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

Lennox entered the variable refrigerant flow market and introduced an emergency replacement product line to go head-to-head with Carrier

Business Strategy and Outlook 

Over the last decade, Lennox has capitalized on its efforts to gain market share and cut costs against a backdrop of improving end-market demand. Its margin expansion story has been remarkable, with adjusted operating margins rising from about 8% during the last sales peak in 2007 to about 15% in 2019 before the pandemic (excluding an insurance recovery benefit and adjusting for divestitures of lower-margin refrigeration businesses). Its expanding distribution network and product portfolio have helped Lennox gain market share, while low-cost manufacturing and product sourcing and more cost-efficient product designs helped reduce its cost base. Lennox-branded products are distributed through a company-owned distribution network, which is advantageous because Lennox has more control over sales strategy, marketing, and dealer support. Its store strategy has expanded its distribution network and improved product availability and fulfilment rates. In terms of new products, Lennox entered the variable refrigerant flow market and introduced an emergency replacement product line to go head-to-head with Carrier. Overall, a growing store footprint and product portfolio will help the firm better penetrate dealers and gain market share.

Strong residential HVAC demand was a bright spot in pandemic-stricken 2020-21. The outlook for residential construction remains constructive, but a more cautious residential replacement market outlook. While regulation changes (for example, energy efficiency standards) should be a tailwind, the replacement cycle is maturing. A favourable demand can be a backdrop for the commercial HVAC business, which can support at least mid-single-digit growth over the next few years. Over the short term, the business should benefit from spending tied to planned replacement projects that were deferred during the pandemic. There’s a heightened focus on air quality and energy efficiency as a longer-term secular opportunity for the commercial business.

Financial Strength

Lennox has a sound capital structure, and its free cash flow generation should easily support its debt-service requirements and future capital-allocation strategy. Lennox has approximately $1.7 billion of outstanding debt and $60 million of cash and short-term investments. The debt load equates to a net debt/2022 EBITDA ratio of about 2.2, which is modestly above management’s target ratio of 1-2. Lennox has a proven ability to generate free cash flow throughout the cycle. The company has generated positive free cash flow (defined as operating cash flow less capital expenditures) every year since its first full year as a public company in 2000. Given the firm’s reasonable use of leverage and consistent free cash flow generation, Lennox’s financial health is satisfactory.

Bulls Say’s

  • Lennox is well positioned to benefit from steady new residential construction and heightened demand for more energy-efficient commercial HVAC systems that improve air quality. 
  • Reinvestment in new product development and its distribution network should help the firm take share from competitors in residential and commercial markets. 
  • Lennox employs a shareholder-friendly capital allocation strategy. Since 2010, it has returned approximately $4.2 billion to shareholders via dividends and share repurchases, and its dividend has risen at an 18% CAGR.

Company Profile 

Lennox International manufactures and distributes heating, ventilating, air conditioning, and refrigeration products to replacement (75% of sales) and new construction (25% of sales) markets. In fiscal 2021, residential HVAC was 64% of sales, commercial HVAC was 21%, and refrigeration accounted for the remaining 15% of sales. The company goes to market with multiple brands, but Lennox is the company’s flagship HVAC brand. The Texas-based company generates most of its sales in North America.

 (Source: MorningStar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Technology Stocks

L3Harris Posts Strong Bookings as Supply Constraints Limit Sales

Business Strategy & Outlook

Defense prime contractors are not born, they’re assembled. L3Harris Technologies, the sixth-largest defense prime by defense sales, was made from the merger of equals between L-3 Technologies, a sensor-maker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger’s thesis was an assumption that additional scale would primarily generate cost synergies but that eventually, the firms would produce meaningful revenue synergies. Defense primes are implicitly a play on the defense budget, which is ultimately a function of a nation’s wealth and its perception of danger. Despite increased U.S. fiscal leverage, defense spending will continue growing because of heightened geopolitical tensions caused by the Russia-Ukraine war. An increasing budgetary environment. That contractors will continue growing as modernization budgets increase to service the increased need to deter great powers conflict in Europe and Asia-Pacific. 

While it’s difficult at this stage to pinpoint exactly how far this defense spending upcycle will go, the heightened geopolitical tensions are likely to last for at least several years. Broadly, management’s thesis on the merger is accountable. Cost synergies, to a large extent, drove the 30-year wave of consolidation across the defense industry, which has largely generated shareholder value. Both L-3 and Harris had high revenue exposure to the defense sensors business and operated reasonably similar businesses, so one doesn’t see major execution risks in the merger. Arguably, L-3 was an ideal partner for a merger of equals because L-3 operated as a holding company and there are quite a few potential efficiencies from consolidating the firm into a more integrated firm. The three biggest firm-specific growth opportunities for L3Harris Technologies are the tactical radios replacement cycle, national security satellite asset decentralization, and international sales expansion.

Financial Strengths

The L3Harris is in solid financial shape. The firm increased debt by about $4.5 billion in 2015 to fund the acquisition of Exelis, a sensor-maker that was spun off from ITT and had been paying down debt since. The firm’s all-stock merger of equals with L-3 Technologies did not dramatically increase debt relative to size, and projecting a 2022 gross debt/EBITDA of roughly 2.0 times, which is quite manageable for a steady defense firm. The company is using the proceeds of portfolio divestitures for share repurchases, so one can anticipating EBTIDA expansion will be the driving force behind a decreasing debt/EBITDA over the forecast period. While the desire to compensate shareholders, the paying down debt may be more value accretive, as it would make us more comfortable decreasing the cost of equity assumption for the firm. While L3Harris has some exposure to commercial aviation (depending on definitions, roughly 5%-15% of sales), one cannot anticipate the firm will be materially affected by the downturn in commercial aviation. As demand for defense products has remained resilient, one cannot see the firm needing to raise capital any time soon. That noted, L3Harris produces a substantial amount of free cash flow and is not especially indebted, so anticipate that the company would be able to access the capital markets at minimal cost if necessary.

Bulls Say

  • There is substantial potential for cost synergies from the merger with L-3 due to the decentralized organizational structure of the pre-merger entity. 
  • L3Harris is at the base of a global replacement cycle for tactical radios, which will drive substantial growth. 
  • Defense prime contractors operate in a cyclical business, which could offer some protection if the U. S. enters a recession.

Company Description

L3Harris Technologies was created in 2019 from the merger of L3 Technologies and Harris, two defense contractors that provide products for the command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) market. The firm also has smaller operations serving the civil government, particularly the Federal Aviation Administration’s communication infrastructure, and produces various avionics for defense and commercial aviation.

(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

Strong Rental Demand Continues To Be the Story for United Rentals, Despite Tight Supplies

Business Strategy & Outlook

The United Rentals will continue to be the top player in the equipment rental industry. As the industry leader, the company provides customers better equipment availability and reliability than smaller players. However, many of the equipment brands found in United Rentals’ product catalog can also be found at other competitors, such as Sunbelt Rentals (owned by Ashtead), Herc, and at thousands of other rental companies across North America. United Rentals has employed an aggressive mergers and acquisitions strategy, completing hundreds of acquisitions over the past two decades. The company continues rolling in smaller rental companies onto its rental platform, further expanding its geographical reach and fleet categories. 

The equipment rental industry is ripe for consolidation and the United Rentals will be a beneficiary, but so too will its competitors. The company will likely be competing with other players looking to build scale. In terms of its branch network, United Rentals operates approximately 1,300 rental locations throughout North America, significantly more than the next-largest player, Sunbelt Rentals, which operates over 900 locations in the region. The company is also increasingly extending into the specialty equipment vertical (28% of sales), which includes trench safety, power and HVAC, and fluid solutions. Finally, the company has exposure to end markets with near-term, attractive tailwinds. The construction and industrial markets will continue to improve from their pandemic lows. Nonresidential construction spending has been depressed, but this trend will reverse over the next few years as economic growth will spur new project development for industrial, retail, hotel, and office markets. The total addressable market for the equipment rental industry will continue to expand as rental penetration increases. More and more contractors are electing to rent general equipment (aerial lifts, forklifts, generators) that are intermittently used on projects. This allows them to save on project costs.

Financial Strengths

United Rentals maintains a sound balance sheet. Total debt at the end of 2021 stood at $9.7 billion, which equates to a net debt/adjusted EBTIDA ratio of 2.2 times. The company can get its net leverage ratio under 2 times over the forecast. This will largely be not only led by the expectations of increasing rental penetration, but also thanks to improving macroeconomic factors, such as higher construction and industrial spending. These factors to boost United Rentals’ adjusted EBITDA. The company’s solid balance sheet gives management the financial flexibility to continue running its growth-focused capital allocation strategy going forward that mostly favors expanding its equipment fleet, particularly specialty equipment. The United Rentals can generate solid free cash flow throughout the economic cycle. By the midcycle year, the company to generate over $2.6 billion in free cash flow, supporting its ability to return free cash flow to shareholders. Similar to previous years, the United Rentals’ capital allocation strategy to be heavily focused on building out its equipment fleet and making tuck-in acquisitions. The management will continue to buy back shares, but one doesn’t expect a dividend to paid out in the near term. In terms of liquidity, the company can meet its near-term debt obligations given its access to credit facilities, approximately $2.6 billion in 2021. The company’s cash position stood at $144 million, which is lower than some of the other companies under the coverage, but the comfort in United Rentals’ ability to liquidate rental equipment on its balance sheet in the event of an economic downturn.  United Rentals maintains a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say

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

Company Description

United Rentals is the world’s largest equipment rental company, and principally operates in the United States and Canada, where it commands approximately 15% share in a highly fragmented market. It serves three end markets: general industrial, commercial construction, and residential construction. Like its peers, United Rentals historically has provided its customers with equipment that was intermittently used, such as aerial equipment and portable generators. As the company has grown organically and through hundreds of acquisitions since it went public in 1997, its catalog (fleet size of $16.6 billion) now includes a range of specialty equipment and other items that can be rented for indefinitely long time periods.

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Smith & Nephew Faces Price Pressure; Giving a Slight Haircut to The Fair Value Estimate

Business Strategy & Outlook

Impressive innovation has allowed Smith & Nephew to carve out a slice of the orthopedic, sports medicine, and wound-care markets. Though the company is smaller than the dominant orthopedic competitors, it has punched above its weight in terms of introducing meaningful innovation with its pioneering hip resurfacing implant and knee replacements with Verilast technology, which it contends can last for 30 years. These are significant improvements that exceed the evolutionary innovation typically seen in orthopedics. Nevertheless, as the competitive set consolidates, Smith & Nephew’s position as a midsize competitor leaves it vulnerable as the hospital customer base seeks to reduce vendors to save costs. The firm’s market share–about 10% of hips and knees–translates into a tenuous position. Share shifts in this market are glacial at best, thanks to significant switching costs, and new technology does not necessarily overcome those switching costs. 

Smith & Nephew’s strong show of meaningful innovation translated into a mere 200-basis-point gain in share over the past decade. This showdown between technical innovation and the stickiness of surgeon preference underscores how difficult it is to induce practitioners to switch. This dynamic and Smith & Nephew’s smaller user base mean the firm could find itself locked out of more hospitals and healthcare systems in the future. The firm has been aggressively pivoting to reduce its reliance on large-joint replacement with the acquisition of ArthroCare for its arthroscopy and sports medicine presence, concerted efforts to penetrate emerging markets, and the new additions of Osiris Therapeutics for its regenerative products and Leaf Healthcare’s pressure sore-monitoring system. The jury is still out on whether this is enough to allow Smith & Nephew to compete effectively against competitors that continue to grow larger and remain independent. As the market moves gradually toward more vendor consolidation, one would not be surprised to see Smith & Nephew eventually pair up with a larger rival, such as Stryker or Johnson & Johnson, in order to better compete.

Financial Strengths

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

Bulls Say

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

Company Description

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

(Source: Morningstar)

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

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

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

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

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

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

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

Categories
Technology Stocks

Turnaround Displayed in Renault First-Half Results, Guidance Raised; FVE Increased to EUR 81

Business Strategy & Outlook

Renault owns 43.7% of Nissan, while Nissan owns roughly 15% of Renault and 34% of Mitsubishi. The alliance is structured as a partnership, with each company operating as an individual entity. Combined, the alliance stands as one of the largest global automakers. The companies benefit from increased scale, purchasing power, and the ability to share vehicle technology and platforms. The group is governed by the alliance board of Renault-Nissan BV, which is 50% jointly owned by Renault and Nissan. Boardroom and management upheaval from the Carlos Ghosn scandal was a huge distraction for the alliance. Renault installed Jean-Dominique Senard (formerly in charge of Michelin) as chairman. The company hired Luca de Meo as CEO (former head of SEAT), who started on July 1, 2020. Renault also owns 67.7% of the parent of Russian automaker AvtoVAZ, which makes Lada, the country’s best-selling brand. However, on March 23, 2022, the company said it may write down its Russian assets, another turnaround setback. In addition, Renault owns 99.4% of Romanian automaker Dacia, and 80.0% of Samsung Motors. Nissan holds a 34% stake in Mitsubishi Motors. 

Renault has organized these companies into an integrated global alliance, sharing purchasing, information services, research and development, production facilities, vehicle platforms, and powertrains. Through its turnaround plan, dubbed “Renaulution” and initiated in 2020, Renault will focus on its geographic market strength and better utilization of alliance cost efficiencies. In the Western European new-car market, Renault has the third-largest share, trailing Volkswagen and Stellantis. To its detriment, Renault has only had limited exposure to China, the world’s largest auto market, but upon the formation of a joint venture with Chinese automaker Dongfeng, local production began in 2017. Nissan has successfully penetrated the China market, annually selling more than 1.0 million units. Renault also has production facilities in Brazil, India, Russia, and Turkey. Through its own operations and through those of its alliance partners, Renault has a solid presence in Eastern Europe, South America, and South Korea.

Financial Strengths

Renault’s automotive business has significant financial leverage, but as per opinion, this is not overly burdensome relative to the company’s substantial cash position. With financial services on an equity basis, total debt/EBITDA has averaged 1.0 times during the period from 2011 to 2021 but was negative 9.7 times at the end of 2020 due to operating losses from COVID-19. The ratio was 3.4 times at the end of 2021. Adding in the impact of operating leases and netting cash against debt, net adjusted debt/EBITDAR during the same period averaged negative 0.2 times, with 2020 coming in at negative 4.2 times, and year-end 2021 at 0.9 times. Before 2008, with financial services on an equity basis, total debt/EBITDA was around 1.5 times. On lower EBITDA and higher outstanding debt in 2008 and 2009, the leverage ratio jumped to 3.6 and 20.6 times, respectively. In early 2009, the company received a EUR 3 billion loan from the French government to reduce refinancing risks associated with accessing credit markets at extremely high interest rates. In 2012, Renault also sold its entire stake in AB Volvo to reduce indebtedness. In response to the coronavirus pandemic, the company announced that it would not pay a dividend in 2020 on 2019’s financial results. Also, the company arranged a EUR 5 billion credit line guaranteed by the French government, on which it drew down EUR 4 billion. At the end of 2020, the undrawn EUR 1 billion was no longer available. Management targets full reimbursement of the French guaranteed loan by the end of 2023. Total liquidity of the automotive group was EUR 17.3 billion at the end of 2021, including a EUR 3.4 billion undrawn credit line and EUR 13.9 billion in cash.

Bulls Say

  • Renault’s alliance with Nissan provides scale and purchasing power that the company would otherwise struggle to achieve on its own. 
  • Renault is the largest manufacturer of light commercial vehicles in Europe, excluding pick-ups, with around a 16% share of the market and a 25% share of the electric LCV market. 
  • The company’s low-cost products, like the Dacia Logan, have benefited from increased demand for value-priced vehicles by cost-conscious consumers.

Company Description

Renault possesses a global alliance of automotive manufacturing, financing, and sales operations. The company’s alliance partners consist of AvtoVAZ (67.7%), Dacia (99.4%), Nissan (43.7%), Renault Samsung Motors (80.0%), and Mitsubishi (Nissan owns 34%). Total 2021 Renault-Nissan-Mitsubishi alliance sales volume of 7.9 million vehicles makes the alliance the third-largest vehicle group in the world, behind Toyota at 10.5 million and Volkswagen at 8.6 million vehicles sold.

(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

Idex has consistently generated returns on invested capital in the upper midteens

Business Strategy and Outlook 

Idex owns a collection of moaty businesses that tend to be leaders in their respective niche end markets, typically holding the number-one or -two market share. It manufactures a wide array of products, ranging from equipment used in DNA sequencing to wastewater pumps to Jaws of Life hydraulic rescue tools. Idex’s lean manufacturing process allows it to effectively operate in a high-mix and low-volume environment, offering customers a wide variety of highly engineered products that are configurable or customizable. Furthermore, a common theme across its businesses is that they specialize in making mission-critical equipment that performs a vital function but typically constitute a small part of the customer’s total bill of materials. This aspect of the business contributes to Idex’s narrow moat through customer switching costs and allows the firm to command premium pricing. In the long run, Idex can be viewed as a GDP-plus business. Organic sales growth will continue to outpace industrial production by around 1%-2% annually as the firm’s commitment to innovation and investments in research and development continue to bear fruit and generate additional revenue through introductions of new or refreshed products. It can be projected organic sales to grow at a roughly low-single-digit clip in fluid and metering technologies as well as the fire and safety segment and the diversified products segment, and at a mid-single-digit rate in the health and science technologies segment.

Additionally, the firm will continue to supplement its organic sales growth with acquisitions. Historically, management has avoided overpaying for acquisitions. As such, despite regular mergers and acquisitions, which add goodwill and assets to the firm’s capital base, Idex has consistently generated returns on invested capital in the upper midteens. Management has remained disciplined in the current elevated valuation environment, and it will continue to manage acquisition risk appropriately and focus on maximizing returns on invested capital.

Financial Strength

Idex maintains a sound capital structure, which will help the firm navigate the uncertainty due to the coronavirus pandemic. As of Dec. 31, 2021, the firm owed roughly $1.2 billion in short- and long-term debt while holding approximately $0.9 billion in cash and cash equivalents. The company can also tap into its $800 million revolving credit facility. Idex will generate average annual operating cash flows of roughly $800 million over the next five years. Given its healthy balance sheet and solid cash flow generation, Idex is adequately capitalized to meet its upcoming debt obligations. Idex will have a debt/adjusted EBITDA ratio of roughly 1.5 times in 2022. Management will continue to prioritize investing in organic growth and executing M&A, growing the dividend, and allocating excess capital to opportunistic share repurchases. The firm has raised its quarterly dividend by an average annual rate of roughly 10% over the last five years, and the dividend will keep growing roughly in line with earnings. The payout ratio will remain around 30% over the next five years.

Bulls Say’s

  • Idex has a portfolio of moaty businesses that have leading shares in niche end markets. 
  • Idex generates strong free cash flows, which have averaged around 16.5% of sales during the last 10 years. 
  • Recent acquisitions of Akron Brass and AWG, as well as new product introductions (including eDraulic and SAM), have reinforced Idex’s already strong competitive position in the fire and safety business

Company Profile 

Idex manufactures pumps, flow meters, valves, and fluidic systems for customers in a variety of end markets, including industrial, fire and safety, life science, and water. The firm’s business is organized into three segments: fluid and metering technologies, health and science technologies, and fire and safety and diversified products. Based in Lake Forest, Illinois, Idex has manufacturing operations in over 20 countries and has over 7,000 employees. The company generated $2.8 billion in revenue and $661 million in adjusted operating income in 2021.

(Source: MorningStar)

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

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

ServiceNow’s Differentiated Software Drives Multiple Organic Growth Vectors in Expanding TAM

Business Strategy & Outlook:    

ServiceNow has been successful thus far in executing on a classic land and expand strategy. First, it built a best-of-breed SaaS solution for IT Service Management (ITSM) based on being modular and flexible, having a superior familiar user interface, offering a way to automate a wide variety of workflow processes, and becoming a platform to serve as a single system of record for the IT function within the enterprise. Having established itself in ITSM and then the much larger IT operations management, or ITOM, market, the firm moved beyond the IT function. The same set of product design features and technologies has allowed ServiceNow to bring its process automation approach to HR service delivery, customer service, and finance. More recently, ServiceNow has been offering higher pricing tiers with an increasing array of features, along with industry specific solutions, which have higher ASPs and help drive revenue growth. 

ServiceNow’s success has been rapid and notably organic. The company already offers high-end enterprise-grade solutions and boasts elite level customer retention of 97% to 98%. ServiceNow focuses on the largest 2,000 (G2K) enterprises in the world and these customers continue to renew for larger contracts, with the average annual contract value doubling in the last three years. Further, the company has no small business exposure. Additionally, customers overall are re-upping for more than one solution, as more than 75% of customers are multi-product purchasers, which is driving deal sizes higher. Having the IT function within an enterprise as the initial landing pad is fortunate, as it provides a built-in advocate for software (an IT responsibility) for other functional areas of the enterprise. ServiceNow will continue to use its position to land new IT-driven customers and upsell ITOM features on the platform, but the company will increasingly cross-sell emerging products in HR and customer service, along with the platform as a service (PaaS) offering. The product strength, market presence, and a strong sales push into areas outside of IT, will continue to drive robust growth.

Financial Strengths:  

ServiceNow is a financially sound company. Revenue is growing rapidly, while non-GAAP margins are positive and expanding. The continued traction in ITSM and ITOM, along with adoption of new use cases in customer service and HR service delivery, and the PaaS solution will continue to drive revenue growth in excess of 20% for at least the next five years. As of Dec. 31, 2021, ServiceNow had $3.3 billion in cash, offset by approximately $1.6 billion in debt, resulting in a net cash position of $1.6 billion. Gross leverage sits at 2.1 times trailing EBITDA, which allows for flexibility should the environment worsen. Operating margins are increasing as ServiceNow continues to scale, with 2019 the first year of profitability on a GAAP basis. ServiceNow should be able to drive in excess of 100 basis points of margin expansion annually. Free cash flow margin was 31% in 2021, providing a preview of what will be strengthening margins over the next decade. In terms of capital deployment, ServiceNow does not pay a dividend, does not regularly repurchase shares, and makes only small acquisitions. In fact, ServiceNow has spent only a few hundred million dollars on acquisitions in aggregate since 2011. The company made a variety of tuck-in acquisitions in 2019 and 2020–all for undisclosed amounts. Small, feature-driven acquisitions are expected to continue but have not explicitly modeled any such deals. The company might not initiate a dividend in the foreseeable future, nor regular share repurchases.

Bulls Say: 

  • ServiceNow’s superior product has led to rapid share gains and exceptional retention within the ITSM market. Now the company is using this strength to expand into other areas of ITOM.
  • The company has added additional growth drivers, including customer service and HR service delivery, which should help propel robust growth over the next five years.
  • GAAP operating margin was break-even for the first time in 2019 and see a decade-long runway for expansion.

Company Description: 

ServiceNow Inc provides software solutions to structure and automate various business processes via a SaaS delivery model. The company primarily focuses on the IT function for enterprise customers. ServiceNow began with IT service management (ITSM), expanded within the IT function, and more recently directed its workflow automation logic to functional areas beyond IT, notably customer service, HR service delivery, and security operations. ServiceNow also offers an application development platform as a service (PaaS).

(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

Spotify Reports Strong Q2 User Growth; Likely to Continue in Q3; FVE $187; Shares are Attractive

Business Strategy & Outlook

Swedish-based Spotify is the world’s leading music streaming service provider. The fast-growing digital streaming space has become the primary distribution platform of choice within the ever-changing music industry. Spotify can benefit from various network effects that will help the firm increase its users and amass valuable intangible assets associated with user data and listening preferences. However, it faces intense competition and has a (mostly) variable cost structure that may limit Spotify’s future operating leverage and profitability. Thus, one does not have sufficient confidence that it will generate excess returns on capital over the next 10 years. Spotify may be at the mercy of the record labels in the music industry, as it will need access to content to continue attracting more listeners. While the distribution side of the industry (Spotify, YouTube, Apple, terrestrial and digital radio, and so on) is fragmented, over 80% of licensing is controlled by the big three major record labels: Universal Music Group, Sony, and Warner Music Group. 

As these licensors gather royalties from Spotify and its peers, they maintain pricing leverage as content remains king. The firm’s entry into the podcast space. However, while the firm has become the market leader via content acquisition, which further diversifies its revenue, one does not expect its dependency on labels to be lessened much. Spotify is ahead of the pack in the growing music streaming and podcast markets, but it faces stiff competition from behemoths such as Amazon, Apple, and Google. Unlike Spotify, these firms don’t rely solely on streaming music or podcasts to drive profitability and can potentially run at break-even, or even as loss leaders, while monetizing users via other products and services. It might also be harder for Spotify to steal share from these competitors over time, as Apple Music and Apple Podcasts listeners are probably entrenched with other Apple products, Amazon Music with Echo, and so on. Thus, they might be relatively more loyal to these music and podcast platforms than the users an operating-system-agnostic platform like Spotify can capture.

Financial Strengths

As of the end of 2020, Spotify did not hold any debt on its balance sheet. Spotify’s cash balance at the end of 2020 was $1.7 billion. Spotify has continued to generate cash from operations since 2016; although the firm has incurred hefty operating losses in recent years, cash flow has been better as a good portion of these costs, which are accrued fees to rights holders, have not yet been paid out in cash. While Spotify remains an asset-light business since it uses Google’s cloud platform for data storage and computing, one does expect the firm’s annual capital expenditure to be EUR 75 million-EUR 100 million, likely necessary to provide additional services and tools on the creation side especially for new, up-and-coming, or independent artists. The firm is also likely to take the M&A route with similar objectives, as displayed by its various podcast acquisitions. The free cash flow to equity/sales, to average around 6% the next 5 years.

Bulls Say

  • Spotify’s listener growth may help it negotiate much better terms with record labels over time. 
  • By investing in more services and tools for artists, Spotify may attract artists away from record labels and toward independent distribution, which may allow the company to pay lower royalties over time. 
  • Revenue growth during the next 10 years should accelerate as Spotify keeps investing in different content such as podcasts and video, attracting more users and advertisers.

Company Description

Spotify, headquartered in Stockholm, Sweden, is one of the world’s largest music streaming service providers, with over 150 million total listeners. The firm monetizes its users through both a paid subscription model, referred to as its premium service, and an ad-based model, referred to as its ad-supported service. Revenue from premium and ad-supported services represented 90% and 10% of Spotify’s 2017 total revenue, respectively.

(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

Strong Execution Continued Into Q2 at T-Mobile; Shares Modestly Undervalued

Over the shoulder view of and stock broker trading online while accepting orders by phone. Multiple computer screens ful of charts and data analyses in background.

Business Strategy & Outlook

T-Mobile’s strong brand and reputation, coupled with its industry-leading spectrum position, provides it with an opportunity to drive strong revenue and profit growth over the next couple of years. Longer term, a rational competitive landscape will allow the firm and its rivals to deliver stable, if modest, cash flow growth. In the five years leading up to the Sprint acquisition, T-Mobile expanded its postpaid phone customer base nearly 60% while the rest of the industry stagnated. Despite this growth, T-Mobile remained far smaller than AT&T or Verizon, putting it at a scale disadvantage evident in significantly lower profitability than its larger rivals. With the addition of Sprint, though, T-Mobile is larger than AT&T and reasonably close to Verizon. The combination of scale and strong management should serve T-Mobile well. 2022 will be an important year, as the firm shuts down the Sprint networks and fully moves Sprint customers to T-Mobile’s network and systems, but one has little reason to doubt this process will go smoothly, as integration thus far has been impressive. 

The T-Mobile network will match up well with that of its rivals over the long term, and it is worthy of a narrow economic moat rating. Importantly, the massive amount of spectrum the firm now controls puts it in a strong position. Its mid band spectrum holdings, which will likely provide the bulk of wireless network capacity well into the future, are massive and largely unused. The firm avoided matching Verizon and AT&T egregious spending in the C-band spectrum auction as a result. Efficiently and effectively deploying this resource, something Sprint failed to do on its own, is now the firm’s primary objective. T-Mobile’s network isn’t perfect. The firm doesn’t own significant fixed-line assets, which will likely be increasingly important as wireless networks become denser. The firm will have access to third-party networks on reasonable terms, but this remains a risk. T-Mobile also leases many of its spectrum licenses and will need to renew leases or purchase licenses outright in the coming years.

Financial Strengths

T-Mobile had done a great job of reducing leverage over the past few years while Sprint had moved in the opposite direction. The merged firm started life with about $64 billion in debt net of cash, equal to about 2.9 times EBITDA, or about 3.5 times adjusted for Sprint’s heavy use of phone leases. Since the merger, T-Mobile has primarily used free cash flow to reduce leverage, but its participation in the C-band spectrum auction, where it spent $9.3 billion, pushed net debt up to $72 billion at the end of the first quarter of 2022. Growth in the business has still allowed net debt to remain at 3.0 times EBITDA. Net leverage also sits at 3.0 times “core-adjusted” EBITDA, which excludes integration costs but also eliminates the accounting benefit from phone lease revenue. T-Mobile management had said it believes it can run the business with leverage in the 3.0-4.0 times range but now targets leverage at a mid-2s multiple of core adjusted EBITDA, a level it believes it can hit by the end of 2022. Management has said it would need to cut leverage below 2.5 times to receive an investment-grade rating from the major agencies but notes that it has been able to borrow at rates only modestly higher than AT&T in recent years. The firm has also received an investment-grade rating on its secured borrowings. One suspect less favorable debt market condition would have a significant impact on T-Mobile’s borrowing costs. Taking leverage down to around 2.5 times adjusted core EBITDA seems reasonable but one wouldn’t be opposed if the firm drove leverage lower still given the ups and downs of the wireless industry and the financial capabilities of rivals AT&T and Verizon. Management expects to begin returning capital to shareholders in 2023, saying it could buy back up to $60 billion of its shares through 2025.

Bulls Say

  • After several years of unprecedented success, T-Mobile has the wind at its back. The firm’s reputation with consumers is as strong as ever, and its network is delivering better service than the other carriers. 
  • The Sprint merger has catapulted T-Mobile near the top of the industry, with ample scale to compete and a spectrum portfolio no other carrier can match. Heavy network investment will bring operating costs savings and a lead in 5G. 
  • Free cash flow, already positive during the Sprint integration, should grow sharply, providing the ability to return capital to shareholders.

Company Description

Deutsche Telekom merged its T-Mobile USA unit with prepaid specialist MetroPCS in 2013, creating T-Mobile US. Following the merger, the firm provided nationwide service in major markets but spottier coverage elsewhere. T-Mobile spent aggressively on low-frequency spectrum, well suited to broad coverage, and has substantially expanded its geographic footprint. This expansion, coupled with aggressive marketing and innovative offerings, produced rapid customer growth. With the Sprint acquisition, the firm’s scale now roughly matches its larger rivals: T-Mobile now serves 71 million postpaid and 21 million prepaid phone customers, equal to around 30% of the U.S. retail wireless market. In addition, the firm provides wholesale service to resellers.

(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

Rockwell’s signature platform in this strategy is Logix, which consists of programmable controllers and a line of products interoperable with third-party and some legacy application

Over the shoulder view of and stock broker trading online while accepting orders by phone. Multiple computer screens ful of charts and data analyses in background.

Business Strategy and Outlook 

Rockwell as the highest quality automation player on the west side of the Atlantic based on quality, breadth of offerings, and shrewd strategic partnerships. Today, it’s one of the best-in-breed competitors seeking to gain a stronger foothold where technology meets traditional manufacturing, which Rockwell calls its Connected Enterprise. Rockwell’s signature platform in this strategy is Logix, which consists of programmable controllers and a line of products interoperable with third-party and some legacy applications. The advantage of this platform is multifold. First, Logix can perform multiple automation applications, like discrete (automotive, for example), process (chemicals), and hybrid (pharmaceuticals) on a single platform. Most competitors pursue these automation applications through a piecemeal mix of hardware and firmware platforms.

Second, by using a single, easy-to-use platform, Logix reduces training costs and maintenance expenses as well as makes it easier to communicate across different manufacturing cells. The training costs will become a greater consideration as technology inevitably becomes increasingly integrated into manufacturing facilities. Ultimately, workers will need to be comfortable with that technology, which can become complicated if they’re forced to learn multiple platforms. Third, because Logix works with third-party applications, customers can make incremental improvements to their facilities without incurring the disruption of an expensive system overhaul. This should allow for cheaper installation and scale-up costs. Finally, like other automation counterparts, the Logix platform offers customers the opportunity to run analytics on the cloud, allowing for improved asset utilization as well as lower total cost of ownership. Predictive maintenance further allows for reduced enterprise risk, while analytics helps customer products get to market faster through optimized throughput. Ultimately, the value offered by solutions like its independent cart and partnerships with Sensia and PTC, combined with inorganic opportunities, should allow the firm to remain a premium player in a growing industry.

Financial Strength

Rockwell operates from a stable and healthy balance sheet position. The firm has low risk of default, which concurs with the model-driven credit risk assessment. The company’s current unrestricted cash position can easily cover all of its short-term debt obligations as of the end of fiscal 2021. As of the end of fiscal 2021, the calculated net debt to EBITDA is of 2.3 times, and an interest coverage ratio (EBIT/interest expense) of 13 times, which is more than sufficient to address Rockwell’s financial obligations. This underpins the strength of the firm’s financial health. Rockwell sports healthy free cash flow conversion that frequently exceeds 100%, though will be closer to 90% during fiscal 2022. It also sports a best-in-class free cash flow margin in the higher midteens, which can even slightly improve on over time.

Bulls Say’s

  • Rockwell is the only automation competitor that integrates discrete, process, and hybrid manufacturing in a single, easy-to-use platform.
  • Newer initiatives like digital twi n and augmented reality, as well as software subscription services that deliver predictive analytics should drive higher growth compared with historical results. 
  • Less than 20% factories are connected, and most insights that drive greater throughput and efficiency are now made “at the edge,” or closer to the manufacturing floor.

Company Profile 

Rockwell Automation is a pure-play automation competitor that is the successor entity to Rockwell International, which spun off its former Rockwell Collins avionics segment in 2001. As of fiscal 2021, the firm operates through three segments–intelligent devices, software and control, and lifecycle services. Intelligent devices contain its drives, sensors, and industrial components, software and control contain its information and network and security software, while lifecycle services contain its consulting and maintenance services as well as its Sensia JV with Schlumberger.

 (Source: MorningStar)

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