Business Strategy & Outlook

One was not enthralled with Coty’s leadership prior to the pandemic, which lacked beauty experience, but Sue Nabi, a successful 20-year veteran of wide-moat L’Oreal who took the reins in September 2020, has the qualifications to right the ship. Her strategic priorities are on target, as she seeks to increase Coty’s exposure to high-growth markets where it has been underexposed. Specifically, she looks to accelerate Coty’s prestige division by expanding from its core fragrance portfolio into makeup, build a skincare portfolio across mass and prestige, enhance its digital capabilities, further penetrate China, stabilize its mass-beauty business, and become an industry leader in sustainability. One can impressed by the progress Coty has realized to date, with improvement in each objective despite the challenges presented by the pandemic, and the further progress in the years to come.

Coty is the second-largest global player in fragrance, with a portfolio of licensed brands, such as Calvin Klein and Gucci. Its prestige business (62% of fiscal 2022 sales, largely fragrance) generally reports mid-single-digit organic growth (in line with the category). However, mass beauty (38%, primarily cosmetics) has faced consistent sales declines, as Coty’s brands (CoverGirl, Max Factor, Rimmel) have suffered from historical underinvestment while many new brands have entered the market. One can be optimistic that Nabi’s strategy will improve Coty’s growth profile, but the less sanguine on the firm’s ability to secure a moat. Collectively, Coty has not demonstrated brand strength, preferred relationships with its channel partners, or a cost advantage, and thus conclude it does not possess an economic moat. The fallout from the pandemic put Coty in violation of its debt covenants, but a $1 billion convertible preferred equity investment from private equity firm KKR (which it has since converted to common and sold), and the sale of a majority stake of its salon/retail haircare business for nearly $3 billion in proceeds should secure Coty’s liquidity position, giving the firm the necessary breathing room to allow Nabi’s turnaround strategy to advance.

Financial Strengths

Since the acquisition of the P&G beauty business in fiscal 2017, Coty’s net debt/adjusted EBITDA has remained over 4 times. It ended fiscal 2022 with leverage at 4.6 times, just under the 4.75 limit imposed by the firm’s debt covenants. The Coty’s leverage to fall over the next five years, to below 3 times by fiscal 2025. Cash was tight for Coty heading into the pandemic, given the $600 million January 2020 investment in Kylie Cosmetics. But KKR’s $1 billion convertible preferred equity investment and the suspension of dividends on common shares (both announced in May 2020) provided much needed liquidity. These moves as prudent, given the uncertain environment caused by the global pandemic. Between September and November 2021, KKR converted its entire preferred stock position to common shares, which it then sold on the open market, saving Coty $77 million in annual preferred dividend payments. The firm to reinstate a dividend on its common shares in fiscal 2024, averaging a 20%-30% payout ratio over the long term. Outside of funding operations, Coty’s top priority for cash is debt reduction, which is sensible, given its relatively high leverage ratio. The Coty is likely to resume acquisitions once its debt leverage falls below 4 times, but as it is uncertain as to the magnitude and timing of potential deals, one has not modelled unannounced transactions. The firm will refrain from share repurchase until fiscal 2024, at which time it will repurchase 2%-8% of shares annually, in the absence of acquisitions. The share repurchases as a prudent use of cash when shares trade below the assessment of its intrinsic value.

Bulls Say

• Coty is a major player in the fast-growing beauty industry and is the second-largest global provider of fragrances, one of the four major beauty categories, representing 15% of the total beauty market. 
• CEO Sue Nabi, an accomplished veteran of the beauty industry, has the experience and qualifications to reinvigorate Coty’s business. 
• Coty plans to increase its exposure to fast-growing markets (skincare, prestige cosmetics, China, e-commerce), where it has historically been underexposed, which should enhance its growth profile.

Company Description

Coty is a global beauty company that sells fragrances, colour cosmetics, and skin/body care. The firm licenses brands such as Calvin Klein, Hugo Boss, Gucci, Burberry, and Davidoff for its prestige portfolio. Coty’s most popular colour cosmetic brands are CoverGirl, Max Factor, Rimmel, Sally Hansen, and Kylie. Coty also holds a minority stake in a salon and retail haircare business, including brands Wella, Clairol, OPI, and GHD. Francois Coty founded the firm in 1904 and it remained private until its 2013 IPO. It had focused on prestige fragrances and nail salon brands until the 2016 acquisition of Procter & Gamble’s beauty business. This nearly doubled the firm’s revenue base, and launched it into mass-channel cosmetics and professional hair care.

(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.

Business Strategy & Outlook

Brown-Forman has established itself as a stalwart in matured spirits, an enclave of the distillation industry that is particularly attractive. In addition to brand recognition and distribution, companies in this industry benefit from scarcity value, the result of the consumer perception surrounding the aging of this type of alcohol and the pricing power that this begets. Against this industry backdrop, it is believed Brown-Forman’s portfolio, anchored by the Jack Daniel’s brand, boasts some of the highest cachet globally. The firm made its bones in whiskey, with Jack Daniel’s Tennessee Whiskey being the best-selling American whiskey in the world, but it also has strong tequila brands like el Jimador and Herradura. The resonance of its trademarks is reflected in its ability to parlay them into numerous line extensions, such as Jack Daniel’s Tennessee Honey, Apple, and ready-to-drink beverages. These provide stimulus to its top line, not only by maintaining mind share among its core consumers, but by expanding the types of palates to which its drinks appeal. Brown-Forman is also benefiting from growth abroad, buoyed by the broader resurgence in global demand for bourbon. The developed markets like the United Kingdom as well as developing economies like Mexico to be increasingly pertinent to its overall trajectory.

Still, the company’s path will not be completely unencumbered. Tariff relief remains a near-term tailwind, but dollar strength figures to slow demand for (proportionately) more expensive U.S. exports. Go-to-market changes also add a degree of execution risk. Despite a successful transition to owned distribution in the U.K, where it previously partnered with Bacardi, future transitions (such as in Taiwan) may not yield similar results. Additionally, while COVID-19 accelerated secular trends in developed markets, developing markets face a more precarious outlook, particularly amid a backdrop of swelling inflation in non discretionary spending categories. Nevertheless, it is expected that Brown-Forman’s embedded advantages and experienced management team will help the company navigate these risks.

Financial Strengths

Brown-Forman is in solid financial health, and from the vantage point, the coronavirus pandemic has not altered this reality. The company has a manageable balance sheet and commendable cash flow generation. Net leverage currently sits well below 2 times EBITDA, with ample capacity to tilt the capital structure toward debt as financial opportunities dictate. Still, management has historically been quite conservative with mergers and acquisitions, and there’s no transformative transactions on the horizon. The stellar cash generation will continue supporting dividends and increases, as well as appreciable reductions in the share count. Moreover, the firm’s commitment to shareholder returns should not impinge on its liquidity, even amid COVID-19. In addition to $899 million in balance sheet cash as of the end of the first quarter of 2022, the company maintains consistent access to capital markets primarily through a commercial paper program (backed by its revolving credit facility) facilitating borrowings of up to $800 million. 

Bulls Say

• Brown-Forman has a foothold in multiple matured spirits categories, where market structure and consumer perception spawn robust pricing and operating margins.
• Flavored line extensions in the Jack Daniel’s family should foster brand resonance among a new generation of alcohol consumers.
• COVID-19 impacts in important markets like the U.S. have proven muted, thanks to a confluence of portfolio and consumer demand dynamics.

Company Description

Brown-Forman is the largest U.S.-domiciled producer of distilled spirits. The firm reports only a single operating segment, and whiskey represents its primary business driver, generating roughly three quarters of sales, undergirded by the Jack Daniel’s brand as well as bourbons such as Woodford Reserve and Old Forrester. Notable non whiskey offerings include tequilas such as el Jimador and Herradura. The firm operates globally, with products sold in more than 170 countries, and adapts its route-to-consumer model depending on regulation as well as the prevailing competitive dynamics in a given market. For example, it sells through distributors in the U.S. but operates its own logistics apparatus in many other countries. The company remains under the control of the Brown family.

 (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.

Business Strategy & Outlook

Johnson & Johnson stands alone as a leader across the major healthcare industries. The company maintains a diverse revenue base, a developing research pipeline, and exceptional cash flow generation that together create a wide economic moat. J&J holds a leadership role in diverse healthcare segments, including medical devices, consumer healthcare products, and several pharmaceutical markets. Contributing close to 50% of total revenue, the pharmaceutical division boasts several industry-leading drugs, including immunology drugs Remicade, Stelara and Tremfya as well as cancer drugs Darzalex and Imbruvica. The medical device group brings in almost one third of sales, with the company holding controlling positions in many areas, including orthopaedics and Ethicon Endo-Surgery’s surgical devices. The consumer division largely rounds out the remaining business lines, but the firm is planning to divest its consumer healthcare group in early 2023, which will leave the remaining company more focused on drugs and devices. 

Research and development efforts are resulting in next-generation products. The pharmaceutical segment has recently launched several new blockbusters. However, relative to the company’s size, J&J needs to increase the number of meaningful drugs in late-stage development to support long-term growth. The company has also created new medical devices, including innovative contact lenses, minimally invasive surgical tools and robotic instruments. These multiple businesses generate substantial cash flow. J&J’s healthy free cash flow (operating cash flow fewer capital expenditures) is over 20% of sales. Strong cash generation has enabled the firm to increase its dividend for over the past half century, and this to continue. It also allows J&J to take advantage of acquisition opportunities that will augment growth. Diverse operating segments coupled with expected new products insulate the company more from patent losses relative to other Big Pharma firms. Further, in contrast to most of its peers, J&J faces the majority of its near-term patent losses on hard-to-make complex drugs, which should likely slow generic drug competition.

Financial Strengths

Johnson & Johnson holds one of the strongest financial positions in the healthcare sector with projected debt/ EBITDA of close to 0.9 for 2022. The acquisitions of Actelion and Momenta did put a dent in the company’s cash balance, but with annual free cash flow of close to $25 billion, J&J is in sound financial shape. Even with expected further bolt-on acquisitions and share repurchases, the company should remain on solid financial footing. From an operating standpoint, patent losses are mitigated by several diverse operating lines in medical devices and consumer products so cash flows should remain relatively stable. Additionally, the share repurchases over the next several years will drawdown the share count.

Bulls Say

• The majority of J&J’s near-term patent losses are for products that are hard to manufacture, which should limit the intensity of generic competition. 
• Diverse healthcare segments help insulate J&J from downturns in the economy, offering a defensive growth opportunity with a steady and likely growing dividend.
• Several of J&J’s key drugs and pipeline drugs are specialty drugs that tend to carry strong pricing power as well as lower regulatory hurdles for approval.

Company Description

Johnson & Johnson is the world’s largest and most diverse healthcare firm. Three divisions make up the firm: pharmaceutical, medical devices and diagnostics, and consumer. The drug and device groups represent close to 80% of sales and drive the majority of cash flows for the firm. The drug division focuses on the following therapeutic areas: immunology, oncology, neurology, pulmonary, cardiology, and metabolic diseases. The device segment focuses on orthopaedics, surgery tools, vision care, and a few smaller areas. The last segment of consumer focuses on baby care, beauty, oral care, over-the-counter drugs, and women’s health. Geographically, just over half of total revenue is generated in the United States.

(Source: Morningstar)

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

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

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

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

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

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

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