Categories
Technology Stocks

BlackBerry Is Seeking Growth From Cybersecurity and Connected Vehicles but Hasn’t Earned a Moat

Stock market digital graph chart on LED display concept. A large display of daily stock market price and quotation. Indicator financial forex trade education background.

Business Strategy & Outlook

BlackBerry has positioned itself in rapidly growing markets that benefit from secular trends toward security and connectivity, but it has a long way to go to earn a durable competitive advantage. BlackBerry sells software into enterprise cybersecurity applications and embedded applications like cars. Its flagship enterprise product is the Spark suite, which combines unified endpoint management with endpoint protection. In the automotive market, BlackBerry’s QNX software powers infotainment systems, where it leads the market, as well as electronic control units and advanced driver-assistance systems. BlackBerry performs best in regulated industries such as government, financial services, and healthcare, where security and privacy are more mission-critical. CEO John Chen has helped turn the business around after its handset decline, primarily via software acquisitions like Good Technology and Cylance. The metrics of BlackBerry’s success going forward will be an ability to gain market share against larger incumbents and improve profitability. The core of its technology–both in cybersecurity and automotive software–is strong, but the company’s lackluster ability to use this technology has been disappointing in relation to maintaining solid growth or gaining market share. BlackBerry does not merit an economic moat. 

BlackBerry is expected to focus on its go-to-market approach for its enterprise offerings in order to gain market share. While BlackBerry is well recognized in regulated industries, it will have to improve its ability to sell into a broader base of enterprises to grow. After a slew of acquisitions during Chen’s pivot, BlackBerry is now anticipated to focus on organic investment in operating expenses to spur growth. The firm’s greatest growth opportunities will come from connected and autonomous vehicles. BlackBerry’s QNX software is anticipated to benefit in the short and medium term from increasing levels of autonomy worldwide, and think its partnership with Amazon for its IVY platform gives it a longer-term growth opportunity in connected and autonomous cars.

Financial Strengths

BlackBerry is expected to focus on improving its profitability and free cash flow over the medium term. As of Feb. 28, 2022, the firm carried $507 million in debt compared with $712 million in cash and equivalents. While the firm is not projected to be GAAP profitable for a few years, management’s goal is to be non-GAAP profitable while generating positive free cash flow, which it failed to do in fiscal 2022. The company is forecasted to steadily improve while it works to regain positive free cash flow and GAAP profitability. The current forecast shows that there is enough cash flow generation to enable the firm to fulfill its obligations over the next few years. BlackBerry does not pay a dividend, nor does it regularly conduct share repurchases as a way of providing capital back to shareholders. Management has been focused on the business turnaround from handsets and has prioritized using excess cash for inorganic growth opportunities and divesting from its hardware business. While the firm has paused M&A for now to focus on its go-to-market strategy, a cash buildup is anticipated over the explicit forecast that could allow for future acquisitions. 

Bulls Say

  • The Spark suite provides the widest breadth of endpoint capabilities BlackBerry has offered to date, and should appeal to enterprises looking to consolidate their software vendor lists. 
  • BlackBerry’s focus on security gives it an advantage in regulated industries, like government, healthcare, and financial services. 
  • BlackBerry IVY—the result of a partnership with Amazon Web Services—could create a revolutionary software ecosystem for connected vehicles, allowing OEMs to process, analyze, and monetize massive amounts of vehicle data.

Company Description

BlackBerry, once known for being the world’s largest smartphone manufacturer, is now exclusively a software provider with a stated goal of end-to-end secure communication for enterprises. The firm provides endpoint management and protection to enterprises, specializing in regulated industries like government, as well as embedded software to the automotive, medical, and industrial markets.

(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
Shares Small Cap

Sonic will have scale relative to a small dealer and can get better terms from vendors for supplies

price of btc is going to breakout

Business Strategy & Outlook

Sonic Automotive is undergoing many changes. Rollout of its omnichannel Digital One Stop process and the CarCash app allows consumers to shop digitally or in-store and helps Sonic procure more used-vehicle inventory. Management has also worked to make the car-buying process nearly paperless, place the customer with only one person for the entire transaction, and enable the customer to take delivery of a vehicle in an hour or less after deciding which one to buy. In October 2013, Sonic announced its intention to compete with CarMax in used vehicles with EchoPark used-vehicle stores. 

The U.S. used-vehicle market is highly fragmented at about 40 million units a year, with late-model used vehicles as old as six years often making up at least 15 million units, so there is certainly room for both firms to pursue their strategies. Openings started in late 2014 in the Denver area and as of March 2022, the EchoPark segment has 47 stores with plans to add 25 a year between 2021 and 2025. It will take time for EchoPark to reach the scale to compete with CarMax’s over 220 stores. The stores will not have a big-box retail format and are not capital-intensive due to most eventually being delivery and buy centers that only cost $1 million-$2 million each. These centers will be served by larger hub stores in a region that each cost between $7 million and $25 million. EchoPark will not do home delivery. Sonic does not plan a captive finance arm like CarMax enjoys. In July 2020, management announced a $14 billion 2025 revenue target for EchoPark, up from $2.3 billion in 2021, with 140 nationwide points. This is not impossible because EchoPark intentionally undercuts competitors on price, then recovers a small loss on the vehicle by arranging loans with third-party lenders and selling extended warranties, targeting over $2,000 gross profit per unit. In 2021, Sonic said it is reviewing alternatives for EchoPark. Sonic will have scale relative to a small dealer and can get better terms from vendors for supplies, computer systems, and health insurance compared with a small dealer. It also captures lucrative service workover repair shops through its warranty business.

Financial Strengths

Sonic’s largest debt maturity at year-end 2021 through 2026 is $118.2 million in 2024, mostly from about $90 million of mortgage line borrowing coming due in November. The credit facility matures in April 2025 and is undrawn at the end of 2021 with $281.4 million available for borrowing. Total liquidity at the end of 2021 is $702.8 million including $299.4 million of cash. Management has told us that the used floorplan line is like a revolver. Net Debt/adjusted EBITDA was about 1.80 times at year-end 2021. Leverage in 2019 declined from about the 3.7 times level thanks to the early redemption of the firm’s $289.3 million 5% notes due in May 2023. Sonic also has $346.2 million of mortgage notes with 62% of the balance at fixed rates ranging between 2.05% to 7% and maturities at various dates through 2033. The company owns about half its real estate, but has not disclosed how much unencumbered real estate it has. In October 2021, Sonic issued $1.15 billion of 2029 ($650 million at 4.625%) and 2031 notes ($500 million at 4.875%) to help fund the $950 million purchase of RFJ Auto Partners in December 2021, but no one is concerned about balance sheet health. The firm’s debt profile is not going to be a challenge for management to maintain.

Bulls Say

  • Auto dealerships are well-diversified businesses that have lucrative parts and servicing operations, which help them be profitable in almost any environment. 
  • EchoPark could prove to be a very lucrative business this decade if it can scale up. 
  • Sonic has the potential to generate significant economies of scale as vehicle demand rebounds and if EchoPark grows.

Company Description

Sonic Automotive is one of the largest auto dealership groups in the United States. The company has 110 franchised stores in 17 states, primarily in metropolitan areas in California, Texas, and the Southeast, plus 47 EchoPark and Northwest Motorsport brand used-vehicle stores. In addition to new and used-vehicle sales, the company derives revenue from parts and collision repair, finance, insurance, and wholesale auctions. Luxury and import dealerships make up about 88% of new-vehicle revenue, while Honda, BMW, Mercedes, and Toyota constitute about 60% of new-vehicle revenue. BMW is the largest brand at over 26%. 2021’s revenue was $12.4 billion, with EchoPark’s portion totaling $2.3 billion. Sonic bought RFJ Auto in December 2021, which added $3.2 billion in 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 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
Daily Report Financial Markets

European Market Outlook – 04 July 2022

Europe-Market-Outlook-04-July-2022Download

Categories
Daily Report Financial Markets

Australian Market Outlook – 04 July 2022

Australia-Market-Outlook-4-July-2022Download

Categories
Dividend Stocks

Itaú Should Benefit from Rising Interest Rates, but Uncertainty in Brazil’s Economy Still a Concern

Business Strategy & Outlook:   

The challenge for Itaú Unibanco will be to navigate an increasingly volatile Brazilian economy and uncertain political environment, which has been hit by the dual shocks of the pandemic and rapidly rising inflation, which exceeded 12% in April 2022. In response, the Brazilian central bank has rapidly increased interest rates, taking the SELIC rate from 2% at the start of 2021 to 13.25% by June 2022. The bank benefits from rising interest rates, as Brazil’s central bank attempts to fight inflation, but there is risk that economic fallout from rapidly increasing rates could lead to lower loan growth and higher credit losses for the bank. As pandemic conditions have eased, Itaú has refocused on individual lending, driving the bank’s impressive loan growth during 2021, with credit cards and mortgages leading the way. With a slew of government guarantee programs for small and midsize enterprises and fiscal stimulus spending, the bank’s credit costs during the pandemic have been surprisingly low. However, these same programs have contributed to Brazil’s growing inflation and budgetary issues. While the company does not expect credit costs to normalize over time, low charge-offs and a surge in deposits have allowed Itaú to expand its loan book significantly from its pre-pandemic size. 

Itaú Unibanco appears to be positioning itself as a regional money center in Latin America, with operations across Chile, Uruguay, Paraguay, Colombia, Panama, and Argentina. Though there are difficulties in such an approach, the bank has been able to diversify its asset growth and simultaneously reduce its exposure to the notoriously volatile Brazilian real. With nearly 30% of loans outstanding held abroad, the bank is in a unique position to benefit from Latin American emerging-market growth. However, in the near to medium term Itaú’s results will be impacted by Brazil’s struggles as the country heads into the 2022 election cycle. Itaú faces a more hostile approach from regulators in recent years, with the central bank’s efforts to increase competition through the launch of the successful Pix payment system and support for the open banking movement.

Financial Strengths:  

Itaú Unibanco has a common equity Tier 1 ratio of 11.1% as of March 2022. The bank’s Tier 1 ratio is 12.5%, as it holds 1.4% of additional Tier 1 capital in hybrid debt and equity securities. While management has said at times that the bank has been overcapitalized, that Itaú has done well to avoid increasing leverage at a time when Brazil’s economic prospects were challenged. The strong capitalization entering the recent crisis permitted the bank to expand its aggregate loan book by more than 15% during 2021 after growing nearly 22% in 2020. Net charge-offs for the bank have been low, a result of government guarantees and fiscal stimulus, which is  expected to normalize as the impact of the central bank’s interest rate hikes is felt in the Brazilian economy. That said, Itaú is in a decent position to withstand higher credit costs as its balance sheet is in good shape.

Bulls Say: 

  • Rising interest rates in Brazil create an opportunity for Itaú to expand its net interest margin. 
  • Itaú has been able to significantly expand its foreign lending operations, diversifying the bank and reducing its exposure to the volatile Brazilian market. 
  • Credit losses in Brazil remain well below historical norms, allowing Itaú to generate good returns on its lending operations.

Company Description:  

Itaú Unibanco is the largest privately held bank in Brazil, the result of the 2008 merger between Banco Itaú and Unibanco. In addition to Brazil, the bank has significant operations in Chile, Colombia, Argentina, Uruguay, and Paraguay. Its commercial and consumer loans account for 36% of the bank’s total loans each, while foreign loans now account for 28% of the bank’s portfolio. Itaú also operates the fifth-largest insurer in Brazil and is the second-largest asset manager in the country, giving it broad reach over the Brazilian financial system. 

(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

Ring the Alarm, RingCentral Poised for Success as UCaaS Becomes the Business Communication Standard

Business Strategy & Outlook:   

RingCentral is a leading unified communication as a service, or UCaaS, provider that enables omnichannel business communication and collaboration on a single cloud-native platform, creating a holistic user experience. As an increasingly mobile workforce requires greater flexibility in business communications, the company believes the firm’s offerings become more critical, and narrow-moat RingCentral should exhibit healthy long-term growth. The company believes the market opportunity for UCaaS providers is significant as 450 million-plus on-premises private branch exchange, or PBX, seats migrate to the cloud. At this point, although cloud penetration of hosted PBX seats is accelerating, less than 5% of seats have moved to the cloud. In a go-to-market model that focuses on leveraging channel partners such as Avaya and Mitel, RingCentral has gained first access to an on-premises PBX install base of over 210 million of these seats. These partnerships provide RingCentral a powerful advantage over competitors in winning a significant portion of the legacy install base. Company foresees healthy long-term growth as the firm increases seat penetration, expands enterprise adoption, and develops its international presence. 

RingCentral’s core product, RingCentral Office, deploys a global unified communications platform that integrates messaging, video, phone, and other cloud-based communication solutions. Users are assigned a single business phone number and profile that allows for connection to the business network from any device and location. Company viewed the platform’s 5,000-plus integration offerings as being particularly important in defining the value and competitiveness of the Office product. RingCentral’s moat is supported by strong user metrics, with a subscription model and net dollar retention rates in excess of 100%. They expect enterprise penetration, which has been the fastest growing business segment, to expand further in coming years, and benefit both deal size and retention. This should lead to lower churn and higher seat penetration, further cementing RingCentral’s position as a leader in the UCaaS space.

Financial Strengths:  

RingCentral’s financial position is reasonably sound but skews toward risky. As of December 2021, RingCentral has $267 million in cash and cash equivalents versus $1.4 billion in debt. In March 2020 and September 2020, RingCentral issued $1.0 billion of convertible senior notes, due 2025 and convertible at $360 per share, and $650 million of convertible senior notes, due 2026 and convertible at $424 per share, respectively. RingCentral has yet to achieve GAAP profitability, as it remains focused on reinvesting excess returns back into the company. RingCentral does not pay a dividend and has only repurchased stock sporadically. In December 2021, the company announced a $100 million share repurchase authorization, which is expected to occur opportunistically. The firm has historically demonstrated descent cash flows, with free cash flow margins averaging 5% over the last five years, including a downward skew from 2020 where free cash flow was pressured as a result of the COVID-19 pandemic. 2021 has shown a rebound to strong free cash flows, and the company expects healthy free cash flow expansion in the coming years. RingCentral has delivered positive non-GAAP operating margins in each year since 2016, which is expected to continue over the next five years, as well. The firm’s non-GAAP operating margin has averaged 10% over the last three years. Over the next 10 years,  margins expand significantly as the company scales, which should translate to GAAP profitability as well.

Bulls Say: 

  • Partnerships with legacy PBX vendors give RingCentral access to a significant portion of the 450 million on-premises users, providing a powerful advantage over competitors in winning a large portion of the legacy installed base. 
  • RingCentral is the first in its space to offer a CCaaS solution in addition to UCaaS, an offering to prove influential in winning enterprise deals again. 
  • As an increasingly mobile workforce requires greater flexibility in business communications, RingCentral should face robust demand and have success in expanding enterprise adoption.

Company Description:  

RingCentral is a unified communication as a service, or UCaaS, provider. RingCentral’s unified communications platform replaces on-premises private branch exchange (PBX) phone systems, which support voice-only desktop phones, with its cloud phone system. Beyond its flagship voice product, the company’s platform enables cloud-based integrated omnichannel communications, including voice, messaging, SMS, video meetings, conferencing, and contact center software solutions, among others. The software allows businesses to communicate and collaborate all on one platform across various device-types.

 (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
Commodities Trading Ideas & Charts

Constructive Regulatory Outcomes Power CMS Energy’s Growth

Business Strategy & Outlook:   

CMS Energy’s decade-long transformation into a high-quality regulated utility positions it for a long runway of growth. CMS Energy’s work with Michigan regulators and politicians has turned the state into one of the most constructive areas for utility investment. These constructive relationships will be critical as CMS pursues an aggressive clean energy growth plan. With regulatory and political backing, CMS Energy plans more than $14 billion of investment during the next five years. That investment plan could expand if the firm receives regulatory backing for new projects. Its goal to reach net-zero carbon emissions by 2040 is a key part of its growth plan, supporting 6%-8% annual earnings growth for many years. Michigan’s 2008 energy legislation and additional reforms in the state’s 2016 Energy Law transformed the state’s utility regulation. As a result of those changes, CMS Energy has achieved a series of constructive settlements and regulatory decisions. 

CMS has secured regulatory approval for almost all of its near-term capital investment as part of the state’s integrated resource plan framework. In June, regulators approved updates to CMS’ 20-year clean energy plan. If CMS can keep rate increases modest by controlling operating costs, the company expects it will continue to get regulatory support and could even add as much as $5 billion of investment on top of its current plan. CMS’ growth strategy focuses on investment in electric and gas distribution and renewable energy, which aligns with Michigan’s clean energy policies and is likely to earn regulatory support. CMS plans to retire its entire coal fleet by 2025, keeping it on track to cut carbon emissions 60% by 2025 and reach net-zero carbon emissions by 2040. Proceeds from its EnerBank sale in 2021 will help finance growth investment. CMS carries an unusually large amount of parent debt, which has helped boost consolidated returns on equity, but investors should consider the refinancing risk if credit markets tighten.

Financial Strengths:  

Although CMS has trimmed its balance sheet substantially, its 65% consolidated debt/capital ratio remains high primarily because of $4 billion of parent debt. Accordingly, the company’s EBITDA/interest coverage ratio is lower than peers, near 5 times. Low interest rates and easy access to capital have allowed management to maintain the current balance sheet leverage and support its investment-grade credit ratings with earnings growth. The company  expects CMS’ consolidated returns on equity to top 13% for the next few years, among the best in the industry due to this extra leverage. But with interest rates rising, management might be less eager to refinance parent-level debt, potentially leading to lower returns on equity in the future. CMS has taken advantage of favorable bond markets in recent years to reduce its refinancing risk and extend its debt maturities, including issuing three series of 60-year notes in 2018 and 2019. CMS now has $1.1 billion of parent notes due in 2078-79 at a weighted-average interest rate near 5.8%. CMS also has been able to issue 40- and 50-year debt at the utility subsidiary. Regulators thus far have not imputed CMS’ parent debt to the utilities, but that’s a risk that could lead to lower allowed returns, customer rates and earnings. Apart from financing the large Covert power plant acquisition in 2023, the management doesn’t expect CMS to issue large amounts of equity after pricing a $250 million forward sale at an average $51 per share in 2019 and issuing $230 million of preferred stock in 2021 at a 4.2% yield. The company  expects the $930 million after tax cash proceeds from the EnerBank sale will offset new equity needs through 2024. With constructive regulation, CMS will be able to use its operating cash flow to fund most of its investment plan during the next five years.

Bulls Say: 

  • Regulation in Michigan has improved since landmark reforms in 2008 and 2016. Support from policymakers and regulators is critical to realizing earnings and dividend growth. 
  • CMS’ back-to-basics strategy has focused on investment in regulated businesses, leading to a healthier balance sheet and more reliable cash flow. 
  • CMS’ board has more than doubled the dividend since 2011. The company expects 7% annual dividend increases going forward even if the payout ratio remains above management’s 60% target.

Company Description:  

CMS Energy is an energy holding company with three principal businesses. Its regulated utility, Consumers Energy, provides regulated natural gas service to 1.8 million customers and electric service to 1.9 million customers in Michigan. CMS Enterprises is engaged in wholesale power generation, including contracted renewable energy. CMS sold EnerBank in October 2021. 

(Source: Morningstar)

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

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

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

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

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

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

Synopsys Boasts Compelling Growth Outlook With its EDA Portfolio

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy & Outlook:   

Synopsys provides electronic design automation, or EDA, software, intellectual property, and software integrity products that are critical to the semiconductor chip design process. It is  expected that as secular trends toward artificial intelligence, 5G communications, autonomous vehicles, and cloud computing, among others, accelerate, Synopsys will benefit from both the rising complexity of chip designs and the advancing digitization of various end markets. The company believes narrow-moat Synopsys has a long growth runway ahead as it continues to make strategic organic and inorganic investments to expand its platform amid a growing semiconductor landscape. Synopsys’ products are transformational in enabling increasingly complex integrated circuit (IC) and system-on-chip (SoC) design. Advancing technologies require these more powerful, precise, and efficient chips, for which EDA software informs the end-to-end process. Synopsys is the largest player in the EDA space, and specifically in digital design as well. With a larger digital exposure, Synopsys privy to higher growth vectors and as a result expected growth greater than that of top competitor Cadence. 

Outside of core EDA, the company views Synopsys’ IP and SI businesses as benefiting from industry trends. As systems companies increasingly design their own differentiated silicon in-house, Synopsys will benefit as its customer base expands beyond traditional semiconductor designers. The company expects this trend in achieving technological differentiation through chip customization to support IP adoption, as leveraging IP blocks for standardized components allows for significant time and resource savings and reallocation to differentiating components. Further, given the rising complexity of chip design, rising cost of failure, and increasing importance of software security, Synopsys’ growing SI business presents an important point of differentiation for the company. Reflecting the mission criticality of EDA tools, Synopsys exhibits negligible churn, with customer retention consistently at approximately 100%, and has relationships with all major chip design companies in the United States.

Financial Strengths:  

Synopsys is in a healthy financial position. As of January 2022, Synopsys had $1.1 billion in cash and cash equivalents versus $24 million in debt. The firm repaid its $75 million outstanding term loan balance in 2021 and is now solely liable for a 12-year credit agreement of approximately $33 million in aggregate, of which about $24 million is outstanding as of January 2022. Company do not have any material concerns about Synopsys’ ability to finance this debt. Approximately 90% of Synopsys’ revenue is of a recurring nature, given that the firm primarily sells time-based licenses. Synopsys’ average license length is approximately three years, with periodic software updates delivered throughout the license’s term ensuring continued access to Synopsys’ evolving technology. The ratable revenue of time-based licenses tends to smooth returns compared with utilizing a perpetual license model, allowing for better visibility into the future of the business. Synopsys is profitable on both a GAAP and non-GAAP basis and demonstrates strong cash flows. Free cash flow margin has grown from 21% in fiscal 2017 to 33% in fiscal 2021, and return on invested capital is increasingly widening its spread above cost of capital. The company expects margins to continue to expand and believes management will deliver on its target of 100 basis points of annual non-GAAP operating margin expansion. The company expects healthy growth in free cash flow as industry tailwinds lead to long-term growth for Synopsys.

Bulls Say: 

  • Secular tailwinds in chip design such as 5G, Internet of Things, AI, and others should increase demand for EDA tools and support growth for Synopsys. 
  • The growing Software Integrity business enables a larger TAM for Synopsys and addresses expanding demand for real-time identification of security vulnerabilities across the entire software development lifecycle. 
  • Synopsys provides mission-critical EDA software, having relationships with all major domestic chip designers and retention rates of approximately 100%

Company Description:  

Synopsys is a provider of electronic design automation software, intellectual property, and software integrity products. EDA software automates the chip design process, enhancing design accuracy, productivity, and complexity in a full-flow end-to-end solution. The firm’s growing SI business allows customers to continuously manage and test the code base for security and quality. Synopsys’ comprehensive portfolio is benefiting from a mutual convergence of semiconductor companies moving up-stack toward systems-like companies, and systems companies moving down-stack toward in-house chip design. The resulting expansion in EDA customers alongside secular digitalization of various end markets benefits EDA vendors like Synopsys.

(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
Shares Small Cap

Sprout’s Turnaround is Unlikely to Result in Much Profitability Improvement Due to Competition

Business Strategy & Outlook:   

Sprouts has capitalized on a natural, health-oriented positioning aligned with culinary trends, but the company believes it faces a competitive onslaught as conventional grocers, mass merchandisers, hard discounters, and online sellers target the same themes. Without the cost leverage of the largest grocers, Sprouts will face continued intense price pressure. Amazon’s 2017 purchase of Whole Foods remains a threat, as the digital juggernaut’s procurement strength and distribution efficiency can fuel price cuts that upend Sprouts’ value proposition (a produce-oriented store featuring fresh, affordable items). Sprouts has room for store growth, but the company believes the ensuing cost leverage will need to be used to keep pace with price cuts in an industry favoring larger firms that can spread fixed costs and omnichannel investments over the broadest possible sales base. 

Sprouts relies on Instacart for its delivery and click-and-collect efforts. While the partnership is prudent given Sprouts’ size, it imposes costs that larger firms can mitigate by fulfilling digital orders internally. Delivery can extend Sprouts’ appeal to customers that do not regularly drive past a store, but the channel is margin-dilutive even for firms that are able to scale costs over a much larger sales base. Although the COVID-19 outbreak has lifted near-term demand as shoppers spend more time at home, increased digital transactions could linger, shifting sales into a less lucrative channel long term. New leadership began revitalization work in earnest in early 2020, attempting to stabilize declining operating margins (6.8% in 2014 versus 3.9% in 2019) and optimize an inefficient expansion strategy. While it is expected that the management will hit its long-term low-single-digit comparable sales growth goal, its low-double-digit adjusted EPS expansion target will be harder to achieve, even after considering share buybacks (forecast is in the mid- to high single digits). Nonetheless, the efforts should provide ammunition to fight unending price battles against intensifying competition as large retailers encroach on Sprouts’ natural and health-oriented turf.

Financial Strengths:  

Sprouts’ financial health strikes us as sound. Net debt was around 1.4 times adjusted EBITDA at the end of fiscal 2019, before the pandemic-related sales spike nearly erased Sprouts’ net debt by the end of fiscal 2020 (with a similar outcome at the end of fiscal 2021) Sprouts will continue to open stores, although management slowed growth in fiscal 2020 as it optimized new unit size and layout. Company foresees mid- to high-single-digit percentage unit count expansion annually over the next decade, with Sprouts exceeding 700 stores (from 374 at the end of fiscal 2021). Store opening costs are modest (roughly $3.6 million net cash investment for the average new unit; the number should dip to around $3.2 million as new management favors smaller, simpler locations), and Sprouts to fund its growth internally. Company expects capital expenditures to average 3% of sales long term. Despite the growth, free cash flow to the firm should average 2%-3% of sales long term (similar to fiscal 2019’s 3.2%; 2020-21’s 5% average mark was inflated on account of the pandemic) amid intense competition. Sprouts enjoys flexibility as it can adjust store growth plans to suit market conditions; while it spent $81 million in fiscal 2021 on capital expenditures (net of landlord reimbursements), it is suspected that about half was for new stores, leaving roughly $40 million for sales initiatives, remodels, infrastructure, and maintenance (which is sufficient as its stores are fairly new). It is anticipated that management will direct excess cash to share repurchases. The model assumes 45% of operating cash flow is dedicated to buybacks long term. Sprouts could also consider bolt-on acquisitions to accelerate its store growth; the forecast does not incorporate such transactions due to their uncertain timing and nature.

Bulls Say: 

  • Sprouts’ health and value-oriented concept is on trend, consistent with customers’ desire to eat foods that are less processed and contain more naturally derived ingredients. 
  • As a fairly new chain, Sprouts’ relatively small stores feature layouts that are consistent with newer consumer demand trends, such as centrally located fresh produce and robust prepared food and grab-and-go offerings. 
  • Sprouts has ample room for growth as it boosts its penetration in existing markets and extends its footprint elsewhere in the United States.

Company Description:  

Sprouts Farmers Market is an American specialty grocer offering an assortment highlighting fresh and naturally derived products. Its offerings are especially focused on produce, which constituted around 21% of sales in fiscal 2021. Founded in 2002, the chain is most heavily concentrated in California, which accounted for over one third of its 374 stores as of the end of fiscal 2021. All of the company’s operations are in the United States, with its stores largely located in the southern half of the country. The firm sells roughly 20,000 products (of which around 70% are attribute driven, such as organic, plant-based, or catering to the keto or paleo diet), with private-label products accounting for about 16% of sales in fiscal 2021. Perishable items accounted for 58% of fiscal 2021 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 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
Daily Report

Morning Report Global Markets Update – 4 July 2022

Morning-Report-Global-Markets-Update-4-July-2022Download