Business Strategy and Outlook
Landstar ranks among the largest third-party logistics providers in the highly fragmented $90 billion domestic asset-light truck brokerage space. Since Landstar doesn’t own tractors, only a fleet of trailers, it has much lower operating leverage than pure asset-based truckload carriers. Thus, it enjoys a variable cost structure with relatively low capital intensity that generates solid capital returns–more than 30% on average over the past five years. Moreover, as one of the largest providers, Landstar has built a vast network of shippers, asset-based truckload carriers, and independent sales agents that support a wide economic moat. Landstar’s trucking capacity is unusual for an asset-light broker because it relies in part on captive owner-operators (which the firm refers to as business capacity owners), in addition to unaffiliated third-party carriers, to haul freight. BCOs represent roughly half of revenue, haul exclusively for Landstar, and most operate fewer than five trucks. The firm pays BCOs a fixed percentage of revenue, which reduces its gross-margin percentage (net revenue/gross revenue) variability relative to peers like C.H. Robinson and Echo Global Logistics. It also specializes in odd-size freight (around one third of sales represents unsized/flatbed business) and irregular routes–factors that bestow incremental competitive differentiation. Additionally, rather than using a captive salesforce, Landstar contracts with a vast network of independent, commission-based sales agents.
Landstar’s immense network of third-party carriers and owner-operators should remain highly valuable to shippers. This is because shippers desire efficient access to the small carrier base throughout the cycle and the broader trucking industry will probably continue to face periodic growth constraints due to the limited driver pool, including the impact of intensifying regulation. Overall, the highway brokerage market to grow at a faster clip, than the combined for-hire trucking and intermodal markets, as large 3PLs continue to process more for-hire truckload and less-than-truckload freight.
Financial Strength
Landstar’s capital structure to be healthy and sustainable. The balance sheet is strong, with more than $290 million in cash and short-term investments at the end of 2020. The company is not highly leveraged, with a very reasonable debt/total capitalization ratio near 20% (including capital leases used to fund trailing equipment), in line with the five-year average. Debt/EBITDA was less than 1 times for 2020. Landstar enjoys a history of solid free cash flow generation, averaging 5.5% of total gross revenue over the past five years (through 2020). The free cash flow to average roughly the same percentage of revenue over the forecast horizon, though it will probably be higher in 2021, given the robust operating backdrop. Cash flow should be more than sufficient to fund share repurchases, regular dividends, and small opportunistic acquisitions.
Bulls Say’s
- Landstar’s vast network of third-party truckload carriers creates a robust value proposition for shippers, particularly during periods of tight supply. The firm is also one of the largest-capacity providers for specialty flatbed shipping; this has proved to be no small advantage.
- Landstar has a long history of excellent execution and impressive profitability throughout the freight cycle.
- Landstar’s asset-light operating model has generated average returns on capital in excess of 30% over the past five years, well above returns generated by most traditional asset-intensive carriers.
Company Profile
Landstar System is an agent-based asset-light third-party logistics provider focused on over-the-road truck transportation (92% of revenue). It also offers intermodal (3%) and global air and ocean forwarding (3%). The remainder of its revenue stems from warehousing services and premiums from insurance programs offered to captive owner-operators.
(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.
Business Strategy and Outlook
Best Buy is taking adequate steps to shore up its competitive position in an intensely competitive consumer electronics space. As the industry emerges from the shadow of the coronavirus (and steps into the quagmire of elevated inflation and softening consumer spending), it has become clear that how people shop has permanently changed–with customers demanding seamless omnichannel access to favourite brands, quick fulfilment across channels, and tech solutions to more problems than ever before. As a result, Best Buy’s strategic positioning continues to resonate, with the firm leveraging its physical footprint for fulfilment and post-sale services, emphasizing its differentiated service offering, and experimenting with newer store formats, as the “one size fits all” retail model across trade areas appears antiquated. With more than one third of sales coming through digital channels in calendar 2021, the firm’s recent supply chain and e-commerce investments ($2.7 billion over the last five years, some 74% of total capital expenditures) look prescient. Next-day delivery now covers 99% of U.S. zip codes (up from 80% from pre-pandemic), allowing the firm to compete on more level ground against e-commerce competitors, like wide-moat Amazon–as buy-online-pick-up-in-store, or BOPIS) volumes, at 40% of Best Buy’s e-commerce sales, remain more challenging for online-only stores to replicate.
Further, there can be a positive view of the firm’s Totaltech program, with more than 4.5 million members receiving unlimited home tech support, VIP access to phone and chat teams, free delivery and standard installation, members-only pricing, and free extended warranties on Best Buy purchases. Through the program, Best Buy leverages its network of 20,000 Geek Squad agents, increases touchpoints with customers, and positions itself better to earn the first shot at servicing customer category needs. Finally, Best Buy Health remains intriguing, with lower price elasticity and auspicious tailwinds from an insurer pay model. However, competition in the space remains rife, as a number of larger firms with healthcare aspirations (Google, Amazon, Apple) have invested in the space.
Financial Strength
Best Buy’s financial strength is sound, with the firm maintaining a modest net debt position and an investment-grade credit rating. With leverage well under 1 turn (0.3 debt/EBITDA at fiscal 2022 year-end), strong EBIT interest coverage (122 times), and no meaningful maturities until 2028, A very little financial risk for the firm may be in the near to medium term. Access to a $1.25 billion credit facility adds a further degree of insulation. Consistent with historical patterns, Best Buy is to prioritize growth capital expenditures, strategic acquisitions, dividends, and share repurchases with its free cash flow to sales (averaging 3.9% of sales annually over the next five years). Best Buy pays an attractive dividend, with the forecast calling for meaningful expansion through 2032, calling for a low-40% payout ratio. Share repurchases are to average a low-single-digit percentage of shares outstanding through 2032, with the model calling for total shareholder returns of $9. billion through fiscal 2027
Bulls Say’s
- With digital sales volumes projected to equilibrate at roughly double pre-COVID-19 levels, Best Buy should better compete for online volumes that it historically ceded to online competitors.
- Improving route densities should strengthen the margin profile of small parcel e-commerce sales, with 35% of store “hubs” now accounting for 70% of shipfrom-store volume.
- The Best Buy Totaltech program should increase touchpoints with the firm’s best customers, increasing spending and frequency relative to pre-program behaviour.
Company Profile
With $51.8 billion in fiscal 2022 sales, Best Buy is the largest pure-play consumer electronics retailer in the U.S., with roughly 10.6% share of the aggregate market and north of 40% share of offline sales, CTA industry, and Euromonitor data. The firm generates the bulk of its sales in-store, with mobile phones and tablets, computers, and appliances representing its three largest categories. Recent investments in e-commerce fulfilment, accelerated by the COVID-19 pandemic, have seen the U.S. e-commerce channel roughly double from pre pandemic levels, with management estimating that it will represent a mid-30% proportion of sales moving forward.
(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.
Investment Thesis:
- Among the most recognized luxury car brands in the world, with approximately 10% market share in the premium market.
- Growth in electric vehicles penetration provides an opportunity.
- Undemanding valuation and attractive dividend yield.
- Potential for further consolidations or partnerships/JVs in the industry.
- Key large investors provide some stability to overall share registry – Stefan Quandt (25.8%) and Susanne Klatten (19.2%).
- BMW’s Financial Segment (new vehicle finance or leasing) provides a key competitive advantage for the Company in times of traditional lenders (e.g. banks) drying up liquidity.
Key Risks:
- Macroeconomic conditions (moderating global growth and its impact on demand), in particular demand significantly falls in China.
- Competition and potential pricing pressure in luxury brands’ segment.
- Electric vehicle strategy is not without risk and competition is likely to be high.
- Potential impacts from Brexit and U.S. trade talks in earnings and supply chain disruption
- Value destructive acquisition(s).
- Substantial investors (with also board representation) mean capital management initiatives such as share buybacks are never likely to be considered despite the strategy offering attractive returns for the broader shareholder base.
Key Highlights:
- FY22 outlook. Management expects; (1) Automotive segment EBIT margin to be 7-9% with decline in deliveries partially offset by positive price and mix effects and the continued development of the used car markets, and ROCE to be 14-19%. (2) Motorcycles segment EBIT margin to be 8-10% driven by slight increase in deliveries, and ROCE to be 19-24%. (3) Financial Services segment ROE to be 17-20% (vs prior forecast of 14-17%) primarily due to good performance in the used car markets, with the segment already recognising appropriate levels of provisions/allowances to cover residual value and credit risks. (4) Deliveries to slightly decline y/y as business conditions continue to remain difficult in 2H22 with ongoing supply bottlenecks (particularly for semiconductors), the war in Ukraine and interruptions in supply chains being headwinds. However, the percentage of electrified vehicles to still increase significantly with sales of fully electric vehicles more than doubling y/y.
- 1H22 results summary. Compared to pcp: Revenues climbed +19.1% to €65.912bn, despite total vehicle deliveries falling -19.8% to 1.16m (still expanded its leading position in the global premium segment), driven by full consolidation of the Chinese subsidiary BBA.
- EBT rose +65.9% to reach an all-time high of €16.156bn with margin improving +690bps to 24.5%, driven by tailwind of € 7.7bn from the revaluation of previously held BBA shares at fair market value, partially offset by +23.3% increase in cost of sales and +14.3% increase in R&D costs.
- NPAT increased +73.6% to €13.232bn.
- Capex increased +71.4% to €2.929bn due to upfront expenditures for the ramp-up of e-mobility and investments at BBA.
- 1H22 segment results. Compared to pcp: Automotive revenues rose +18.8% to €56.7bn, benefiting from positive pricing, product mix effects and growth in aftersales business which combined with +23.1% increase in cost of sales (headwinds from full consolidation, rising raw material and energy prices and higher R&D costs) delivered -22% decline in EBIT to €4.83bn with margin declining -450bps to 8.5%. FCF increased +58.5% to €7.77bn driven by acquisition of BBA’s liquid funds with management targeting FY22 FCF of at least €10bn.
- Financial Services delivered EBT growth of +2.3% to €1.981bn as -20.8% decline in new contracts with retail customers amid limited availability of new cars and intense competition in the financial services sector was more than offset by increased financing volume per vehicle.
- Motorcycles revenue increased +2.6% to €1.663bn despite sales volume remaining flat y/y, however, EBIT declined -17.3% to €235m with margin down -340bps to 14.1%.
Company Description:
Bayerische Motoren Werke AG (BMW) is a leading manufacturer and retailer of luxury cars and motorcycles globally. The Company is increasingly focused on producing electric vehicles, with the group selling more than 140,000 electrified vehicles during 2018. BMW Group brands include BMW, Mini and Rolls-Royce.
(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.
Investment Thesis:
- Attractive valuation versus the price target.
- Leveraged to the improving economic conditions and activity in the U.S.
- Efficiency gains at the expense line exceeds market expectations.
- Significant leverage to the yield curve steepening in the U.S.
- Cost out program to support earnings over the long-term.
- Revenue growth driven by consumer and business.
- Credit quality is very strong, with further reserve releases possible.
- Capital position is well above requirement level and management’s desired buffer, which opens up capital management initiatives.
Key Risks:
- Further decline in net interest margins from low yields and U.S. Fed interest rate cuts.
- Intense competition to loan growth.
- Subdued economic growth or a shallow/deep recession.
- Funding pressures for deposits and wholesale funding.
- Political and regulatory changes affecting the banking legislation.
- Credit risk with potential default of mortgages, personal and business loans and credit cards.
- Efficiency gains disappoint relative to market expectations.
Key Highlights:
- 2Q22 result summary. Revenue (net of interest expense) increased +6% y/y to$22.7bn, with Net interest income (NII) up +22% y/y to $12.4bn (yield up +25bps to 1.86%), driven by higher interest rates, lower premium amortization and loan growth, and non-interest income down -9% y/y to $10.2bn, driven by lower investment banking fees, mark-to-market losses related to leveraged finance positions and lower service charges due to non-sufficient funds and overdraft policy changes, partially offset by higher sales and trading revenues.
- Non-interest expense increased +2% y/y (flat qoq) to $15.3bn and included $425m recognized for certain regulatory matters.
- Net income of $6.2bn, declined -32% y/y as pcp benefited by positive tax adjustment from revaluation of U.K. deferred tax assets of $2bn and $2.2bn in credit reserves releases, with Consumer Banking decreasing -5% y/y to $2.9bn, Global Banking decreasing -38% y/y to $1.5bn, Global Markets increasing +12% y/y to $1bn and Global Wealth & Investment Management increasing +16% y/y to $1.2bn.
- Average loan and lease balances up +12% y/y to $1.0 trillion led by strong commercial loan growth as well as higher consumer balances and average deposits up +7% y/y to $2.0 trillion.
- CET1 declined -100bps y/y (up +10bps qoq) to 10.5%, however, remains well above 2Q minimum requirement of 9.5% and +10bps above expected minimum required on October 1, with management expecting to build some additional buffer on top of that in 3Q.
- Shareholder returns of $2.7bn ($1.7bn in dividends and $1bn in repurchases).
- NII outlook. Assuming forward curve (as on July 15) materializing (asset sensitivity on a spot basis to a 100bps rate hike would be $5.8bn), modest growth in loans and deposits and deposit betas reflecting disciplined pricing, management expects net interest income in 3Q22 to increase by $900m-1bn qoq, further growing at a faster pace on a sequential basis in 4Q22, which combined with combined with expense discipline should boost the bottom line.
- Strong asset quality. Asset quality continued to remain strong with net charge-offs declining -4% y/y to $571m resulting in a net charge-off ratio of 23bps (down -4bps y/y), however, bank took a provision for credit losses of $523m (vs release of $1621m in pcp) amid loan growth and builds for a dampened macroeconomic outlook in the future. Though a slowdown in economy/recession brings risks of worsening credit profile, the BAC’s loan portfolio remains solid and carries less inherent risk compared to prior downturns, with lower concentration in the consumer portfolio (down -22% vs 4Q09), less exposure to unsecured consumer credit (down -48% vs 4Q09) and home equity loans (down -82% vs 4Q09), and 92% of commercial loan book either investment-grade or secured with Fed’s stress test indicating significantly lower credit losses expected in a severe downturn (5.2% vs 6.9% in 2013) and the bank holding much higher liquidity with global liquidity sources having increased 5x over 4Q09.
Company Description:
Bank of America (BAC) is one of the largest banks in the U.S., serving consumers, small and middle-market businesses, and large corporations with a full range of banking, investing, asset management, and other financial and risk management products and services.
(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.
Business Strategy and Outlook
Impressive innovation has allowed Smith & Nephew to carve out a slice of the orthopaedic, sports medicine, and wound-care markets. Though the company is smaller than the dominant orthopaedic 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 orthopaedics. 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, Smith & Nephew can eventually pair up with a larger rival, such as Stryker or Johnson & Johnson, in order to better compete.
Financial Strength
Thus far, there is a little to get 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 compared 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, it is expected the firm to end 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 acquisition.
Bulls Say’s
- Smith & Nephew participates in the fast-growing sports medicine arena thanks to its extensive arthroscopy portfolio.
- A strong arthroscopy presence in ambulatory surgical centres 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 Profile
Smith & Nephew designs, manufactures, and markets orthopaedic devices, sports medicine and arthroscopic technologies, and wound-care solutions. Roughly 42% of the U.K.-based firm’s revenue comes from orthopaedic 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.
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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.