Business Strategy and Outlook
Scotts Miracle-Gro is the largest and most recognizable name in the U.S. consumer lawn and gardening market. The firm sells a wide array of products aimed at helping consumers grow and maintain their lawns. The U.S. consumer segment, which consists of lawn and gardening products, generated 65% of total revenue in fiscal 2021. Scotts has generated healthy margins on its products through effective branding, which allows it to maintain favourable product positioning and shelf space in the largest mass-market and home improvement retailers. Scotts has also been able to charge a premium over competitors because of its strong brand equity. While actual product differentiation in the industry is limited, consumers have been willing to pay up for Scotts’ products.
Future demand for gardening products will depend on growth in the housing industry. We expect housing starts to average a little over 1.5 million per year through 2030. While housing starts alone should increase demand for gardening products, we see some secular trends that will offset the growth. Living-preference shifts to smaller lots and urban centers should result in less need for gardening products. Additionally, a greater proportion of gardening products will be sold online. Currently, the vast majority of sales occur at brick-and-mortar retail. Even if Scotts increases its online sales presence, it may lose some pricing power as many products in the gardening industry shift away from brick-and-mortar retailers to online platforms, where Scotts will likely face more low-priced competition. The Hawthorne segment, which includes indoor gardening, hydroponics, and lighting equipment, contributed a little under 30% of revenue in fiscal 2021. Its growth is closely tied to the legalization of cannabis in the U.S., as its products are frequently used by licensed growers. Recent acquisitions in the business should position Scotts to take advantage of growing demand from states where cannabis has been recently legalized. The majority of U.S. consumer sales typically come from Home Depot and Lowe’s. However, this should decline as a percentage of companywide revenue as the Hawthorne segment grows.
Financial Strength
Scotts Miracle-Gro currently has elevated leverage. As of March 31, we calculate net debt/adjusted EBITDA was nearly 5 times, well above with management’s long-term target leverage of 3.5 times. However, the company built up inventory in both the U.S. consumer and Hawthorne businesses in anticipation of improving volumes in the second half of the fiscal year. As the company works down its inventory and uses the cash to repay debt, we see no issues with its current financial position. Further, as the Hawthorne business recovers from the current industry oversupply, we expect EBITDA growth will resume and leverage ratios will fall back to management’s targets. Over the last five years, dividends grew at an average mid-single-digit rate. Management has indicated that it intends to continue raising the dividend, and Scotts should have the free cash flow to do so.
Bulls Say’s
- U.S. household formation growth will drive demand for gardening products. As the market leader in consumer gardening products, Scotts will benefit from the secular housing trend.
- Consumer behaviour has changed as a result of COVID-19, with more consumers engaging in gardening as an activity. As the largest player in the consumer gardening market, Scotts will benefit from this change.
- The emerging cannabis industry represents a lucrative opportunity for Scotts, which is well positioned to capture this segment of the market.
Company Profile
Scotts Miracle-Gro is the largest provider of gardening and lawncare products in the United States. The majority of the company’s sales are to large retailers that include Home Depot, Lowe’s, and Walmart. Scotts Miracle-Gro can sell its products at a higher price point than its competition because of a well-recognized portfolio of brands that include Miracle-Gro, Roundup, Ortho, Tomcat, and Scotts. Scotts is also the leading supplier of cannabis-growing equipment in North America through its Hawthorne business.
(Source: MorningStar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Business Strategy and Outlook
As a leading player in travel retail and a leading concession operator in airport retail with around 20% market share, more than double that of its next biggest peer, Dufry is well positioned to benefit from increasing global travel flows. Over the years, Dufry has played the role of consolidator in a globally fragmented industry, allowing it to achieve purchasing scale, breadth of store formats and product offer, and geographical diversification. We contend that airports capture the bulk of value in airport retail through concession fees of about 30%, owing to ownership of unique real estate assets. Nonetheless, we believe that Dufry, as the most efficient retail operator in over 400 locations globally, benefits from a purchasing scale that not many competitors or airports can match as a stand-alone entity (the global airport industry is rather fragmented and 70% publicly controlled, hindering consolidation). Dufry should thus be well positioned to withstand concession inflation pressure and consolidate the industry as weaker operators exit the market, which should increase its bargaining power in the long term. Dufry also provides value for suppliers (many of them fast-moving consumer goods companies and luxury brands) by giving exposure to an attractive high-growth distribution channel with brand-building opportunities to an affluent, captive audience.
We believe Dufry should be able to expand by about 3%-4% annually over the 10-year forecast period (from prepandemic levels) through a mix of organic growth (driven by increasing passenger numbers) and new concessions (gained organically or through consolidation). We expect operating margins (excluding acquisition-related amortization) to be broadly stable, with gross margin efficiencies and scale offset by airport concession inflation, both effects moderating over time.
Financial Strength
Dufry had around CHF 2.2 billion in available liquidity at the end of December 2021, which should be sufficient for many months under management’s assumption of CHF 20 million monthly cash burn with revenue 40% lower than 2019 levels and CHF 10 million monthly cash burn with revenue down 35% against 2019 levels. We assume revenue in 2021 to be 21% lower than that reached in 2019. Covenant testing has been delayed until 2023 with a threshold of 5 times net debt/adjusted operating cash flow. We expect the company to be in compliance with covenants as travel picks up. It is believed the liquidity risk for the company can be considered low
Bulls Say’s
- Dufry is well positioned to benefit from increasing passenger flows, which have historically grown faster than global GDP.
- Investment in digital initiatives, such as “reserve online, collect at the airport,” could increase spending per passenger, as actual airport buying may be currently limited by the time constraints.
- Dufry has room to expand its business into new geographies (Asia) and new business areas (downtown duty-free, duty-free on cruise ships)
Company Profile
Dufry is the world’s largest duty-free shop operator and leader in travel retail. It commands about 12%-13% share in a fragmented global travel retail market, including around 20% in airport retail (more than double that of the next biggest competitor), through its presence in 65 countries and about 420 locations globally; airports make up over 80% of the company’s total revenue. Dufry’s main markets are Europe (45% of revenue), Americas (about 45% revenue each), and Asia, the Middle East, and Australia.
(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 & Outlook:
Lonza Group has been a dominant player in the contract development and manufacturing space for decades. The company thinks the outlook for Lonza looks bright, especially as drug manufacturing becomes more complex with biologics and cell and gene therapies playing larger roles in the overall mix. Lonza’s 2021 CHF 4.2 billion divestment of its former specialty ingredients business to Bain Capital and Cinven as positive since it allows for an increased focus on further expanding its biopharma contract manufacturing business. Lonza’s specialty ingredients customers were large consumer goods and industrials players, which had significant bargaining power. As a result, this segment had lower margins and shorter contracts of one to three years compared with its lengthy contracts for its biopharma manufacturing business.
Lonza maintains an extensive network of partnerships with pharmaceutical and biotechnology firms that leverage its expertise and scale to optimize drug production and avoid the risks of in-house manufacturing. Company anticipates outsourcing penetration will continue to incrementally increase, driven by the complexities of biologic manufacturing. Only one-third of pharmaceutical manufacturing is currently conducted in-house while two-thirds are outsourced. Additionally, the customer relationships in Lonza’s contract manufacturing segment are sticky and long-lasting, as drug companies tend to stick with trusted suppliers with good track records of regulatory compliance. Biopharma customers are likely to continue outsourcing manufacturing in order to benefit from access to flexible capacity and manufacturing improvements.
Financial Strengths:
Lonza is in fair financial health, and company expects the business to continue providing a steady stream of cash. The company has historically utilized debt, particularly for acquisitions. The company ended 2017 with CHF 3.8 billion in debt after acquiring Capsugel with a mix of debt and equity. Since then, the company has steadily deleveraged. It is expected that the company will be able to meet its financial obligations with its free cash flow. Lonza also divested its specialty ingredients business in July 2021 for CHF 4.2 billion. Management is using the proceeds from the divestment to further improve its biopharma manufacturing capabilities. The management team has a continued record of returning cash to shareholders in the form of dividends, with a dividend of CHF 3.00 paid in 2021. The payout ratio as a percentage of adjusted earnings per share has varied between 20% and 40% over the last few years, depending on cash needed for capital expenditures. The payout ratio has trended down in recent years due to increased investment in new manufacturing capabilities. Due to the business’ strong cash flow, the management will maintain its dividend policy and utilize cash for dividend payments, debt paydown, internal investment, and opportunistic deals.
Bulls Say:
- The pharma biotech and nutrition segment are a sticky business with long-term contracts and high switching costs for its customers.
- As drug portfolios are increasingly made up of complex drugs like biologics and emerging therapies, Lonza’s biopharma customers will be more reliant on outsourced manufacturing.
- With its global scale, Lonza is less dependent on any one customer or drug, which allows it to better absorb surprising late-stage failures or drops in demand
Company Description:
Lonza Group is a contract development and manufacturing organization, or CDMO. It operates under four segments: small molecules, biologics, cell & gene, and capsules & health ingredients. Lonza derives its revenue primarily from long-term supply agreements with pharmaceutical customers. The company provides a range of development and manufacturing services throughout the entire lifecycle of a product from drug research to commercial supply. The majority of Lonza’s customers are pharmaceutical and biotechnology companies, academic institutions, and government research organizations.
(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:
VMware, a pioneer of virtual machines, dominates the maturing data center server virtualization market. With organizations prioritizing cloud over on-premises computing infrastructure, company believes VMware’s robust cloud provider partnerships, including the major hyperscale’s, should help the firm handle the changing market landscape. Company expects VMware’s growth to come from being the glue between computing infrastructures, networking locations, and burgeoning security and developer offerings being bolstered from its strong end user compute portfolio. Our view of cloud networking, akin to VMware’s assessment, is that most enterprises will utilize hybrid cloud solutions. Public clouds can precipitously augment network growth but enterprises face integration complexities among on-premises networks and private and public clouds. Beyond hyperscale cloud provider partnerships, VMware’s Cloud Provider Program offers thousands of cloud partners collaborating with VMware software. In our view, this allows VMware to remain ingrained in networks while becoming the commonality between private and public clouds. Company thinks that the November 2021 spinoff from Dell Technologies put an end to an uncertain future around VMware, and that growth can accelerate through VMware’s integration with cloud vendors and cadence of product releases outside of Dell’s umbrella. With solid free cash flow and growth opportunities, Company assumes that its $11.5 billion special dividend, to all shareholders, as part of the spinoff was worth the price of becoming a stand-alone entity.
VMware’s vSphere and ESXi hypervisor are virtualization gold standards, and its hybrid cloud platform creates a consolidated view across multicloud environments. The company’s strong franchises within end user compute, security, and virtualized networking and storage can be overlooked, and support growth ventures such as VMware’s integration of Kubernetes-based container management within vSphere. It is expected that software cohesion across on-premises and clouds along with nascent networking products should give VMware maintainable growth. In May 2022, the firm agreed to be acquired by Broadcom.
Financial Strengths:
Company considers VMware a financially stable company that should continue generating strong free cash flow. The company’s main expenditures are in the forms of developing product innovations and marketing efforts. VMware’s R&D expenditures are in the low 20s as a percentage of revenue while sales and marketing expenditures are in the low 30s. In the past, VMware has bolted on firms to bolster its presence in focus growth areas, and organic developments to be supplemented with future acquisitions. As of the end of fiscal 2022, VMware had $3.6 billion in cash and equivalents, and the company will pay its debts on time. VMware completed its first special dividend of $11 billion in December 2018, which helped Dell Technologies facilitate an exchange of Dell Class V tracking stock (DVMT) for a new class of Dell Technologies Class C common stock or a cash buyout option for shareholders. As part of becoming an independent company and spinning off from Dell, VMware paid special dividends worth $11.5 billion and retained an investment-grade credit rating. Although VMware raised capital to help pay the special dividend, company expects to quickly lower its obligations through cash on hand and its robust free cash flow generation.
Bulls Say:
- VMware’s hybrid cloud program could yield tremendous growth if VMware is cemented as the dominant software supplier between private and public clouds. Its presence in hyperscale public cloud networks could make it the de facto virtualization choice.
- Product leadership in application management, endures computing, cybersecurity, and software-defined networking provides robust growth opportunities beyond core virtualization.
- VMware can more tightly integrate itself with Dell peers as a stand-alone company, while also benefiting from its Dell commercial contract and their salesforce.
Company Description:
VMware is an industry titan in virtualizing IT infrastructure and became a stand-alone entity after spinning off from Dell Technologies in November 2021. The software provider operates in the three segments: licenses; subscriptions and software as a service; and services. VMware’s solutions are used across IT infrastructure, application development, and cybersecurity teams, and the company takes a neutral approach to being the cohesion between cloud environments. The Palo Alto, California, firm operates and sells on a global scale, with about half its revenue from the United States, through direct sales, distributors, and partnerships.
(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:
Alibaba BABA is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and online-to-offline services. Company think a strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba. Alibaba’s internet services had annual active consumers of 953 million as of September 2021, versus the 1.2 billion online population in September 2021 per Questmobile and the 1.4 billion population in China. This provides Alibaba with an unparalleled source of data that it can use to help merchants and consumer brands develop personalized mobile marketing and content strategies to expand their target audiences, increase click-through rates and physical store transactions, and bolster return on investment. Alibaba’s marketplace monetization rates have reduced recently, due to increased compliance of antitrust laws, more competition, and weak consumer sentiment. Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD.
While the company view the Taobao/Tmall marketplaces as Alibaba’s core cash flow drivers, it also believes AliCloud and globalization offer long-term potential. While AliCloud will remain in investment mode in the medium term, accelerating revenue per user suggests a migration to value-added content delivery and database services that can drive segment margins higher over time. On globalization, third-party merchants are successfully reaching Lazada’s users across Southeast Asia, something that should continue as the company rolls out incremental personalized mobile marketing and content opportunities. While early, company share management’s views about Ele.me offering incremental monetization opportunities from Alibaba’s user base.
Financial Strengths:
Alibaba is in sound financial health. As of December 2020, the company had CNY 456 billion in cash and unrestricted short-term investments on its balance sheet against CNY 117 billion in short- and long-term bank borrowing and unsecured senior notes. Although Alibaba remains in investment mode, company believes the strong cash flow profile of its e-commerce marketplaces offers it the financial flexibility to continue investing in technology infrastructure and cloud, research, marketing, and user experience initiatives through its current balance sheet and strong cash flow profile. Additionally, it is assumed that the company has the capacity to add leverage to its capital structure, which could allow it to take advantage of low borrowing rates to fund growth initiatives, introduce a cash dividend when it sees limited investment opportunities with good returns on investment, or repurchase shares. It is expected that for the company to pursue acquisitions that could further improve its ecosystem, including online-to-offline, physical retail, and increased logistic capacity or capabilities.
Bulls Say:
- Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD.
- Core annual active users on Alibaba’s China retail marketplaces had a retention rate of over 90% for the year ended September 2021.
- Alibaba’s core commerce (which includes China marketplace-based businesses and other loss-making businesses) adjusted EBITA margin was 26.2%, higher than JD retail’s 2.3% non-GAAP EBIT margin and PDD’s 15.2% non-GAAP EBIT margin for the September quarter of 2021.
Company Description:
Alibaba is the world’s largest online and mobile commerce company as measured by gross merchandise volume (CNY 7.5 trillion for the fiscal year ended March 2021). It operates China’s online marketplaces, including Taobao (consumer-to-consumer) and Tmall (business-to-consumer). Alibaba’s China commerce retail division accounted for 63% of revenue in the September 2021 quarter. Additional revenue sources include China commerce wholesale (2%), international retail/wholesale marketplaces (5%/2%), cloud computing (10%), digital media and entertainment platforms (4%), Cainiao logistics services (5%), and innovation initiatives/other (1%).
(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:
Medtronic’s standing as the largest pure-play medical device maker remains a force to be reckoned with in the med-tech landscape. Pairing Medtronic’s diversified product portfolio aimed at a wide range of chronic diseases with its expansive selection of products for acute care in hospitals has bolstered Medtronic’s position as a key partner for its hospital customers. Medtronic has historically focused on innovation, designing and manufacturing devices to address cardiac care, neurological and spinal conditions, and diabetes. All along, the firm has remained focused on its fundamental strategy of innovation. It is often first to market with new products and has invested heavily in internal research and development efforts as well as acquiring emerging technologies. However, in the postreform healthcare world where there are higher hurdles for securing reimbursement for next-generation technology, Medtronic has slightly shifted its strategy to include partnering more closely with its hospital clients by offering greater breadth of products and services to help hospitals operate more efficiently. By partnering more closely and integrating itself into more hospital operations, Medtronic is well positioned to take advantage of more business opportunities in the value-based reimbursement environment, in our view. In particular, Medtronic has been pioneering risk-based contracting around some of its cardiac and diabetes products, which company thinks is attractive to hospital clients and payers alike.
Company has always appreciated Medtronic’s diverse portfolio, where certain waning product lines would be offset by growth in other categories. The addition of devices and consumables used in the surgical suite should further stabilize potential speed bumps in individual product lines. The COVID-19 disruption added more near-term turbulence, especially with supply chain issues and delays in nonpandemic patient volume, but the company remains confident that underlying demand for many of these therapies and Medtronic’s ongoing innovation should prevail over the longer term.
Financial Strengths:
Medtronic’s financial health deteriorated somewhat after financing a significant portion of the Covidien merger with new debt issuance. Covidien shareholders owned about 30% of the combined entity at the time of the merger, which allowed the combined entity to invert to Covidien’s Irish domicile, lowering its tax rate and enhancing its ability to access overseas cash. At the end of January 2016, Medtronic owed $36 billion in debt, or around 4 times adjusted EBITDA, which is up from around 2 times historically. Since then, the firm has paid off approximately $14 billion of the debt. The firm ended fiscal 2022 with debt to adjusted EBITDA around 3 times, which is manageable, but slightly higher than the 2.5 times that is common in the medical technology industry. Nonetheless, the firm generates strong cash flow that can be put toward tuck-in acquisitions. Beyond its debt obligations and M&A, the firm aims to return a minimum of 50% of its annual free cash flow to shareholders but has been in the 60% to 100% range in recent years, primarily through its dividend and peripherally due to opportunistic share repurchase
Bulls Say:
- Medtronic has historically held roughly 50% share in its core heart devices. It’s also the market leader in spinal products, insulin pumps, and neuromodulators for chronic pain.
- Medtronic’s pipeline contains treatments for atrial fibrillation, mitral valve disease, and renal denervation for hypertension. If these new therapies prove effective, Medtronic could dominate three more potentially large markets.
- Medtronic often finds novel ways to apply familiar technologies, like using the implantable electronic stimulation in pacemakers to address fecal incontinence and chronic pain
Company Description:
One of the largest medical device companies, Medtronic develops and manufactures therapeutic medical devices for chronic diseases. Its portfolio includes pacemakers, defibrillators, heart valves, stents, insulin pumps, spinal fixation devices, neurovascular products, advanced energy, and surgical tools. The company markets its products to healthcare institutions and physicians in the United States and overseas. Foreign sales account for almost 50% of the company’s total sales.
(Source: Morningstar)
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