Business Strategy and Outlook
Spirit AeroSystems is the largest independent aerostructures manufacturer. The firm produces fuselages, wing structures, as well as structures that house and connect engines to aircraft. Spirit’s revenue has traditionally been almost entirely connected to the original production of commercial aircraft, but Spirit has a growing defense segment and recently acquired Bombardier’s maintenance, repair, and overhaul business. As commercial aerospace manufacturing is highly consolidated, it is unsurprising that Spirit has customer concentration. Historically, 80% of the company’s sales have been to Boeing and 15% have been to Airbus. Management targets a 40% commercial aerospace, 40% defense, and 20% commercial aftermarket revenue exposure. The firm acquired Fiber Materials, a specialty composite manufacturer focused on defense end markets, and Bombardier’s aftermarket business in 2020 to diversify revenue.
Financial Strength
Spirit AeroSystems has raised and maintained a considerable amount of debt since the grounding of the 737 MAX began in 2019. The company has $1.9 billion of cash on the balance sheet and about $3.9 billion of debt at the end of 2020, and access to another $950 million of debt if it so needs. The firm has $300 million debt coming due in 2021 and 2023, as well as $1.7 billion of debt coming due in 2025, and $700 million of debt coming due in 2028. Revenue of $1.1 billion and adjusted loss per share of $0.84 beat FactSet consensus by 0.1% and missed the same estimates by 29.9%, respectively, though much of the earnings miss was due to a forward loss associated with 787 production.
Revenue increased 22.1%, primarily due to increased 737 MAX production increasing OE production-related revenue. Although we slightly lowered our long-term outlook for 737 MAX production in the third quarter, we continue to expect that increasing 737 MAX production will be the primary value driver for the firm. Management continues to expect it can generate 16.5% gross margins (including depreciation) at 737 MAX production of 42 per month from efficiencies achieved during the pandemic.
Bulls Say’s
- Commercial aerospace manufacturing has a highly visible revenue runway, despite COVID-19, from increasing flights per capita as the emerging market middle class grows wealthier.
- Spirit has restructured to become more efficient when aircraft manufacturing recovers.
- Spirit is diversifying its customer base, which we anticipate will make it less susceptible to customer specific risk.
Company Profile
Spirit AeroSystems designs and manufactures aerostructures, particularly fuselages, for commercial and military aircraft. The company was spun out of Boeing in 2005, and the firm is the largest independent supplier of aerostructures. Boeing and Airbus are the firms and its primary customers, Boeing composes roughly 80% of annual revenue and Airbus composes roughly 15% of revenue. The company is highly exposed to Boeing’s 737 program, which generally accounts for about half of the company’s revenue.
(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.
Business Strategy and Outlook
Westpac Bank Corporation is the second-largest of Australia’s four major banks. The bank provides a range of banking and financial services to retail and business customers, including mortgages, consumer finance, credit cards, business loans, and term deposits.
Westpac’s strategy is anchored in its commitment to conservatively manage risk across all business areas, following its near-death experience in the early 1990s. The multibrand, customer-focused strategy aims to capture an increasing share of business from its Australian and New Zealand banking and wealth management customer base.The main current influences on earnings growth are modest credit growth, with regulators likely to cool credit demand due to rising house prices and increased household leverage, and delays to business plans for capital expenditure. Intense competition is constraining interest margins with opportunities to lower funding costs largely exhausted. Operating expenses are increasing due to increased provisions for regulatory and compliance project spend.
Bad and doubtful debt expenses peaked in first-half fiscal 2009 and remained at decade lows until provisions for the coronavirus impact were taken in first-half fiscal 2020. Morningstar analysts expect loan impairment expenses to average under 0.2% of loans over the long term.
Westpac Grinds Through Another Tough Quarter as Margins Continue to Shrink
Westpac’s first-quarter 2022 profit of AUD 1.58 billion was up modestly from the quarterly average of second-half fiscal 2021. A 2% increase in net interest income and 7% fall in operating expenses lifted earnings pre-impairments by around 10%. Unlike last year, the bottom line is no longer being boosted by loan impairment provision releases. Impairments were still modest, and credit quality remains sound, with loans in arrears as a percentage of loans falling 10 basis points to 0.58%.
Loan growth was soft in a strong market, and net interest margins, or NIM, fell to 1.91% in the quarter from 1.98% in the second half of fiscal 2021. The squeeze from chasing loan growth in a competitive environment, an ongoing drag from more fixed-rate loans, plus holding more liquid assets which earn no interest, was a little more severe than Morningstar analyst expected. Morningstar analysts lower fiscal 2022 NIM forecast to 1.85% from 1.90% previously. The 7% reduction to fiscal 2022 profit forecast is not material enough to move to A$29 fair value estimate.
Financial Strength
Westpac comfortably meets APRA’s common equity Tier 1 ratio benchmark of 10.25%. The bank’s common equity Tier 1 ratio was 12.2% as at Dec. 31, 2021. This is based on APRA’s globally conservative methodology and a top-quartile internationally comparable 18%. We see the risk of higher loan losses and credit stress inflating risk-weighted assets as the greatest threat to the bank’s capital position in the near term. In the past three years, the proportion of customer deposits to total funding is about 60% to 65%, reducing exposure to volatile funding markets. Westpac has AUD 8.6 billion in excess capital as at Dec. 31, 2021. Assuming completion of the AUD 3.5 billion share buyback announced in November 2021, this surplus falls to around AUD 5 billion. The bank expects divestments to add roughly AUD 2 billion to this position in fiscal 2022.
Bulls Say
- Improving economic conditions underpin profit growth from fiscal 2021. Productivity improvements are likely from fiscal 2023.
- Cost and capital advantages over regional banks and neo-banks provide a strong platform to drive credit growth.
- Consumer banking provides earnings diversity to complement the more volatile returns generated from business and wholesale banking activities.
- The withdrawal of personal financial advice by Westpac salaried financial advisors reduces compliance and regulatory risk.
Company Profile
Westpac is Australia’s oldest bank and financial services group, with a significant franchise in Australia and New Zealand in the consumer, small business, corporate, and institutional sectors, in addition to its major presence in wealth management. Westpac is among a handful of banks around the globe currently retaining very high credit ratings. The bank benefits from a large national branch network and significant market share, particularly in home loans and retail deposits.
(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.
Business Strategy and Outlook
Vodafone has steadily transformed its business over the past several years, adding fixed-line assets in core markets, selling out of peripheral areas like New Zealand, and forming partnerships in others. Through a series of acquisitions and partnerships, Vodafone has added fixed-line infrastructure to its traditional wireless business in several countries.Vodafone is now the largest cable company in the country, with networks that reach around 60% of the population, enabling it to capture about one third of the broadband market.
Vodafone has also sought to improve efficiency and free up assets. Intense competition, especially in Spain and Italy, has led to disappointing financial results recently. However, Morningstar analysts think the reshaping of Vodafone’s capabilities across Europe to integrate fixed-line and wireless assets positions the firm to compete more effectively over the long term. Integrating fixed-line and wireless networks should improve the quality of each over time, while bundling services should enable the firm to serve customers more efficiently.
Vodafone Continues to Make Gradual Progress as Potential Consolidation Comes Into Focus
Vodafone’s fiscal third-quarter results were broadly as expected, with management stating that the firm remains on track to hit the upper end of its financial expectations for the year. The firm only reports revenue and customer metrics for odd-numbered quarters. More importantly, management clearly sounded optimistic that it will move forward with transactions that change the structure of its operations in several countries. Rumors have swirled around potential merger partners for Vodafone’s operations in the U.K., Italy, and Spain, each of which continues to face challenging competitive environments. We continue to believe the market has overly discounted the long-term value of Vodafone’s assets, and we suspect moves to improve the economics in certain countries will help uncover that value. Morningstar analysts don’t plan to change its GBX 185 fair value estimate.
Financial Strength
As of mid-fiscal 2022, net leverage stood at 3.0 times (before lease obligations), with spectrum costs, restructuring expenses, and dividend payments consuming a large portion of free cash flow while the pandemic and competitive pressure have weighed on EBITDA. Management targets leverage in the range of 2.5-3.0 times EBITDA, though, so debt reduction is not a high priority currently.Even with management claiming comfort with the balance sheet, Vodafone still decided to cut its dividend 40% in May 2019, saving the firm about EUR 1.6 billion annually. The payout in fiscal 2019 consumed more than 90% of free cash flow, after funding spectrum purchases. At the new dividend payout, that ratio dropped to less than 50% of free cash flow during fiscal 2020, though cash payments for spectrum were modest. Sizable spectrum purchases pushed the payout ratio to nearly 80% of free cash flow in fiscal 2021. The firm expects a 60% cash flow payout assuming EUR 1.2 billion of spectrum purchases in the average year.Overall, Morningstar analysts don’t believe Vodafone’s debt load is a concern. The firm holds stakes in multiple assets that could be sold if needed to reduce leverage, including its Australian venture, its partnership with Liberty Global in the Netherlands, and its stake in Vantage Towers. Vodafone has also pledged not to put additional money into its troubled Indian venture.
Bulls Say
- Vodafone possesses massive scale, serving around 280 million wireless customers globally, and it owns extensive wireless and fixed-line networks in most of the markets it serves. Few telecom firms can match its size and strength.
- While Europe forms the core of the business, Vodafone still provides access to several emerging markets with strong growth potential.
- Even after the 2019 dividend cut, Vodafone shares still offer a very attractive yield. The current payout should prove sustainable, with room for growth as restructuring efforts wind down.
Company Profile
With about 270 million wireless customers, Vodafone is one of the largest wireless carriers in the world. More recently, the firm has acquired cable operations and gained access to additional fixed-line networks, either building its own or gaining wholesale access. Vodafone is increasingly pushing converged services of wireless and fixed-line telephone services. Europe accounts for about three fourths of reported service revenue, with major operations in Germany (about 30% of total service revenue), the U.K. (13%), Italy (12%), and Spain (10%). Outside of Europe, 65%-owned Vodacom, which serves sub-Saharan Africa, is Vodafone’s largest controlled subsidiary (12% of total service revenue). The firm also owns stakes in operations in India, Australia, and the Netherlands.
(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.
Process:
This strategy’s distinctive approach remains in place under its new leader, earning it an Above Average Process rating. Former lead manager Benjamin Segal said he favoured the mid-cap universe because firms of that size–along with those in the smaller part of the large-cap range–tend to be well-enough established that they can withstand some setbacks but remain less familiar to many global investors and thus often sell at attractive prices. They can also be takeover targets. Former comanager Elias Cohen, who became lead manager upon Segal’s departure on June 30, 2021, follows the same approach. This team wants steadily growing firms, but it also focuses on the quality of company management. The team is willing to own firms without hefty margins if other traits are impressive. The strategy has a 15% limit on emerging-markets exposure, but the portfolio has been far below that for a long time. The turnover rate tends to be moderate. Ideas can come from Cohen, comanager Tom Hogan, or the analysts, and decision-making is collaborative, though the lead manager has final authority for portfolio decisions.
Portfolio:
Portfolio shows that this fund makes fuller use of the market-cap spectrum than most peers and its chosen benchmark, the MSCI EAFE Index. The fund had about 33% of its assets in midcaps and another 4% in small caps (as classified by Morningstar), versus just 10% in mid-caps and almost nothing in small caps for the index and just slightly higher figures for the foreign large-growth and foreign large-blend category averages. The portfolio’s figures are nearly identical to those from one year earlier, showing that new lead manager Elias Cohen has maintained the strategy’s broad market-cap approach even as he traded several stocks into and out of the portfolio. Cohen, like former manager Benjamin Segal, favours the mid-cap and smaller large-cap universes. The portfolio often lies on the border between the growth and blend portions of the style box, but the latest portfolio is fully in the blend region. The strategy continues to spread its assets widely, with none of the 78 stocks receiving more than 2.6% of assets. Emerging-markets exposure remains below 5% and is limited to China and India.
People:
This strategy’s long-tenured lead manager, Benjamin Segal, left Neuberger Berman on June 30, 2021, to become a high school math teacher. Replacing him as lead manager was former comanager Elias Cohen. The firm had earlier promoted Thomas Hogan from the analyst ranks to comanager on Jan. 20, 2021. Cohen had worked with Segal for almost 20 years, most recently as comanager–for two years on this strategy and four years on sibling Neuberger Berman International Select NILIX. The analyst staff remained intact including one addition in March 2021. Three of the six members of the analyst team have been in place since 2008 or earlier. They and the managers also talk with the members of Neuberger Berman’s emerging-markets team. Cohen and Hogan each have more than $1 million invested in this strategy.
Performance:
It’s a bit complicated assessing this fund’s performance, but all in all, the fund has a solid record as a core international equity choice. This fund launched in 2005 and was known until late 2012 as Neuberger Berman International Institutional. But an identical fund that was merged into it in January 2013 posted a strong 10-year record prior to the merger, using the same strategy, under recently departed lead manager Benjamin Segal. Another complication is that although this fund’s growth leanings result in its placement in the foreign large-growth category, it is not very aggressive in that direction, with its portfolio often landing around the border between growth and blend or, as currently, in the blend box. That’s typically been a disadvantage versus growthier rivals for a long time. The managers aim to outperform when markets tumble; although it did not do so in the bear market of early 2020, it did hold up well during the 2014 sell-off and the 2015-16 bear market.
(Source: Morningstar)
Price:
It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s second-costliest quintile. That’s poor, but based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we still think this share class will be able to overcome its high fees and deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze.
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(Source: Morningstar) (Source: Morningstar)
About Funds:
A growing conviction in the duo that manages JPMorgan U.S. Large Cap Core Plus and its Luxembourg resided sibling JPM U.S. Select Equity Plus, and the considerable resources they have effectively utilised, lead to an upgrade of the strategy’s People Pillar rating to Above Average from Average. The strategy looks sensible and is designed to fully exploit the analyst recommendations by taking long positions in top-ranked companies while shorting stocks disliked by the analysts. Classic fundamental bottom-up research should give the fund an informational advantage. The portfolio is quite diversified, holding 250-350 stocks in total with modest deviations from the category index in the long leg. The 30/30 extension is broadly sector-, style-, and beta-neutral. Here the managers are cognizant of the risks of shorting stocks, where they select stocks on company-specific grounds or as part of a secular theme. For example, the team prefers semiconductors, digital advertising, and e-commerce offset by shorts in legacy hardware, media, and network providers. Short exposure generally stands at 20%-30%, with the portfolio’s net exposure to the market kept at 100%. The strategy’s performance since inception, which still has some relevance given Bao’s involvement, has been outstanding.
(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.
