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

KLA Tencor has built its leading technical expertise and extensive knowledge base into a wide economic moat

Business Strategy and Outlook 

KLA dominates the process diagnostic and control segment of the semiconductor equipment industry. During the fabrication process, wafers must be inspected for defects and proper critical dimensions to identify and rectify problem sources. As customers continue pursuing Moore’s Law, smaller chips must meet more precise specifications, which in turn increase the need for advanced PDC tools. These tools help customers improve semiconductor die yields, accelerate development and product ramps, and ultimately maximize profitability. KLA boasts a wide economic moat and is well positioned for healthy growth going forward.

With a 50%-plus share in the PDC market and installed base of 48,000 tools, KLA-Tencor has built its leading technical expertise and extensive knowledge base into a wide economic moat. These competitive advantages have allowed the firm to maintain its technological edge through a large research and development budget and close relationships with customers to identify future needs in the PDC space. The firm is not immune to the cyclicality of the semiconductor equipment market and thus may face bouts of low capital expenditures due to prolonged process nodes and increased tool reuse. However, KLA has been able to charge a premium for its specialized products, as competitors’ offerings are generally not as advanced. This allows the firm to handle cyclical troughs fairly well for a company that operates in the chip equipment industry. KLA is well positioned for the long-term, as chipmakers will require more advanced PDC tools to go with fabrication technologies featuring smaller circuit sizes, new materials, and more process steps. For example, EUV lithography, which is being deployed at process nodes 7-nanometer and below, requires new PDC tools to help validate and maintain the new technology. This endeavour requires a large research and development budget that only firms such as KLA can provide. The firm’s acquisition of Orbotech provides solid diversification into the flat panel display and printed-control board markets, though these tools are slightly margin-dilutive relative to KLA’s core offerings.

Financial Strength

Historically, KLA-Tencor has maintained excess cash over its debt balance. However, with the leveraged recapitalization in 2015, the company went to a net debt position for the first time. At the end of fiscal 2022, KLA reported $2.7 billion in cash, cash equivalents, and marketable securities versus $6.6 billion in long-term debt. While the firm has been able to generate sufficient cash to service the outstanding debt and maintain healthy R&D investments, one can remain vigilant for signs that KLA is unable to appropriately accomplish either requirement. During cyclical downturns, typically prefer to see equipment providers have a healthy cash cushion.

Bulls Say’s

  • KLA is the leader in a highly profitable segment. PDC tools lower production costs and maximize productivity for chipmakers, making them a crucial part of the semiconductor manufacturing process.
  • KLA has the most extensive data and knowledge base in the PDC market, which it has gained through years of industry leadership, making it difficult for competitors to catch up. 
  • By focusing on PDC, KLA has carved a leadership position in this increasingly important subsegment of the equipment market.

Company Profile 

LA designs and manufactures yield-management and process-monitoring diagnostic and control systems for the semiconductor manufacturing industry. The systems are used to analyse the manufacturing process at various steps in a semiconductor’s development. The firm’s laser-scanning products are used for wafer qualification, process monitoring, and equipment monitoring. KLA also provides inspection tools and systems for optical metrology and e-beam metrology.

(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

EQIX posted strong 2Q22 results, with revenue of $1.817bn and net income of $216m

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

Investment Thesis

  • By considering the quality of the business, EQIX is trading at fair valuation (from the perspective of trading multiples, dividend yield and the DCF valuation).
  • Attractive long-term outlook in global digitization and data requirements of companies, with 5G and cloud computing as key drivers.
  • Businesses moving away from on-premise centers towards colocation and cloud networks.
  • Diversified client base and revenue stream minimizes contractual risk.
  • Opportunity for future market share expansion via potential acquisitions. 

Key Risks

  • Increases to operating expenses – particularly electricity costs. However, the contracts between Equinix and its customers provide for rights and protection clauses to permit the Company to pass on electricity cost increases that exceed 5%.
  • Rising technology and acceptance of cloud-based services may incentivise businesses to fully leverage cloud infrastructure rather than connecting with IBX data centers. However, management has downplayed these concerns, stating that there must still be direct interconnection between Cloud and businesses within the data centers.
  • Newer IBX data centers have twice the cooling needs as old centers. Potential power limitations could force the company to have a lower utilization rate of its cabinets.  
  • Increased competition in the industry from the likes of Google, Apple, Microsoft and Digital Realty Trust, and the possibility of formation of strong strategic alliances amongst competitors 
  • EQIX is subject to exchange rate risk due to the company’s diverse geographical scale of operations. However, the company hedges many of these exposures. 
  • REIT classification mandates a minimum of 90% of taxable income paid to shareholders. This may hinder EQIX’s ability to increase its cash via retained earnings and could render the company’s balance sheet inflexible.

Key Highlights 

  • For FY22 total revenues of $7.259-7.299bn, up +9-10% y/y (+10-11% normalized and in CC), an increase of $65m vs prior guidance offset by a $102m FX impact, adjusted EBITDA of $3.323-3.353bn with margin of 46%, an increase of $33mvs prior guidance excluding integration costs ($30m integration costs) offset by a $49m FX impact, AFFO of $2.636-2.666bn, up +8-9% y/y (+8-10% normalized and in CC) and an increase of $33m vs prior guidance offset by a $42m FX impact, AFFO per share of $28.77-29.10, up +6-7% y/y (+8-9% normalized and in CC), total capex of $2.313-2.563bn with recurring capex of $180-190m, and cash dividend of $1,132m (up +10% y/y) equating to DPS of $12.4 (up +8% y/y). 
  • For 3Q22 revenues of $1.827-1.847bn, up +1-2% qoq, adjusted EBITDA of $831-851m, and recurring capex of $42-52m. 
  •  Revenue increased +10% y/y to $1.817bn (vs guidance of $1.809-1.829bn), with America is up +11% y/y (+9% normalized in CC), EMEA up +11% y/y (and in normalized CC) and APAC up +5% y/y (+11% normalized in CC). 
  • Adjusted EBITDA increased +8% y/y to $860m (vs guidance of $828-848m) with margin of 47.3%, with Americas growing +15% y/y (+14% normalized in CC) with margin of 45.3% (up +190bps y/y), EMEA growing +13% y/y (+12% normalized in CC) with margin of 49.3% (up +50bps y/y), while APAC declined -10% y/y (-5% normalized in CC) with margin of 48.8% (down -770bps y/y).
  • Net Income increased +217% y/y to $216m, primarily due to strong operating performance and a favorable tax settlement and AFFO increased +9% y/y to $691m.
  • Capex was $495m (~55% of expansion cabinets in metros that generate >$100m of annual revenues), including recurring capex of $35, down -23% y/y and at lower end of guidance range of $33-43m.  

Company Description

Equinix is a leading company in internet connection and data centers. It is the global market leader in the colocation data center industry, providing data services and platforms for over 9800 companies across 24 countries. This allows companies to connect to their online ecosystem and meet their interconnection needs for their business operations. EQIX also offers additional solutions such as the Equinix Cloud Exchange Fabric to connect data centers to cloud networks, and the recently introduced Equinix SmartKey to offer encryption protection for the data security management of companies.

(Source: Banyantree)

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

NFLX reported positive 2Q22 results, which despite missing top-line consensus forecast

Investment Thesis

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

Key Risks

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

Key Highlights 

  • Sheds subscribers for second quarter in a row. After more than a decade of uninterrupted growth, NFLX has been suffering a drop in subscriber numbers in FY22, ending 2Q22 with 220.67m, down -97,000 vs prior quarter (vs management’s forecast of 2m decline), as the Company continues to suffer from the pull forward in demand from the pandemic. The management’s strategy to roll out a cheaper, ad-supported membership scheduled to start in FY23 would not only help reduce churn rate (according to Antenna research NFLX’s churn rates have climbed to 3.3% from 2.4% historically) and help lure new customers especially as tough macro-economic conditions are prompting consumer budget cuts, but also help in profit growth by attracting premium CPMs from brand advertisers by leveraging combination of very engaged audience and high quality content, with a crackdown on password-sharing (NFLX estimates that more than 100m households are currently sharing another one’s account) further boosting subscriber numbers.
  • Cashflow profile improving. Cashflow profile continued to improve with net cash from operations in 2Q of $103m (vs outflow of $64m in pcp) and FCF of $13m (vs outflow of $175m in pcp) as transformation of the content model from licensed second run content to mostly Netflix originals (60% of net content assets on balance sheet are now Netflix-produced) continues to bear fruits with the Company now through the most cash-intensive part of the transition, resulting in cash content spend-to-content amortization expense ratio declining from FY19’s peak of 1.6x (along with peak negative FCF of $3.3bn) to 1.4x in FY21 and expected to be 1.2-1.3x in FY22 (resulting in FCF of ~$1bn) with further decline going forward leading to substantial growth in y/y FCF in FY23.

Company Description

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

(Source: Banyantree)

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

Arista is well positioned as a pioneer in the new age of software-defined networking and will continue to be a leader in next-generation switches and routers

Business Strategy and Outlook 

Arista Networks has solidified its market presence through data center switching and software-based networking innovation, and customers will remain loyal to the firm’s Extensible Operating System software and peripheral products. Arista’s initial growth came from high-frequency trading firms that found value in its low-latency switches and EOS. By remaining at the forefront of switching and routing speeds, Arista became a key networking supplier to giant cloud operators, service providers, and enterprises. EOS’ novelty lies in its single software image that provides a consolidated view of device activity from end to end and its ability to centrally upgrade the entire network. EOS contains leading software-defined networking features while remaining intuitive and fully programmable. Additional software offerings like CloudVision expand functionality and interoperability across networks. Arista uses merchant silicon for its hardware, which allows the company to focus on its core competencies.

Arista works closely with its core customers to optimize their networking ecosystems, which can strengthen its customer switching costs. To expand its customer base beyond the data centers of hyperscale cloud providers, enterprises, service providers, and financial institutions, Arista entered into the campus market. The adjacent move is due to requests from existing customers desiring one software platform across networking locations, and Arista has bolstered its clout with wireless and security capabilities. Even with current customer concentration risk, hence Arista is growing alongside key customers and that new ventures have expanded from core competencies. Arista is well positioned as a pioneer in the new age of software-defined networking and will continue to be a leader in next-generation switches and routers.

Financial Strength

Arista is in a financially healthy position; its zero debt balance and $3.4 billion in cash, cash equivalents, and marketable securities as of the end of 2021 provide flexibility for the future. With no stated plans to return capital to shareholders, the company’s investment plan is fixated on developing products and expanding sales. The company’s financial health will remain stable and that cash could be deployed for growth via bolt-on products or technologies.

Bulls Say’s

  • Demand for EOS continuity across networks should proliferate Arista’s installation base. Installation base growth causes new customers to consider Arista during upgrades. 
  • Arista has been a first mover on its path to rapid profitable growth. Upcoming industry disruptions that Arista may lead include 400 Gb Ethernet switching and campus market splines. 
  • Instead of relying on partnerships to plug portfolio gaps, Arista might be able to make accretive acquisitions in adjacent markets that could catalyse growth in areas such as analytics, access points, and security.

Company Profile 

Arista Networks is a software and hardware provider for the networking solutions sector. Operating as one business unit, software, switching, and router products are targeted for high-performance networking applications, while service revenue comes from technical support. Customer markets include data centers, enterprises, service providers, and campuses. The company is headquartered in Santa Clara, California, and generates most of its revenue in the Americas. It also sells into Europe, the Middle East, Africa, and Asia-Pacific.

(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

Verisign will continue to meet its contractual obligations and for the registry agreements to renew into perpetuity

Business Strategy and Outlook 

Verisign provides registry services for several top-level domains, or TLDs, and infrastructure essential to the functioning of the Internet. Verisign plays a vital role in supporting the Domain Name System, or DNS, which is akin to a massive address book that matches human friendly domain names to the accompanying numbers-based Internet Protocol, or IP, address. This allows an end user to browse the Internet and access requested content via a network of interconnected servers. The company operates software and infrastructure globally to support the translation of domain names to IP addresses for its assigned domains, including managing zone files and registration and policies for the specified domain. Verisign also provides root zone maintenance services, operates two of the world’s 13 roots servers that are foundational to the DNS, and manages a shared registration system that allows registrars to query the availability of and manage second level domains. Verisign has exclusive registry rights for two of the world’s most popular TLDs, .com and .net, under renewable contracts with the Internet Corporation for Assigned Names and Numbers, or ICANN. The lucrative contracts run for six years and have a presumptive right of renewal provided Verisign meets its contractual obligations. The .com and .net contracts are up for renewal in 2024 and 2023, respectively. 

Per the current contract terms, Verisign may raise .com pricing by up to 7% per year for the last four years of the contract and .net by up to 10% per year. Verisign currently charges $8.39 per year for a new or renewed .com domain and $9.02 for .net domain. Verisign will maximise price increases for .com within the limits of the contract, the company can still generate attractive returns in the event of tighter pricing controls. Verisign will continue to meet its contractual obligations and for the registry agreements to renew into perpetuity, underpinning the wide moat rating. The company has provided uninterrupted DNS services for over 25 years and continues to invest in infrastructure and cybersecurity measures to mitigate the risk of service disruptions.

Financial Strength

Verisign is in a sound financial position. As of year-end fiscal 2021, the company had a net debt position of about $580 million and reported $1.79 billion of long-term debt from senior unsecured notes. The company also has access to at least $200 million of liquidity under an unsecured revolving credit facility. Under these agreements, Verisign is subject to certain operating and financial covenants and must not exceed certain gearing ratios. Verisign will remain compliant with these covenants and meet interest and maturity payments on outstanding debt over the forecasted period. Verisign does not pay dividends but instead returns capital to shareholders through a substantial share repurchase program. The company has returned about $3.5 billion of capital to shareholders over the five years to fiscal 2021, which was funded through the company’s strong free cash generation and debt. As of February 2022, Verisign’s board has authorized an additional $1 billion of share repurchase, with no expiration.

Bulls Say’s

  • Verisign is to maximise price increases for the .com domain within the contractual limits, supporting further margin expansion. 
  • Verisign’s relationship with ICANN continues to strengthen as the company’s powerful track record of performance extends. 
  • While Verisign faces competitive pressure from competing TLDs, it is expected that .com is to remain the world’s most popular TLD.

Company Profile 

Verisign is the sole authorized registry for several generic top-level domains, including the widely utilized .com and .net top-level domains. The company operates critical Internet infrastructure to support the domain name system, including operating two of the world’s 13 root servers that are used to route Internet traffic. In 2018, the firm sold off its Security Services business, signalling a renewed focus on the core registry business.

(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

CNH to maintain its market share over smaller local and regional competitors with its full line of agriculture machinery

Business Strategy and Outlook 

CNH Industrial provides customers an extensive product portfolio of off-highway products. CNH will continue to be a top-two player in the agriculture industry. For generations, the company’s agriculture equipment has garnered intense brand loyalty among farmers. Customers value CNH Industrial’s high-quality and strong performing products, in addition to its robust dealer network. In developed markets, CNH Industrial helps customers reduce the total cost of ownership through improved fuel efficiency, limited machine down-time and consistent parts availability. The company’s off-highway strategy manufactures agriculture and construction equipment. CNH addresses the agriculture market with three brands: Case IH (targets large grain farmers) and New Holland (serves small grain, livestock farmers) make full lines of agriculture equipment, while Steyr is mainly a tractor manufacturer. The agriculture business is well positioned to compete with peers, but the construction business will need to optimize its dealer network, product portfolio and manufacturing operations to be competitive.

In early 2022, CNH spun off its on-highway business. The commercial vehicles and powertrain businesses will be owned by the Iveco Group. This decision was a prudent move for shareholders. With the demerger, management will now shift its focus to the more profitable, off-highway business. As a strong number-two player in agriculture markets, CNH is to maintain its market share over smaller local and regional competitors with its full line of agriculture machinery. In addition, the company’s high exposure to agriculture markets (over 90% of off-highway profits from the estimation) will bode well, as demand for new machinery will remain robust in the near term. CNH Industrial has exposure to end markets that have attractive tailwinds. In agriculture, demand for crops will be strong in the near term, largely due to robust demand from China and tight global supplies. In construction, increased infrastructure spending in the U.S. will be a benefit in the near term.

Financial Strength

CNH Industrial maintains a sound balance sheet. Outstanding industrial debt (excluding Iveco Group) at the end of 2021 stood at $9.2 billion. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total finance arm debt came in at $15.9 billion in 2021, along with $19.4 billion in finance receivables and over $800 million in cash. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of year-end 2021 stood at $4.3 billion on its industrial balance sheet. The comfort is in CNH Industrial’s ability to tap into available lines of credit to meet any short-term needs. The company has access to $3.9 billion in credit facilities. CNH Industrial maintains a strong financial position supported by a clean balance sheet and strong free cash flow prospects. CNH Industrial can generate solid free cash flow throughout the economic cycle. The company can generate over $1 billion in free cash flow In the midcycle year, supporting its ability to return free cash flow to shareholders, mostly through dividends. Additionally, management is determined to rationalize its product portfolio and manufacturing operations. The company is working to reduce a significant portion of its products in the construction business, refocusing their efforts on higher volume models. This will allow CNH Industrial to run leaner in its manufacturing operations. If successful, this will put CNH Industrial on much better footing from a cost perspective, further supporting its ability to return cash to shareholders.

Bulls Say’s

  • Higher crop prices increase farmers’ profitability, allowing them to purchase new agriculture equipment, which substantially boosts CNH Industrial’s revenue growth. 
  • CNH Industrial will benefit from strong replacement demand, as uncertainty around trade, weather, and agriculture commodity demand have eased, encouraging farmers to refresh their machine fleet. 
  • CNH improves the construction business by optimizing the product portfolio and dealer network. Additionally, increased infrastructure spending in the U.S. and emerging markets leads to more construction equipment purchases.

Company Profile 

CNH Industrial is a global manufacturer of heavy machinery, with a range of products including agricultural and construction equipment. One of its most recognizable brands, Case IH, has served farmers for generations. Its products are available through a robust dealer network, which includes over 3,600 dealer and distribution locations globally. CNH Industrial’s finance arm provides retail financing for equipment to its customers, in addition to wholesale financing for dealers; which increases the likelihood of product sales.

 (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

JBT should benefit from consumer preference for environmentally friendly packaging options

Business Strategy and Outlook 

Both of JBT’s segments will benefit from growth in the global middle class. The middle class will approximately double by 2030, and the Asia-Pacific region will be a significant contributor to that growth. This helps JBT FoodTech because per capita meat consumption in APAC has traditionally and significantly lagged that of Europe and North America. North America’s per capital meat consumption is about three and a half times that of APAC, but the gap narrows during the five-year explicit forecast. Overall global meat consumption is also on the rise, as people have become more conscious of protein intake in their diet. The ready-to-eat market will safely grow in the high single digits over the medium term. Young consumers prize this type of food for convenience and as an easy alternative to everyday and conventional three-meal dining. Offsets to protein technology forecast include a rising prevalence of livestock disease. Furthermore, not all APAC countries, like India, will converge toward Western dietary trends. Nevertheless, China will remain the single-biggest market and should account for nearly 30% of incremental demand.

Liquid foods packaging trends should benefit from advancements in packaging standards, escalating demand for packaged foods generally, increased e-commerce, as well as high demand for eco-friendly and lightweight packaging. JBT should benefit from consumer preference for environmentally friendly packaging options since its solutions can cut down on waste, among other interventions. Additionally, the air cargo growth will be a strong driver for JBT’s airport equipment, along with general infrastructure spending for aging equipment. Also, the ecommerce market’s size will greatly increase over the medium term and that will boost air cargo demand. Finally, getting passengers on board safely has garnered increased attention among airport authorities in recent years. This trend will resume as global air travel continues to recover

Financial Strength

 JBT is on decent financial footing and once again assigned the firm a moderate credit risk rating. As of the end of 2021, net debt/EBITDA was nearly 2.5 times, in line with multi-industry peers, but elevated relative to historical levels. That said, the firm has relatively low capital expenditures requirements (nearly 3% of sales), and free cash flow conversion sits at about 150% after a paltry mid-60s in 2019. It is not expected a repeat of 2020 levels, strong free cash flow conversion over the long term, with greater linearity in the conversion rate. The conversion will dip below 100% in 2022. As of the end of 2021, the interest coverage ratio (EBIT/interest expense) remains over 18 times, and JBT can service its financial obligations over the long run. As of the end of 2021, the firm’s pension fund was underfunded by $56 million, which reduces the fair value estimate by $2 per share. Long-term debt was nearly $675 million as of the end of 2021 (the firm has no short-term debt), versus cash on hand of nearly $80 million, of which about 75% is unrestricted and not needed to operate the business.

Bulls Say’s

  • JBT will benefit from the consumer preference for value- added foods, including clean labels and organics. 
  • The market fails to appreciate the positive impact from the commercial aerospace recovery and the ensuing operating leverage JBT will enjoy from a return of volume. 
  • After taking a pause during the uncertainty of the pandemic, JBT will likely look to deploy capital in M&A once again.

Company Profile 

JBT is a mid-cap diversified industrial conglomerate that spun out of FMC Technologies in August 2008. Over half of JBT’s sales are made in the United States. The firm operates through two segments: JBT Foodtech and JBT Aerotech. Foodtech provides both customized and turnkey industrial solutions for the food and beverage industry, including a large variety of protein processing and packaging solutions, as well as fruit and juice extraction and ready-to-eat solutions. Aerotech sells solutions to airport authorities, passenger airlines, airfreight firms, and defence contractors, among others. These solutions include gate equipment, as well as commercial and military cargo loading, aircraft dicing, and aircraft ground power and cooling system products

 (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

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.

Categories
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)

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