Business Strategy and Outlook
Evergy must secure constructive regulatory outcomes in Missouri and Kansas to support growth plans that include $10.4 billion of capital investment during the next five years, primarily to replace aging coal plants with renewable energy. New legislation in Missouri should allow Evergy to securitize the remaining book value of coal plants as they retire in the coming years, improving cash flow and reducing equity needs.
Kansas, which represents about half of Evergy’s total asset base, has a more constructive regulatory environment than Missouri, and Kansas regulators have supported renewable energy investment for many years. Evergy also benefits from favorable federal regulation for its electric transmission assets, which could top 15% of its asset base in the coming years. Evergy is one of the few utilities that does not have any investments outside its rate-regulated businesses. Management said it remains committed to directing all of Evergy’s investment to its regulated utilities at least through 2025. Senior leadership has extensive experience at companies with unregulated power businesses, and we wouldn’t be surprised if Evergy directs some capital investment outside of the utilities, perhaps with a partner.
Evergy raised the dividend 6% during the two years following the merger and raised it 7% for 2022 to $2.29 per share annualized. Morningstar analyst expect the dividend to grow in line with earnings for the foreseeable future
Constructive Regulatory Outcome in Missouri Would Be Big Boost for Evergy
Morningstar analyst are reaffirming to $60 fair value estimate for Evergy after reviewing the company’s two Missouri customer rate filings and incorporating them into their forecast.
Morningstar analyst expect regulators to approve rate increases less than Evergy’s $43.9 million request in its Missouri Metro jurisdiction and $27.7 million request in its Missouri West jurisdiction. However, Morningstar analyst think these are reasonable requests and expect constructive outcomes that support 6% average annual earnings growth rate through 2024. If regulators were to approve the full rate increase, it would raise Morningstar analyst growth rate to 7%, the middle of management’s 6%-8% target.
Financial Strength
Evergy had an equity-heavy balance sheet following the all-stock combination of Westar and Great Plains. However, the company has repurchased over 45 million shares following the merger for about $2.6 billion. Morningstar analyst don’t expect any additional share repurchases due to an acceleration of the company’s investment plan. Morningstar analyst expect debt/total capital to remain in the mid-50s. Following the merger, the board raised the dividend 6.3% in late 2019, 5.9% in late 2020, and 7% in late 2021. Management has targeted a payout ratio of 60%-70% of operating earnings, in line with most other regulated utilities. Morningstar analyst forecast 6% dividend increases for at least the next four years, in line with earnings growth.
Bulls Say
- Morningstar analyst expect annual dividend increases to average 6% over the next four years.
- A material net operating loss position is likely to shield Evergy from paying significant cash taxes until 2023.
- Recent legislation has improved the regulatory framework in Missouri, home to one third of Evergy’s rate base. This should reduce regulatory lag
Company Profile
Evergy is a regulated electric utility serving eastern Kansas and western Missouri. Major operating subsidiaries include Evergy Metro, Evergy Kansas Central, Evergy Missouri West, and Evergy Transmission Co. The utility has a combined rate base of approximately $15 billion, about half in Kansas and the rest split between Missouri and federal jurisdiction. Evergy is one of the largest wind energy suppliers in the U.S.
(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.
The Reserve Bank of India (RBI) intimated in October 2021 that it had got approval for a modification to the Reserve Bank of India Act 1934 that would broaden the definition of bank note to include CBDCs. The central government has emphasised the potential benefits of CBDCs, claiming that they will lessen reliance on fiat currencies.
In another major announcement, Sitharaman said that all income from the transfer of virtual digital assets will be taxed at 30%. This will impact gains from cryptocurrencies and NFTs.
She further highlighted that no deduction will be allowed for expenditure undertaken on its acquisition. The loss from transfer of virtual digital assets cannot be set off against any other income.
The Finance Minister also proposed to provide for TDS on payment made in relation to transfer of virtual digital assets at the rate of 1 percent of such consideration above a monetary threshold. Gift of virtual digital assets has also been proposed to be taxed in the hands of the recipient.
India’s crypto industry had several demands, including that the government classify cryptocurrencies, provide clarity on taxation and establish a self-regulatory framework shaped by the crypto industry.
Many countries have rolled out their CBDCs recently. Nigeria launched eNaira in October last year. The Bahamas and five other islands in the East Caribbean have also rolled out their digital currencies.
(Source: The Financial Express)
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
It is understood Sensata Technologies is a differentiated supplier of sensors and electrical protection. The firm has oriented itself to benefit from secular trends toward electrification, efficiency, and connectivity, and it is supposed that investors will see meaningful topand bottom-line growth as upon an automotive market recovery.
Despite the cyclical nature of the automotive and heavy vehicle markets, electric vehicles (EVs) and stricter emissions regulations provide Sensata the opportunity to sell into new sockets, which has allowed the firm to outpace underlying vehicle production growth by about 4% historically. It is alleged such outperformance is achievable over the next 10 years, given the expectations for a fleet mix shift toward EVs and Sensata’s growing addressable content in higher-voltage vehicles.
It is observed, Sensata’s ability to grow its dollar content in vehicles demonstrates intangible assets in sensor design, as it works closely with OEMs and Tier 1 suppliers to build its products into new sockets. It is also believed the mission-critical nature of the systems into which Sensata sells gives rise to switching costs at customers, leading to an average relationship length of 31 years with its top 10 customers. As a result of switching costs and intangible assets, it is held Sensata benefits from a narrow economic moat and will earn excess returns on invested capital for the next 10 years.
Over the next decade, it is anticipated Sensata to use bolt-on M&A to supplement sensor content growth in its core markets. Sensata established a leading share in the tire pressure monitoring system (TPMS) market in 2014 with its acquisition of Schrader, and it is implicit acquisitions will play a key role in allowing the firm to enter new, higher-growth, adjacent markets. Recent acquisitions of GIGAVAC and Xirgo will allow Sensata to compete in the electric vehicle charging infrastructure and telematics markets, respectively, which is likely to begin to bolster the top line and margins near the end of analyst’s explicit forecast and beyond.
Financial Strength
Sensata Technologies is leveraged, but it is held that its balance sheet is in good shape, and that it generates enough cash flow to fulfill all of its obligations comfortably. As of Dec. 31, 2021, the firm carried $4.2 billion in total debt and $1.7 billion cash and equivalents. Sensata closed out 2021 with a net leverage ratio of 2.8 times, which is squarely in management’s target range of 2.5-3.5 times. Over the next few years, it is probable Sensata to stay in its target leverage range as it continues to engage in supplemental M&A. Between 2023 and 2026, Sensata has $2.1 billion total in debt maturing, with $400 million-$700 million coming due each year. It is projected the firm to easily fulfill its obligations with its cash balance and cash flow—it is foreseen over $700 million in average annual free cash flow over Analyst’s explicit forecast. Finally, it is noted that Sensata has a variable cost structure that allows it to keep a relatively healthy balance sheet during difficult demand environments. Even with weak end markets in 2019 and 2020 that shrunk the top line, Sensata’s free cash flow generation held steady, with its free cash flow conversion jumping to 130% in 2020.
Bulls Say’s
- Sensata should benefit from secular trends toward electrification, efficiency, and connectivity to continue outgrowing global vehicle production.
- Fleet management is an opportunity for Sensata to expand its margins and create a recurring base of revenue in an emerging, high-growth market.
- Sensata has some of the sensor industry’s highest margins and strong free cash flow conversion, providing it with capital to invest in organic and inorganic growth.
Company Profile
Sensata Technologies is a leading supplier of sensors for transportation and industrial applications. Sensata sells a bevy of pressure, temperature, force, and position sensors into the automotive, heavy vehicle, industrial, heating, ventilation, and cooling (HVAC), and aerospace markets. The majority of the firm’s revenue comes from the automotive market, where it holds the largest market share for tire pressure monitoring systems.
(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
Cushman & Wakefield underwent a major business transformation after the combination of DTZ, Cassidy Turley and Cushman & Wakefield in 2015. The combination of these three firms expanded its geographical presence, added incremental capabilities, and gave the company adequate scale to effectively compete with its larger rivals CBRE and JLL for lucrative global contracts from multinational clients. The company has benefitted from the secular trends in the real estate services industry and has been able to grow strongly through organic growth opportunities, strategic in-fill acquisitions and by actively recruiting fee earning teams. M&A is a strategic pillar for the company in its quest to become a single source provider for the full spectrum of real estate related services on a global footprint and the company has demonstrated a track record of successful integrations and broker onboarding.
The GAAP operating margin of the company has been negatively impacted by restructuring & integration related charges, and various efficiency related projects over the past several years. However, it is alleged that these investments were necessary for the firm and the enhanced scale and efficiency improvements from the prior initiatives will contribute positively toward margin accretion on a midcycle basis in the upcoming years. It is also anticipated non-recurring changes to normalize, resulting in positive earnings and cash flow generation that can be reinvested into the business.
The leasing and capital market segments which make up about 38% of fee revenue provides full-service brokerage and has a higher cyclicality in revenue. By contrast, the property & facility management segment, which make up about 54% of fee revenue, represents the outsourcing business and provides a contractual stream of revenue. The valuation & other segment contributes 8% of fee revenue and provides solutions related to workplace strategy, digitization, valuation and so on. The company should be able to post healthy growth rates as it continues to take share from its smaller competitors and benefits from rising capital flows into real estate, increasing corporate outsourcing and growth in urbanization.
Financial Strength
Cushman & Wakefield has somewhat concerned financial health. The company had a total debt of $3.2 billion and net debt of $2.0 billion as of the end of third quarter in 2021. This resulted in a net debt/adjusted EBITDA ratio of about 2.8 times. Management has repeatedly stated that debt reduction is not a strategic priority, and they are comfortable with a debt/adjusted EBITDA ratio in mid 2s. Debt maturity timeline is not an issue for the company as most of the debt matures after 2024. The company is also in a comfortable position with respect to liquidity with a total liquidity of $2.2 billion consisting of cash and a revolving credit facility. This gives the firm enough flexibility to fund its operations, pursue M&A and invest in organic growth opportunities. The company has used leverage for in-fill acquisitions in the past to achieve adequate scale and capabilities to compete with its larger rivals. The company is currently using approximately 40% debt to fund its capital structure, which makes it significantly more leveraged than its larger competitors CBRE and JLL, which are currently using approximately 5.0% debt. Additionally, it has not been able to consistently generate positive operating cash flows since 2015 because of the significant investments in integration and efficiency related projects. This makes the company vulnerable to macroeconomic downturns and the cyclicality in the commercial real estate. It is likely the cash flow generation capacity of the business to improve in the upcoming years as it achieves scale and the nonrecurring expenses normalize. Although it isn’t viewed, the company’s high level of debt as an immediate liquidity concern, a prolonged downturn could call its underlying financial stability into question. While it is anticipated the firm to benefit from various secular tailwinds, it is alleged that management should err on the side of caution and refrain from taking too much incremental debt, given the cyclical nature of the industry.
Bulls Say’s
- As one of the largest of only a few truly international one-stop shops, Cushman & Wakefield is poised to continue taking share from competitors in a growing industry that increasingly rewards scale.
- The trend of corporate outsourcing represents a significant opportunity and area of growth for Cushman & Wakefield.
- Increased scale and the recent efficiency initiatives should help the company achieve material margin accretion in the upcoming years.
Company Profile
Cushman & Wakefield is the third largest commercial real estate services firm in the world with a global headquarters in Chicago. The firm provides various real estate-related services to owners, occupiers and investors. These include brokerage services for leasing and capital markets sales, as well as advisory services such valuation, project management, and facilities management.
(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:
Through dispositions and additions, VF has built a portfolio of strong brands in multiple apparel categories. The three brands that are viewed account for about 80% its sales (Vans, Timberland, and The North Face) as supporting VF’s narrow moat based on a brand intangible asset. Despite short-term disruption from the COVID-19 crisis and economic weakness in China, VF is believed to grow faster than most competitors in the long run and maintain its competitive edge.
The North Face will benefit from its new Future Light waterproof fabric, brand extensions, and expansions of its direct-to-consumer business. VF plans 8%-9% annual growth for The North Face, which may be possible after the coronavirus crisis has passed. It is less certain of VF’s long-term growth targets for Timberland and Dickies of 3%-4% and 5%-6%, respectively, given inconsistent results. At its 2019 investor event, VF targeted a gross margin above 55.5%, an operating margin above 15%, and an ROIC above 20% in fiscal 2024.
Financial Strength:
Although VF is struggling with some product shortages, higher costs, and inconsistent demand for Vans in China, its sales and profit margins have mostly recovered from the worst of the pandemic. Fiscal 2022 sales growth forecast has been lowered to 29% from 30% but adjusted EPS estimate have been held at $3.20. For fiscal 2023, adjusted EPS is adjusted of $3.68 on 7% sales growth. Fair value estimate implies fiscal 2023 price/adjusted earnings and EV/adjusted EBITDA of 18 and 15, respectively. The Kontoor spin-off and the sale of some of VF’s work brands has improved the firm’s margins as its remaining brands have more pricing power than those that have been eliminated. Further, the remaining VF has higher exposure to attractive active and outdoor categories. Gross margins of 56% or higher are forecasted after this fiscal year, well above historical gross margins of below 50%.
Bulls Say:
- Vans, expected to generate over $4 billion in sales in fiscal 2022, is developing into a fashion brand. It still has growth potential, given its small share in the global sports-inspired apparel and footwear market, estimated at $152 billion in 2021 (Euromonitor).
- VF has disposed of its weaker jeans and work brands, helping to pull its gross margins up to the mid-50s from the high-40s.
- As an upscale brand with high price points, Supreme brings higher margins than any of VF’s individual brands except Vans. There is potential for VF to expand Supreme in international markets.
Company Profile:
VF designs, produces, and distributes branded apparel and accessories. Its largest apparel categories include action sports, outdoor, and workwear. Its portfolio of about 15 brands includes Vans, The North Face, Timberland, Supreme, and Dickies. VF markets its products in the Americas, Europe, and Asia-Pacific through wholesale sales to retailers, e-commerce, and branded stores owned by the company and partners. The company has grown through multiple acquisitions and traces its roots to 1899.
(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.
