Business Strategy and Outlook
As a cash-pay business with sticky customers and few competitors, the contact lens industry is an attractive market, in our opinion. Four players (Johnson & Johnson, Alcon, Cooper, and Bausch Health) dominate the global market, and industry regulation creates strong barriers to entry, keeping new entrants away. Cooper’s surgical segment has contributed approximately one fourth of total revenue since 2018, following the acquisition of Paragard, a nonhormonal copper intrauterine device.
Though Paragard sales dropped during the COVID-19 pandemic, its believe that the product is well positioned to benefit from secular trends toward increased adoption of IUDs in the U.S. IUD usage rate to mirror the rate in other developed countries, leading to market saturation and a slowdown in segment revenue growth.
Financial Strength
Cooper is in solid financial strength. While the company took on $1.4 billion in debt in fiscal 2018 to acquire Teva’s Paragard IUD, its vision and surgical segments should generate enough cash to allow the company to pay down debt and continue investing in its businesses. Historically, Cooper had no trouble paying down debt, with debt/EBITDA down from 3.1 in fiscal 2014 to 1.9 times by the end of fiscal 2017. Even with the large acquisition and significant upticks in COVID-19-related costs, the firm ended 2020 with debt about 3 times EBITDA.
The contact lens market is already very consolidated, especially after the Sauflon acquisition, so future large acquisitions seem unlikely for CooperVision, but the firm may seek additional capital to pursue bolt-on deals in its surgical division. CooperSurgical has acquired about 40 companies since 1990, and we project this trend to continue. Cooper has spent $1.1 billion and $1.9 billion on acquisitions over the past five and 10 years, respectively.
Bulls Say’s
- CooperVision will benefit as customers trade up from weekly or monthly contact lenses to more expensive daily lenses.
- Paragard is the only nonhormonal IUD approved in the U.S. and does not have any serious competition.
- MiSight has first-mover advantage in a fast-growing market with a multibillion-dollar market potential.
Company Profile
Cooper Companies operates two units: CooperVision and CooperSurgical. Accounting for approximately 75% of total sales, CooperVision is the the second-largest player in the oligopolistic contact lens market. Over 50% of CooperVision’s sales are in international territories. The second unit, CooperSurgical, develops and manufactures diagnostic and surgical products for gynecologists and obstetricians, including the Paragard IUD, which Cooper acquired from Teva in 2017.
(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
Murphy Oil repositioned itself as a pure-play exploration and production company in 2013, spinning off its retail gas and refinery businesses.The firm is a top-five producer in the Gulf of Mexico, and the region accounts for almost half of its production. Murphy has a number of expansion projects lined up there that should offset legacy declines and enable it to hold production flat in the next few years. There is regulatory risk, though: after entering office, U.S. President Joe Biden has pledged to halt offshore oil and gas permitting activity (to demonstrate his climate credentials). Murphy already holds valid leases for its upcoming projects and is ahead of schedule on permitting but will eventually require further approvals if it wants to continue its development plans. Thus far, the Biden administration has taken little action, leaving Murphy unencumbered. But we would not rule out a more comprehensive ban.
The firm has made considerable progress cutting costs and boosting productivity since the post-2014 downturn. However, while the firm still has over 1,400 drillable locations in inventory.When this portion is exhausted, well performance, and thus returns, could deteriorate. And in Canada, the firm is currently prioritizing the Tupper Montney gas play while natural gas prices in the region are more stable after a period of steep discounts caused by takeaway constraints that have now cleared.
Murphy Shares Starting to Look Pricey After Rally
Morningstar analyst nudged fair value for Murphy Oil to $26 from $25, after incorporating the firm’s third-quarter financial and operating results. That’s about 25% higher than where shares were trading as recently as September, but since then the stock has surged higher along with near-term oil prices. Morningstar analyst think the market has gotten carried away and is mistakenly extrapolating spot prices and midcycle forecast is unchanged at $60 Brent.
Financial Strength
The COVID-19-related collapse in crude prices during 2020 impacted the balance sheets of most upstream oil firms, and Murphy saw its leverage ratios tick higher as well. But management has engineered a rapid recovery, aided by strengthening commodity prices. At the end of the last reporting period, debt/capital was 39% and net debt / EBITDA was 1.4 times. That’s about average for the peer group.The firm currently holds about $2.6 billion of debt, and has roughly $2 billion in liquidity ($500 million cash and about $1.5 billion undrawn bank credit). The term structure of the firm’s debt is reasonably well spread out, and only about 20% of the outstanding notes come due before 2024 (the firm has maturities totaling $500 million in 2022). At strip prices, the firm should have no issues covering the 2022 notes with cash, but if the operating environment deteriorates, management could always refinance a portion of this obligation or lean on the revolver.
Bulls Say
- The joint venture with Petrobras is accretive to Murphy’s production and generates cash flows that can be redeployed in the Eagle Ford and offshore.
- The Karnes County portion of Murphy’s Eagle Ford acreage offers economics that are as good as or better than any other U.S. shale.
- Murphy’s diversified portfolio gives it access to oil and natural gas markets in several regions, insulating it to a degree from commodity price fluctuations or regulatory risks.
Company Profile
Murphy Oil is an independent exploration and production company developing unconventional resources in the United States and Canada. At the end of 2020, the company reported net proven reserves of 715 million barrels of oil equivalent. Consolidated production averaged 174.5 thousand barrels of oil equivalent per day in 2020, at a ratio of 66% oil and natural gas liquids and 34% natural gas.
(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
Five Below’s management team has generated consistent returns by leveraging a differentiated concept and prudent expansion strategy. The firm should be able to expand profitably, as its nimble supply and distribution network are well-suited to meeting the ever-changing demands of its customers (preteens, teenagers, and their money-wielding parents). Five Below offers a variety of items in a tailored store environment while giving parents a measure of cost-certainty, a concept that should remain attractive to shoppers under a range of economic scenarios.
Still, online retailers’ cost leverage is rising, and as it is estimated that many of Five Below’s target households have access to an Amazon Prime membership, the digitization threat looms. Competitive pressure also comes from physical rivals, including mass merchants dedicating aisles to items priced at a given dollar amount or less.
Financial Strength
Debt-free with ample cash generation, Five Below’s financial health is strong. Shifting its assortment to include more cleaning and essential products kept the stores open even as infection rates soared in late-2020. Store growth should remain a capital priority (albeit with a continued reliance on leased locations) during our 10-year explicit forecast, with our estimates suggesting Five Below will exceed its 2,500-unit nationwide target toward the end of that time frame. Five Below’s cash generation should lead to share repurchases, escalating as its distribution center build-out is completed. It is estimated that the firm eventually uses roughly 65% of its annual cash flow from operations to buy back equity. Alternatively, it could pursue acquisitions of regional chains to accelerate its growth, though we do not incorporate such purchases into our forecasts because of their uncertain timing and nature.
Bulls Say’s
- Five Below’s differentiated concept gives its core customers access to a wide range of items while providing parents cost certainty, a combination enabled by its efficiency and flexible merchandising.
- One of the few sizable retailers we cover with significant room for expansion, Five Below should build cost leverage as it grows, helping to protect margins from competitive erosion.
- Strategically entering new markets with several stores opened concurrently, Five Below has rapidly gained an ability to spread distribution, supply chain, and advertising costs over a large local sales base.
Company Profile
Five Below is a value-oriented retailer that operated 1,020 stores in the United States as of the end of fiscal 2020. Catering to teen and preteen consumers, stores feature a wide variety of merchandise, the vast majority of which is priced below $6. The assortment focuses on discretionary items in several categories, particularly leisure (such as sporting goods, toys, and electronics; 47% of fiscal 2020 sales), fashion and home (for example, beauty products and accessories, home goods, and storage solutions; 36% of fiscal 2020 sales), and party and snack (including seasonal goods, candy, and beverages; 17% of fiscal 2020 sales). The chain had stores in 38 states as of the end of fiscal 2020.
(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.
Approach
FAIR tracks the Nasdaq Future Australian Sustainable Leaders Index, a benchmark Nasdaq co-developed with BetaShares in 2017. As per the guidelines laid out by the Responsible Investment Committee, Sustainability Leaders are defined as companies generating more than 20% revenue from select sustainable business or having a certain grade (B or better) from sanctioned ethical consumer reports or being a certified B corporation. There is a maximum 10 stocks per sector and a limit of 4% exposure at an individual stock level.
Portfolio
As at 30 November 2021, FAIR has a large-cap-dominated portfolio comprising 86 stocks. Stocks must have a market cap of more than USD 100 million and three-month trading volume of over USD 750,000. The index differs largely from the category index S&P/ASX 200, as there is a significant overweight in healthcare, real estate, technology, and communication services. On the other hand, the portfolio is underweight in financial services and materials with nil exposure to energy stocks.
People
The three-person responsible investment committee may remove index inclusions at any time based solely on qualitative considerations of whether a company still meets ESG considerations. The committee comprises Betashares co-founder David Nathanson and Adam Verwey, a managing director of large investor Future Super.
Performance
In early 2020, the fund dropped significantly owing to the frantic sell-off triggered by the global coronavirus pandemic. Despite this, the fund managed to close on a positive return of 2.23% for the year 2020. The uptrend continued into 2021, and it ended the calendar year with 17.99% returns, closely matching the category.
(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.