Stock Research - Investor Desk

James Hardie’s FVE Raised 4% to AUD 35.40; Outlook for Fiscal 2023 Is Strong

Post author By lvc-admin
Post date February 8, 2022
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Business Strategy and Outlook

James Hardie Industries is the clear leader in fibre cement siding and internal lining products in North America and Asia-Pacific. After patenting cellulose-reinforced fibre cement in the late 1980s, the Australian company entered the North American market in 1990, establishing its business with the benefit of patent protection. In doing so, the company’s product line has become synonymous with the product category. The firm now enjoys 90% share in fibre cement siding in North America, its largest and most important market, with similar positions in Australia and New Zealand. More recently, James Hardie has entered the Philippines and European residential siding markets.

Fibre cement siding possesses durability advantages and superior aesthetics over vinyl cladding, leading to vinyl’s market share eroding to about 26% today from around 39% in 2003. At this same time, fibre cement’s share has increased to 19%, almost entirely due to increased penetration for Hardie’s product. With Hardie the clear leader in fibre cement systems, it is expected that the firm will continue to take share from vinyl while maintaining its own position within its category.

Financial Strength

James Hardie announced an ordinary first-half fiscal 2022 dividend of USD 0.40 per share after regular dividends were suspended in early fiscal 2021 in response to the pandemic. It is forecasted that an annual full-year payout ratio of 65% of underlying earnings, near the top-end of Hardie’s 50%-70% targeted payout range. Hardie runs a conservative balance sheet with leverage typically within a targeted range of 1-2 net debt/EBITDA. Net debt/EBITDA stood at 0.8 at the end of fiscal third-quarter 2022.Hardie’s asbestos-related liability–the AICF trust–has a gross carrying value at fiscal third-quarter 2022 of USD 1 billion and remains an overhang. However, payments to fund the liability are capped at 35% of trailing free cash flow. While this reduces cash flows available to shareholders over the medium term, the liability shouldn’t constrain the business’ ability to reinvest and thus expand and protect its competitive positioning.

Bulls Say’s

James Hardie’s clear leadership in the fibre cement category should drive growth in market share in the North American siding market. We forecast the company retaining its 90% share of the category, while fibre cement climbs to 28% of the total housing market.
Hardie’s strong brand equity translates into pricing power, allowing for inflation in manufacturing costs to be easily passed on, thus protecting profitability in the face of imminent input cost inflation.
The Fermacell acquisition could finally unlock Europe as an avenue of significant growth following market saturation in North America

Company Profile

James Hardie is the world leader in fibre cement products, accounting for roughly 90% of all fibre cement building materials sold in the U.S. It has nine manufacturing plants in eight U.S. states and five across Asia-Pacific. Fibre cement competes with vinyl, wood, and engineered wood products with superior durability and moisture-, fire-, and termite-resistant qualities. The firm is a highly focused single-product company based on primary demand growth, cost-efficient production, and continual innovation of its differentiated range. With saturation of the North American market in sight, the acquisition of Fermacell in early 2018, Europe’s leading fibre gypsum manufacturer, will provide Hardie with a subsequent avenue of growth.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Shares Small Cap

Capri Has Suggested The Two Brands (Jimmy Choo and Versace), When Mature, Could Combine For Operating Profit Of $450 Million

Post author By lvc-admin
Post date February 8, 2022
No Comments on Capri Has Suggested The Two Brands (Jimmy Choo and Versace), When Mature, Could Combine For Operating Profit Of $450 Million

Business Strategy and Outlook

It is probable Michael Kors lacks the brand strength (and ultimately pricing power) to provide an economic moat for Capri. Powered by store openings and retail expansion in the 2010-15 period, Michael Kors became one of the largest American handbag producers in sales and units. However, its sales have declined from peak levels due to markdowns at third-party retail, store closures, and weakness in some categories. While Capri has reduced distribution to limit discounting of its bags, competition in the American handbag market is fierce, and store closures in the region continue. Michael Kors, though, has good potential in Asia, which Bain & Company expects will compose 50% (up from 37% at present) of the worldwide luxury market by 2025. It is foreseen the brand stands to win favor with Chinese consumers, but it is not foreseen for the brand to reach Capri’s $1 billion Asia sales target (up from $448 million in fiscal 2021) in the next 10 years given its limited tenure in the region relative to Coach and others.

Capri spent a steep $3.4 billion to purchase Jimmy Choo and Versace to boost its status as a luxury house and reduce its dependence on Michael Kors. However, it is not likely these deals have changed Capri’s no-moat status as the acquired brands have more fashion risk, less profitability, and narrower appeal than Michael Kors. Capri is investing in store remodels, store openings, and expanding the set of accessories for both Jimmy Choo and Versace, but it is not seen these efforts will yield the intended gains, particularly given the severe interruption it is probable from COVID-19. While Capri has suggested the two brands, when mature, could combine for operating profit of $450 million and account for 30% of its total, it is not probable for this to happen until the end of this decade.

Financial Strength

Capri has debt, but it is seen as it is very manageable. The firm took on significant debt to fund its Jimmy Choo and Versace acquisitions, which came with a combined price tag of $3.4 billion. At the end of December 2021, it had total short- and long-term debt of $1 billion, but it also had more than $261 million in cash and $1 billion in available borrowing capacity. Moreover, during the COVID-19 crisis, it amended its revolving and term loan credit agreement so that most of its term loan that was due in December 2020 was extended to December 2023. Thus, Capri has no significant debt maturities prior to 2023. The firm’s debt/adjusted EBITDA was a very manageable 2.3 at the end of fiscal 2021, and it is foreseen this will fall to 0.8 at the end of fiscal 2022 on greater EBITDA and debt reduction. Capri has resumed share repurchases, which were suspended during the pandemic. The firm averaged more than $500 million in annual buybacks in fiscal 2015-20. It is now foreseen its share repurchases at an annual average of about $740 million over the next decade. However, Capri does not pay dividends.Capri plans to open new stores and remodel existing stores for all three of its brands, although these efforts stalled in fiscal 2020 due to COVID-19. Analysts forecast its fiscal 2022 capital expenditures will rise to $205 million (3.7% of sales) from just $111 million (2.7% of sales) last year. Long term, Analysts forecast Capri’s annual capital expenditures as a percentage of sales at 4.1% as management works to improve the performance at Jimmy Choo and Versace.

Bulls Say’s

Michael Kors is one of the largest brands in terms of units and sales in the high-margin handbag market, and it is likely, this positioning should aid its prospects as it looks to grow in complementary categories like footwear.
Michael Kors has reduced its dependence on wholesale customers, which is viewed favorably as increased direct-to-consumer sales allow for better pricing and control over marketing.
The acquisitions of Jimmy Choo and Versace afford diversification opportunities by bringing two luxury brands that maintain products with high price points into the fold.

Company Profile

Michael Kors, Versace, and Jimmy Choo are the brands of Capri Holdings, a marketer, distributor, and retailer of upscale accessories and apparel. Kors, Capri’s largest brand, offers handbags, footwear, and apparel through more than 800 company-owned stores, wholesale, and e-commerce. Versace (acquired in 2018) is known for its ready-to-wear luxury fashion, while Jimmy Choo (acquired in 2017) is best known for women’s luxury footwear. John Idol has served as CEO since 2003 but will be replaced in the position by Joshua Schulman in late 2022. (Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Tags Recommendations, Small Caps

Commodities

First Solar’s Sales Efforts Have Become Increasingly Focused On Select End Markets

Post author By lvc-admin
Post date February 8, 2022
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Business Strategy and Outlook

First Solar’s strategy has pivoted back to its origins as a supplier of thin film solar modules following the exit of its North American development business, and its operations and maintenance business in 2021. The company’s development business supported profits during 2012-17 when First Solar’s module business faced challenges. However, margins in the business became compressed in recent years, and it is likely the company made a prudent decision to exit the business given increasing need for scale. The company retains modest development activities in Japan, but it is not seen, these as core to its long-term strategy.

Upon taking the helm in 2016, CEO Mark Widmar has led the successful execution of the transition to its Series 6 module. This was a major transition for the company and came at a hefty price tag–$2 billion in capital expenditures–but has resulted in a better competitive position compared with its prior module generation (Series 4). Further, the company’s sales efforts have become increasingly focused on select end markets. The U.S. and India represent approximately 90% of booking opportunities, where trade policies leave the company in a more favorable competitive position. In particular, the company performs well in the U.S. utility-scale market, where it is projected, its market share to be approximately 30%.

Financially, the company is focused on leveraging scale benefits to drive margin improvement. Given continued expectations for declining selling prices and a largely fixed operating expense profile (circa 80% fixed), the key lever to grow operating margins is through capacity additions. It is largely definite with many of the company’s strategic moves in recent years. However, it is questioned whether a pure module supplier can achieve consistent excess profits. It would be interesting to see the company seek adjacent revenue opportunities- for example, balance of system components- to complement its module business.

Financial Strength

First Solar’s financial strength stands alone relative to solar module peers. It is considered that this a competitive advantage because it allows First Solar more flexibility to take advantage of investment opportunities. The company carries essentially no debt besides project debt associated with its Systems business and holds more than $1 billion in cash and investments as of late 2021. First Solar’s financial strength is in part due to its conservative approach to expanding capacity, which is in stark contrast to the track record of the broader industry. Cash flow generation has been weighed down by working capital in recent years, but it is probable, this should normalize over the medium term. Capital expenditures will be elevated for the next few years, due to large-scale manufacturing expansions in the U.S. and India. It is likely, the potential for local debt (India) and potential incentives (U.S.) to help fund part of the associated capital expenditures. Given its robust level of cash and investments, combined with continued steady cash flow generation, It isn’t seen the elevated capital expenditures posing a threat to the company’s financial position.

Bulls Say’s

First Solar’s balance sheet strength has enabled it to persist through solar cycles when competitors have failed.
First Solar’s thin film cadmium telluride technology is unique within the industry and benefits from its simple manufacturing process and supply chain.
First Solar is well positioned to benefit from potential U.S. manufacturing incentives.

Company Profile

First Solar designs and manufactures solar photovoltaic panels, modules, and systems for use in utility-scale development projects. The company’s solar modules use cadmium telluride to convert sunlight into electricity. This is commonly called thin-film technology. First Solar is the world’s largest thin-film solar module manufacturer. It has production lines in Vietnam, Malaysia, and Ohio. It plans to add a large factory in India.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Tags Energy

Commodities Trading Ideas & Charts

Onsemi’s Sales Growth Above That Of The Broader Semiconductor Industry

Post author By lvc-admin
Post date February 8, 2022
No Comments on Onsemi’s Sales Growth Above That Of The Broader Semiconductor Industry

Business Strategy and Outlook

It is seen Onsemi is a power chipmaker aligning itself to the differentiated parts of its portfolio in order to accelerate growth and margin expansion. It is probable Onsemi to outpace the growth of its underlying markets over the next five years as it tailors its portfolio of transistors, analog chips, and sensors to pursue secular trends toward electrification and connectivity that allow it to sell into new sockets. Specifically, Onsemi is the top supplier of image sensors to automotive applications like advanced driver-assist systems, or ADAS, and its semiconductors enable power management and conversion in electric vehicles, or EVs, and renewable energy–all of which is likely to keep Onsemi’s sales growth above that of the broader semiconductor industry.

It is viewed onsemi will be vulnerable to modest cyclicality in the short term, but think its portfolio realignment will lend itself to more durable returns through a cycle. The firm’s increased focus on sticky verticals, as well as its differentiated sensor and silicon carbide technologies, contribute to Analysts narrow economic moat rating. Onsemi’s bread and butter historically was in more commodity like discrete power chips, but it is probable for it to focus on higher-value applications in the automotive and industrial end markets going forward and in turn earn more consistent returns on invested capital.

It is seen Onsemi will focus on expanding margins over the medium term. Management invested heavily in pruning and improving its manufacturing efficiency in 2018 and 2019, and it is alleged it see the fruits of these efforts after 2022 when Onsemi fully acquires its first 12-inch fab. It is also alleged the firm will focus its investments on the automotive and industrial markets–higher growth and higher margin than its legacy consumer and smartphone markets. It is seen management faces execution risk in hitting its lofty goal of 48%-50% adjusted gross margin, but expect both a focus on higher-margin verticals and an improved manufacturing footprint to get it to the high-40% range in the next five years–from a previous midcycle margin below 38%.

Financial Strength

It is probable Onsemi’s primary financial focus in the medium term will be generating free cash flow and paying down debt after hefty investments over the last five years. Onsemi took on more than $2 billion debt for its 2016 Fairchild acquisition, and also committed over $1 billion in capital expenditures between 2018 and 2019 to improve its manufacturing footprint (shuttering inefficient fabs and purchasing equipment for its new 12-inch fab). Management has a stated goal of holding off on new share repurchases until the firm meets its 2:1 net leverage goal (net debt/adjusted EBITDA). As of the end of fiscal 2021, Onsemi held $1.4 billion in cash compared with $3.1 billion in total debt, putting its year-end net leverage at 0.88 times. It is projected Onsemi to generate an average of $2 billion in free cash flow through 2026-even while committing roughly 10% of sales to capital expenditures-and seen the firm can use its extra cash to resume repurchases. If Onsemi were to come into a liquidity crunch, it has $1.3 billion available (as of end-fiscal 2021) under its $2 billion revolving credit facility.

Bulls Say’s

Onsemi’s image sensors are best of breed in the automotive market, with a leading market share in high-growth, mission-critical applications like ADAS.
It is viewed Onsemi will continue to outgrow its underlying markets and the broader semiconductor industry by selling greater dollar content into applications like cars and servers, which also helps stave off its vulnerability to market cycles.
Onsemi is focusing its portfolio on the automotive, industrial, and cloud markets, which is seen, will expand margins and create stickier customer relationships.

Company Profile

Onsemi is a leading supplier of power and analog semiconductors, as well as sensors. Onsemi is the second-largest global supplier of discrete transistors like insulated gate bipolar transistors, or IGBTs, and metal oxide semiconductor field-effect transistors, or MOSFETs, and also has a significant integrated power chip business. Onsemi is also the largest supplier of image sensors to the automotive market, targeting autonomous driving applications. The firm is concentrated in and focused on the automotive, industrial, and communications markets, and is reducing its exposure to the consumer and computing markets.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Tags Commodities, Energy

Global stocks Shares

Grainger Shows Strong End Market Growth to Close out 2021; but We See Shares as Still Overvalued

Post author By lvc-admin
Post date February 8, 2022
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Business Strategy and Outlook

W.W. Grainger operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $13 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 287 in 2020 and added distribution centres in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019.

Grainger continues to expand its endless assortment strategy, albeit skeptical of the margin expansion opportunity for this business, given strong competition in the space from the likes of Amazon Business and others. Still, Grainger has distinct competitive advantages in its traditional business, such as its long-standing relationships with large customers and its inventory management solutions, which should help it earn excess returns over the next 10 years.

Financial Strength

As of the fourth quarter of 2021, Grainger had $2.4 billion of debt outstanding, which net of $241 million of cash, represents a leverage ratio of about 1.2 times our 2022 EBITDA estimate. Grainger’s leverage ratio is relatively conservative for the industry, in our view. We believe the company certainly has room to increase leverage if needed, but management looks to be committed to keeping its net leverage ratio between 1-1.5 times. Grainger’s outstanding debt consists of $500 million of 1.85% senior notes due in 2025, $1 billion of 4.6% senior notes due in 2045, $400 million of 3.75% senior notes due in 2046, and $400 million of 4.2% senior notes due in 2047.Grainger has a proven ability to generate free cash flow throughout the cycle. Indeed, it has generated positive free cash flow every year since 2000, and its free cash flow generation tends to spike during downturns because of reduced working capital requirements. By our midcycle year, we forecast the company to generate over $1 billion in free cash flow, supporting its ability to return free cash flow to shareholders. Given the firm’s reasonable use of leverage and consistent free cash flow generation, we believe Grainger exhibits strong financial health.

Bulls Say’s

With a more sensible, transparent pricing model, Grainger should continue to gain share with existing customers and win higher-margin midsize accounts.
As a large distributor with national scale and inventory management services, Grainger is well positioned to take share from smaller regional and local distributors as customers consolidate their MRO spending.
Grainger operates a shareholder-friendly capital allocation strategy; it has increased its dividend for 49 consecutive years and has reduced its diluted average share count by nearly 45% over the last 20 years.

Company Profile

W.W. Grainger distributes 1.5 million maintenance, repair, and operating products that are sourced from over 4,500 suppliers. The company serves about 5 million customers through its online and electronic purchasing platforms, vending machines, catalog distribution, and network of over 400 global branches. In recent years, Grainger has invested in its e-commerce capabilities and is the 11th-largest e-retailer in North America.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Tags US Market

Dividend Stocks

2021 a Year of Strong Growth for C.H. Robinson; Outlook Positive, but Expect Normalization in 2022

Post author By lvc-admin
Post date February 8, 2022
No Comments on 2021 a Year of Strong Growth for C.H. Robinson; Outlook Positive, but Expect Normalization in 2022

Business Strategy and Outlook

C.H. Robinson dominates the $80-plus billion asset-light highway brokerage market, and its immense network of shippers and asset-based truckers supports a wide economic moat, in our view. Although the company isn’t immune to freight downturns, its variable-cost model helps shield profitability during periods of lack lustre demand, as evidenced by a long history of above-average profitability. The firm does not own transportation equipment, and a large portion of operating expenses are tied to performance-based variable compensation, which tends to move in line with net revenue growth. The firm is thought to be well positioned to capitalize on truck brokerage industry consolidation (including market share gains) despite intensifying competition.

Over and above underlying shipment demand trends, share gains will probably remain the key growth driver for Robinson long term. For perspective, it is estimated that Robinson’s stake of the domestic freight brokerage industry at roughly 18% in recent years, up from 13% in 2004, based on market data from Armstrong & Associates. The truck brokerage business is still vastly fragmented, and small, less sophisticated providers are finding it increasingly difficult to keep up with rising demand for efficient capacity access and the need to automate processes. Robinson’s industry-leading network of asset-based truckload carriers (most small) should remain highly valuable to shippers over the long run. This is particularly because truckload-market capacity will probably continue to see growth constraints due in part to the stubbornly limited driver pool.

Robinson has also positioned its air and ocean forwarding unit to contribute to growth. In this segment, it competes with other top-shelf providers like Expeditors International. In 2012, it purchased Phoenix International, which doubled Robinson’s forwarding scale, and organic growth has continued (on average), along with additional tuck-in deals that have boosted the firm’s global footprint. Buying scale and lane density are important in order to secure adequate capacity for shippers, particularly during the peak season.

Financial Strength

C.H. Robinson has taken a more active stance with its balance sheet over the past decade, increasing leverage in part to fund occasional opportunistic acquisitions. Before 2012, the firm was largely debt free. That said, its capital structure remains quite healthy. At the end of 2021, the firm had a manageable total debt load near $1.9 billion and $257 million in cash. Debt/EBITDA was near 1.6 times (versus 1.4 times in 2019 and 2020), and in line with management’s targeted range of 1.0-1.5 times. Interest coverage (EBITDA/interest expense) in 2021 was a comfortable 20 times. Importantly, as a well-managed asset-light 3PL, Robinson has a long history of consistent free cash flow generation, averaging more than 3.0% of gross revenue over the past five years (20% of net revenue). Note that truck brokers’ free cash flow tends to be lowest in strong years of growth by nature of the intermediary business model and related spike in accounts receivable. It is expected that free cash flow to approximate 3%-4% of gross revenue over our forecast horizon. Robinson is expected to have no issues servicing its long-term obligations, given its top-tier profitability, and the firm’s liquidity should be more than ample to weather cyclical demand pullbacks

Bulls Say’s

C.H. Robinson enjoys a long history of impressive execution throughout the freight cycle, and it has thwarted a host of competitive threats over the years.
It is estimated that C.H. Robinson has gradually increased its share of the truck brokerage industry to roughly 17% from 13% in 2004.
Robinson’s non-asset-based operating model has generated average returns on capital near 27% during the past decade and 21% since 2017 (around 23% in 2021)–well above returns generated by most traditional asset-intensive carriers.

Company Profile

C.H. Robinson is a top-tier non-asset-based third-party logistics provider with a significant focus on domestic freight brokerage (57% of 2021 net revenue), which reflects mostly truck brokerage but also rail intermodal. Additionally, the firm also operates a large air and ocean forwarding division (34%), which has grown organically and via tuck-in acquisitions. The remainder of revenue consists of the European truck-brokerage division, transportation management services, and a legacy produce-sourcing operation.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.