020 with an NZD 123 million cash balance, more than enough to repay the NZD 100 million bond (matured in March 2021). It also has an undrawn NZD 200 million facility (maturing July 2023).

Finally, management reaffirmed all current guidance for fiscal 2021. In fact, it even alluded to the potential that EBITDA may exceed the upper end of the NZD 170 to 183 million projected range, suggesting some remnants of COVID-19-related content cost savings and/or continued progress on non-content expense reductions. We have increased our fiscal 2021 EBITDA estimate to NZD 183 million, from NZD 175 million, but our longer-term forecasts are unchanged.

Company Profile

Sky Network Television is the only satellite pay-TV provider in New Zealand, and distributes local and overseas content to its customers through a digital satellite network. It generates subscription and content revenue from these customers. This business is augmented by a free-to-air television channel (Prime) and defensive forays into other distribution channels such as online video-on-demand and online access to live sports.

(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.