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Littelfuse is a small but differentiated electrical protection supplier with semiconductor exposure

Post author By lvc-admin
Post date February 4, 2022
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Business Strategy and Outlook:
Littelfuse is a differentiated supplier of electrical protection into cars and industrial applications. While the firm is a smaller player than other competitors in the components market under our coverage, it has aligned its portfolio toward secular themes of safety, efficiency, and connectivity to pursue growth. Littelfuse’s best organic growth opportunities will come from vehicle electrification; battery electric vehicles require five times
the circuit protection content of an internal combustion counterpart, and charging infrastructure presents a lucrative opportunity for the firm’s growing power semiconductor business.
Littelfuse’s passive components are small and inexpensive, yet vitally important to the safe and continuous function of mission-critical systems in end applications. Circuit protection products safeguard against
electrostatic discharge and overcurrent to prevent component failure and/or fire in cars, power grids, data centers, and manufacturing plants. Even though individual parts like fuses and relays don’t carry a hefty price
tag, Littelfuse’s application expertise helps the firm stave off commoditization and creates sticky customer
relationships.
Financial Strength:
Littelfuse is in good financial shape. As of Jan. 1, 2022, the firm held $637 million in total debt and $478 million in cash on hand. The firm is expected to satisfy its financial obligations with ease. Littelfuse has no more than $150 million coming due in a single year through 2026, and the firm averaged $226 million in free cash flow from 2017 to 2021. The firm has been forecasted to average $471 million in free cash flow per year over our explicit forecast. Littelfuse’s debt/adjusted EBITDA ratio of 1.29 times at the end of 2021 places it solidly at the low end of management’s long-term range of 1 times-2.5 times.
Bulls Say:
 Secular trends toward renewable energy and electric vehicles should boost demand for Littelfuse’s
products.
 Littelfuse has a foot in the door of the emerging silicon carbide semiconductor market, which could fuel
future rapid growth for the firm.
 Littelfuse’s sticky customer relationships have helped it earn excess returns on invested capital for 11
straight years, even in the face of cyclical downturns in 2019 and 2020.
Company Profile:
Littelfuse is a leading provider of circuit protection products (such as fuses and relays) and other passive
components, selling billions of units into the transportation, industrial, telecommunications, and consumer electronics end markets. The firm is also increasing its power semiconductor business, where it predominantly
serves industrial end markets and is breaking into electric vehicle charging infrastructure.
(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.

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Property

Fundamentals for Equity Residential’s High Quality Apartments Seeing Strong Recovery from Pandemic

Post author By lvc-admin
Post date February 4, 2022
No Comments on Fundamentals for Equity Residential’s High Quality Apartments Seeing Strong Recovery from Pandemic

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Business Strategy and Outlook:

Equity Residential has repositioned its portfolio over the past decade to focus on owning and operating high-quality multifamily buildings in urban, coastal markets with demographics that allow the company to maintain high occupancies and drive strong rent growth. The company has sold out of inland and southern markets and increased its operations in high-growth core markets: Los Angeles, San Diego, San Francisco, Washington, D.C., New York, Boston, and Seattle. These markets exhibit traits that create demand for apartments, like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers that draw younger people. The company regularly recycles capital by selling noncore assets or exiting markets and using the proceeds for its development pipeline or acquisitions with strong growth prospects, a strategy that has produced strong returns.

While Equity Residential has repositioned its portfolio into markets with strong demand drivers, analysts are cautious on its long-term growth prospects, given that many markets have historically seen high supply growth. The urban, luxury end of the apartment market where Equity Residential traditionally operates has seen the highest amount of new supply, competing directly with the company’s portfolio. Additionally, the pandemic has caused many millennials to consider moves to the suburbs, either into suburban apartments or their own single-family homes, though demand for new urban apartments has remained resilient as people begin to resume their prepandemic lifestyles. Equity Residential has created significant shareholder value through development, but the increased competition for apartment assets combined with high construction costs is making accretive deals more difficult to find and underwrite. As a result, Equity Residential’s development pipeline is now down to $700 million

Financial Strength:

Equity Residential is in good financial shape from a liquidity and solvency perspective. The company seeks to maintain a solid but flexible balance sheet, which is believed will serve stakeholders well. Near-term debt maturities should be manageable through a combination of refinancing, asset sales, and free cash flow. The company should be able to access the capital markets when acquisition and development opportunities arise. As a REIT, Equity Residential is required to pay out 90% of its income as dividends to shareholders, which limits its ability to retain its cash flow. However, the company’s current run-rate dividend is easily covered by cash flow from operating activities, providing plenty of flexibility to make capital allocation and investment decisions.

Bulls Say:

Equity Residential’s portfolio of high-quality assets should see relatively consistent levels of demand long term from high-income earners and will likely see just a small hit to fundamentals during the current pandemic as most residents have not experienced job losses.
Equity Residential has a history of finding accretive development opportunities to bolster its growth prospects.
While current supply deliveries are near peak levels, rising construction costs and tighter lending standards should lead to lower supply growth.

Company Profile:

Equity Residential owns a portfolio of 310 apartment communities with around 80,000 units and is developing three additional properties with 1,136 units. The company focuses on owning large, high-quality properties in the urban and suburban submarkets of Southern California, San Francisco, Washington, D.C., New York, Seattle, and Boston.

(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.

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Dividend Stocks

Returning to Truist After Q4 Earnings; Increasing Our Fair Value Estimate to $66 From $63

Post author By lvc-admin
Post date February 4, 2022
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Business Strategy and Outlook

Truist (the combination of BB&T and SunTrust), is set for its next step up in profitability, as merger-related costs are essentially cut in half in 2022 and then fall out completely in 2023. The combination has formed one of the better regionals in the U.S. from a competitive standpoint.Morningstar analysts like Truist’s insurance growth engine, and the bank has only been adding to its strength here with the acquisition of Regions Insurance Group in 2018, multiple smaller acquisitions in 2020, and Constellation Partners in 2021.Morningstar analyst also like the strength of the bank’s investment banking group, as well as its growing wealth business, and believe Truist will have room to increase non interest revenue over time.

Morningstar analysts view the bank’s latest push into the Point of Sale consumer financing space with the acquisition of Service Finance in late 2021 as another positive. We expect the unit will drive multiple billions of dollars of loan originations for years to come, with solid yields on these loans, although expect competition to increase over time, as Truist is not the only bank making major moves in this space.

Truist has made steady progress on its integration efforts (the acquisition closed in late 2019), with much of the remaining work set to be completed in 2022. The financials still remain a bit complex due to PAA and PPP related NII, one-time expenses, and additional bolt-on acquisitions taking place. Once the dust settles in 2023, we believe management’s goal of becoming a top-tier bank from the standpoint of efficiency and return on tangible equity is realistic.

After updating projections with the latest quarterly results, Morningstar analyst increased its fair value estimate to $66 per share from $63. This values Truist at roughly 2.6 times tangible book value as of December.

Financial Strength

Morningstar analysts think Truist is in good financial health and also do not have significant concerns about capital, and the bank had a common equity Tier 1 ratio of 9.6% as of the fourth quarter of 2021, roughly in line with management’s expectations.

Bulls Say

A strong economy and higher rates are all positives for the banking sector and should propel revenue even higher.
Truist’s now combined operations will allow the bank to reach new levels of operating efficiency and profitability, previously out of reach when BB&T and SunTrust were separate franchises.
Truist keeps growing its insurance operations at an above market rate. Additional bolt-on acquisitions, higher interest rates, and the falling out of acquisition related expenses means Truist will see uniquely strong core revenue growth along with falling expenses.

Company Profile

Based in Charlotte, North Carolina, Truist is the combination of BB&T and SunTrust. Truist is a regional bank with a presence primarily in the Southeastern United States. In addition to commercial banking, retail banking, and investment banking operations, the company operates several nonbank segments, the primary one being its insurance brokerage business.

(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.

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Technology Stocks

Fortive Delivers Solid Margin Expansion in Q4 Despite Cost Inflation and Supply Chain Challenges

Post author By lvc-admin
Post date February 4, 2022
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Business Strategy and Outlook

Fortive, spun off from Danaher in 2016, has followed in its former parent’s footsteps and adopted the philosophy underpinning the proven Danaher Business System, which has its roots in the Toyota Production System. The Fortive Business System essentially involves acquiring moatworthy companies, expanding operating margins through Lean manufacturing principles, and redeploying cash flows into further mergers and acquisitions.

Fortive targets companies with reputable brand names, large installed bases, and strong cash flows. Management has focused particularly on boosting recurring revenue in its portfolio, which has already increased from roughly 18% at the time of the spin-off to 38% in 2021, and we think it could reach 50% over the next five years. Driving this trend are acquisitions, divestments and the increasing importance of the firm’s software-as-a-service business.

Management has pursued acquisitions to bolster its digital capabilities. Fortive seeks to leverage its large installed base and combine connected devices with software to offer customers an integrated package. We expect management’s focus on recurring revenue and digitalization to reinforce Fortive’s moat by increasing customer switching costs and enhancing its intangible assets.

Under the leadership of CEO James Lico, who brings two decades of experience at Danaher, Fortive has delivered impressive midteens returns on invested capital as a stand-alone company. Given its impressive legacy of prudent capital allocation and driving operational improvement at acquired companies through FBS, Morningstar analysts believe that Fortive has solid prospects to continue compounding cash flows and creating value for shareholders.

Fortive Delivers Solid Margin Expansion in Q4 Despite Cost Inflation and Supply Chain Challenges

Despite ongoing supply-chain constraints, Fortive grew its fourth-quarter core sales 1% from the prior-year period. Fortive’s fourth-quarter core revenue was up 0.8% in intelligent operating solutions, up 2.6% in precision technologies, and down 0.8% in advanced healthcare solutions. Morningstar analysts think that Fortive’s ability to expand its margins despite supply-chain disruptions and cost inflation is a testament to its moat as well as strong execution. Morningstar analysts have increased its fair value estimate for Fortive to $88 from $86, which reflects slightly more optimistic near-term revenue growth and operating margin projections as well as time value of money.

Financial Strength

Fortive is on solid financial footing. As of December 2021, Fortive owed roughly $4 billion in long-term debt and held approximately $0.8 billion in cash and equivalents. Additionally, the company had $2 billion available under its revolving credit facility. Morningstar analysts estimate that Fortive will have a net debt/adjusted EBITDA ratio of around 1.1 times in 2022, and believe that the company will work toward reducing its leverage in the near term to protect its investment-grade credit rating.

Bulls Say

Management has an impressive record of capital allocation and improving operating margins of acquired companies.
Fortive’s digital strategy can help reinforce its moat by combining its large installed base of equipment with complementary software to offer a comprehensive package and enhance customer loyalty.
Growth in recurring revenue and SaaS-based offerings, as well as the recent divestment of the automation and specialty unit, has reduced the cyclicality of Fortive’s portfolio.

Company Profile

Fortive is a diversified industrial technology firm with a broad portfolio of mission-critical products and services that include field solutions, product realization, health, and sensing technologies. The company serves a wide range of end markets, including manufacturing, utilities, medical, and electronics. Fortive generated roughly $5.3 billion in revenue and $1.2 billion in adjusted operating income in 2021.

(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.

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Daily Report Financial Markets

Indian Market Outlook – 04 February 2022

Post author By Aayushi Swami
Post date February 4, 2022
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Daily Report

Morning Report Global Markets Update – 04 February 2022

Post author By Aayushi Swami
Post date February 4, 2022
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Dividend Stocks

Snap-on Remains Resilient Despite Supply Headwinds

Post author By lvc-admin
Post date February 4, 2022
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Business Strategy and Outlook

Snap-on provides premium tools to vehicle repair shops and industrial customers. Snap-on will continue to be the top player in the tools industry. The company benefits from a strong brand reputation among repair professionals. Customers value Snap-on’s high-quality and strong performing products, in addition to its high-touch mobile van network. Snap-on’s tools and diagnostic products help customers complete repairs faster, improving productivity. Customers will continue to pay up for Snap-on’s tool durability, convenience, and flexible financing options.

The company’s strategy focuses on providing technicians, shop owners, and dealerships a full line of products, ranging from tools to diagnostic and software solutions. Snap-on’s tools are considered the go-to products, exhibiting better durability and reliability than cheaper alternatives that break a lot quicker. Diagnostic products arm technicians with more information to identify issues faster. Snap-on has exposure to end markets that have attractive tailwinds. In automotive, Demand for vehicle repair work will be strong in the near term, largely due to vehicle owners taking in their cars for overdue servicing (delayed due to the COVID-19 pandemic).

Financial Strength

Snap-on’s remaining segments were resilient, despite the supply headwinds. The repair systems and information segment increased about 9% year on year. A key contributor to sales growth was increased demand for undercar equipment and diagnostic products, which help technicians quickly access repair data, boosting operational efficiency. Snap-on’s exposure to diagnostic products positively, given the proliferation of electronics in automobiles. Snap-on maintains a sound balance sheet. The industrial business does not hold any long-term debt, but the debt balance of the finance arm stood at $1.7 billion in 2021, along with $2.1 billion in finance and contract receivables.

As a lender, the finance arm helps drive sales in the industrial business by providing both customers and franchisees financing. With respect to financing for customers, Snap-on extends credit for large ticket purchases and leaves financing for smaller items to franchisees. Sales representatives bear the credit risk if customers fail to pay. Snap-on’s solid balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth but also returns cash to shareholders via dividends and share repurchases.

Bulls Say’s

The growth in vehicle miles driven increases the wear and tear on vehicles, calling for more maintenance and repair work to keep them on the road, benefiting Snap-on.
Auto manufacturers continue to tap Snap-on to create new tools and products to service new EV models. This alleviates concerns that EV adoption will threaten Snap-on’s viability.
Sales representatives can add new customers on their designated service routes, increasing revenue per franchisee.

Company Profile

Snap-on is a manufacturer of premium tools and software for repair professionals. Hand tools are sold through franchisee-operated mobile vans that serve auto technicians who purchase tools at their own expense. A unique element of its business model is that franchisees bear significant risk, as they must invest in the mobile van, inventory, and software. At the same time, franchisees extend personal credit directly to technicians on an individual tool basis. Snap-on currently operates three segments—repair systems and information, commercial and industrial, and tools. The company’s finance arm provides financing to franchisees to run their operations, which includes offering loans and leases for mobile vans.

(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.