Business Strategy and Outlook
Founded in 1901, Walgreens Boots Alliance is a leading global retail pharmacy chain. In fiscal 2020, the company generated approximately $140 billion in revenue and dispensed over a billion prescriptions annually, representing just under a quarter of the U.S. drug market. The firm’s over 9,000 domestic stores are strategically located in high-traffic areas to generate over $13 million per store, which drives scale and remains a critical consideration in an increasingly competitive market that has witnessed rationalization. The core business is centred around the pharmacy, which accounts for about three fourths of revenue and is considered the main driver of traffic.
Despite Walgreens’ scale as a leading purchaser of prescription drugs and competitive advantage over smaller retail pharmacy chains, gross margins have come under pressure in recent years as a result of pharmacy benefit managers’ negotiation leverage and market power. These pressures have affected margins across the entire retail pharmacy industry, pushing the largest players (Walgreens, CVS, Walmart) to branch into other healthcare services. Walgreens has been focused on leveraging scale to foster strategic partnerships to increase traffic and cross-selling opportunities with a long-term focus to improve coordinated care.
While Walgreens has expanded into omnichannel offerings, we think the company’s high-traffic brick-and-mortar locations and convenience-oriented approach is less susceptible to pressures from e-commerce and mass merchandisers, particularly in the health and wellness categories, than other retailers. Historically the company’s strategy was based on footprint expansion but having established a scalable infrastructure, the focus has evolved and the concentration has shifted to improving store utilization and strategically aligning with healthcare partners to address the macro trend of localized community healthcare. The company’s partnership with VillageMD to establish primary-care clinics in
select Walgreens locations further establishes the drugstore as a one-stop shop for care.
Financial Strength
As of fiscal first-quarter 2022, cash and equivalents were over $4.1 billion, offset by $13.8 billion in debt, with $2.0 billion due over the next three years. The company continues to focus on its core assets, and the recent divestiture of its international wholesale business should allow the company to pay down debt and fund strategic initiatives to improve its long-term positioning. We believe the firm will be able to rebuild its cash balance through the normal course of business. Free cash flow generation was over $4 billion in fiscal 2020 and is expected to normalize at these levels in the near term.
Bulls Say’s
- As a leading retail pharmacy with around 9,000domestic locations, Walgreens is able to reach 80% of U.S. consumers.
- Strategic partnerships focused on increasing store utilization through the addition of clinical partners to localize community healthcare should be a natural extension in providing coordinated care that will increase community engagement and offset reimbursement pressures.
- An increase in higher-margin health and beauty merchandise sales bolsters front-end store performance
Company Profile
Walgreens Boots Alliance is a leading retail pharmacy chain, with over 13,000 stores in 50 states and 9 countries. Walgreens’ core strategy involves brick-and-mortar retail pharmacy locations in high-traffic areas, with nearly 80% of the U.S. population living within 5 miles of a store. Currently, the company has a leading market share of the domestic prescription drug market at about 20%. In 2021, the company sold off a majority of its Alliance Healthcare wholesale business to AmerisourceBergen for $6.5 billion, doubling down on its core pharmacy efforts and ventures in strategic growth areas in primary care (VillageMD) and digital offerings. The company also has equity stakes in AmerisourceBergen (29%) and Sinopharm Holding Guoda Drugstores (40%).
(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
CMS Energy’s transformation during the past decade into a mostly regulated utility has set it up for a long runway of growth during the next decade. In addition, CMS’ work with Michigan regulators and politicians has turned the state into one of the most constructive areas for utility investment. These constructive relationships will be critical as CMS pursues an aggressive clean energy growth plan.
With regulatory and political backing, CMS plans more than $13 billion of investment the next five years and potentially as much as $25 billion during the next 10 years. Its goal to reach net-zero carbon emissions by 2040 is a key part of its growth plan, supporting 6%-8% annual earnings growth for many years.
Michigan’s 2008 energy legislation and additional reforms in the state’s 2016 Energy Law transformed the state’s utility regulation. As a result of those changes, CMS Energy has achieved a series of constructive regulatory decisions.
CMS has secured regulatory approval for almost all its near-term capital investment as part of the state’s 10-year integrated resource plan framework. We expect regulators to support CMS’ updated 10-year plan filed in mid-2021. If CMS can keep rate increases modest by controlling operating costs, it is expected to continue to get regulatory support and could even add as much as $1 billion of investment on top of its current plan.
CMS’ growth strategy focuses on investment in electric and gas distribution and renewable energy, which aligns with Michigan’s clean energy policies and is likely to earn regulatory support. CMS plans to retire the Palisades nuclear plant and all its coal fleet by 2025, keeping it on track to cut carbon emissions 60% by 2025 and reach net-zero carbon emissions by 2040. Proceeds from its EnerBank sale in 2021 will help finance growth investment.
CMS carries an unusually large amount of parent debt, which has helped boost consolidated returns on equity, but investors should consider the refinancing risk if credit markets tighten.
Financial Strength
Although CMS has trimmed its balance sheet substantially, its consolidated 70% debt/capital ratio remains high primarily because of $4 billion of parent debt. Accordingly, the company’s EBITDA/interest coverage ratio is lower than peers, near 5 times. CMS has reduced its near-term financing risk with opportunistic refinancing. It is projected CMS to maintain its current level of parent debt and take advantage of lower interest rates as it refinances. This should enhance returns for shareholders. Management appears committed to maintaining the current balance sheet and improving its credit metrics through earnings growth. We expect CMS’ consolidated returns on equity to top 13% for the foreseeable future, among the best in the industry due to this extra leverage. CMS has taken advantage of favourable bond markets to extend its debt maturities, including issuing three series of 60-year notes in 2018 and 2019. CMS now has $1.1 billion of parent notes due in 2078-79 at a weighted-average interest rate near 5.8%. CMS also has been able to issue 40- and 50-year debt at the utility subsidiary. Regulators thus far have not imputed CMS’ parent debt to the utilities, but that’s a risk that ultimately could end up reducing CMS’ allowed returns, customer rates and earnings. We don’t expect the company to issue large amounts of equity after pricing a $250 million forward sale at an average $51 per share in 2019 and issuing $230 million of preferred stock in 2021 at a 4.2% yield. We expect the $930 million aftertax cash proceeds from the EnerBank sale will offset new equity needs through 2024. With constructive regulation, we expect CMS will be able to use its cash flow to fund most of its investment plan during the next five years.
Bulls Say’s
- Regulation in Michigan has improved since landmark reforms in 2008 and 2016. Support from policymakers and regulators is critical to realizing earnings and dividend growth.
- CMS’ back-to-basics strategy has focused on investment in regulated businesses, leading to a healthier balance sheet and more reliable cash flow.
- CMS’ board has more than doubled the dividend since 2011. We expect 7% annual dividend increases going forward even if the pay out ratio remains above management’s 60% target.
Company Profile
CMS Energy is an energy holding company with three principal businesses. Its regulated utility, Consumers Energy, provides regulated natural gas service to 1.8 million customers and electric service to 1.8 million customers in Michigan. CMS Enterprises is engaged in wholesale power generation, including contracted renewable energy. CMS sold EnerBank in October 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.
Business Strategy and Outlook
Magellan’s refined product pipelines are high-quality assets that have contributed to earnings stability as well as steady increases in distributions over time. As both supply and demand are remarkably steady over time, Magellan has been able to extract modest inflation-linked price increases. However, investment opportunities have been more limited in the refined products segment. As a result, Magellan has invested more than $5 billion largely elsewhere since 2010 and has built up a respectable but ultimately more volatile and lower-quality crude oil pipeline, which now contributes about a third of operating margin.While the competitive intensity of the new businesses is higher than the core refined product pipelines.
Magellan’s current growth capital program is expected to wind down in 2021 with only $80 million in planned expenditures given the difficult environment. In 2022, Morningstar analyst focus remains on capital allocation. Growth spending is expected to be minimal. With a newly expanded $1.5 billion unit buyback in place, the partnership has already bought back $750 million in units in 2020 and 2021. Asset sales have contributed with $271 million completed in 2021, and another $435 million awaiting regulatory approvals and expected to be completed in 2022.
Magellan Midstream Sees Stronger Volume Recovery in 2021, Expands Buyback Program
Magellan’s capital spending program remains quite muted, as it plans to spend $80 million in 2021 and $20 million in 2022 on growth projects presently, it has devoted much more capital toward buybacks recently. The partnership bought back $391 million in units during the quarter, wrapping up its $750 million program initiated in 2020. The board has added another $750 million in buybacks and extended the program to 2024. With the stock trading below our fair value estimate, Morningstar analyst view both the historical repurchases and future program as good capital allocation and supportive of our Exemplary capital allocation rating.
Financial Strength
Magellan remains among the most prudent managers of capital in our MLP coverage. Three factors support this partnership’s exceptional level of financial health. First, the lack of general partner sponsorship keeps Magellan’s cost of equity lower than peers. Second, conservative leverage (far below its maximum ratio of 4 times debt/EBITDA) has kept its cost of debt low and provided considerable flexibility in financing growth projects. Third, ample distribution coverage has allowed management to fully fund its growth initiatives through retained distributable cash flow without needing to tap equity markets.
Magellan was one of the first MLPs to buy out its general partner interests in 2010. Better aligning interest of its holders, the deal also lowered the partnership’s cost of equity capital. Its stable, largely contracted sources of revenue and low leverage relative to peers also support among the lowest cost of debt in the industry. Combined, this cost of capital advantage and low leverage allows Magellan to more opportunistically engage in growth initiatives. Magellan has about $1 billion in liquidity compared and no debt maturities until 2025. The firm has flexed capital spending as needed to address any financial issues.
Bulls Say
- Magellan has been highly discerning with regards to capital allocation and invested in a number of attractive projects at excellent prices.
- Magellan supplies more than 40% of the refined products to 7 of the 15 states it serves.
- Magellan only undertakes profitable butane blending opportunities when spreads warrant it, meaning this is a low-risk endeavour.
Company Profile
While Magellan’s capital spending program remains quite muted, as it plans to spend $80 million in 2021 and $20 million in 2022 on growth projects presently, it has devoted much more capital toward buybacks recently. The partnership bought back $391 million in units during the quarter, wrapping up its $750 million program initiated in 2020. The board has added another $750 million in buybacks and extended the program to 2024. With the stock trading below our fair value estimate, we view both the historical repurchases and future program as good capital allocation and supportive of our Exemplary capital allocation rating.
(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
To diversify from regulated PBS revenue, API acquired the Priceline chain of health and beauty stores in 2004.Priceline contributes around one quarter of API’s revenue but over 40% of gross profit. Priceline’s key growth strategies are increasing its contribution from online sales and leveraging its loyalty scheme, the Sister Club. However, Morningstar analyst have concerns regarding these endeavours. Market statistics suggest the Australian health and beauty retail market is growing at a mid-single-digit pace, which provides an attractive opportunity for API at first blush. However, Morningstar analyst believe the market growth opportunity is skewed to the premium end rather than Priceline’s mass-middle positioning and consequently forecast below-market average revenue growth for the retail business. This is despite its loyalty program that differentiates Priceline from key competitors .
Similarly, Priceline’s growing online sales will likely lead to a subdued outlook for in-store sales. Morningstar analyst forecast same-store sales climbing at just 1% per year, less than inflation. Moreover, the shift of sales from physical stores to online places pressure on margins due to challenges in evolving the cost base at the same rate.
Offsetting these challenges, API’s acquisition of the Clear Skincare clinics in fiscal 2018 offers significantly higher profitability. With gross margins above 80%, Morningstar analyst expect the rollout of Clear Skincare clinics to help API’s earnings recover in the short term and permanently reduce its exposure to the PBS.
Woolworths’ Offer for API Has Been Withdrawn but Wesfarmers’ Offer Still Stands
In yet another unexpected turn, Woolworths has withdrawn its non-binding proposal to acquire no-moat Australian Pharmaceutical Industries, or API, for AUD 1.75 per share made on Dec. 2, 2021. Following completion of due diligence, Woolworths was not convinced it could achieve the financial returns it requires. However, the takeover offer from Wesfarmers remains in place and is not subject to due diligence, which completed in October 2021. Accordingly, Morningstar analyst have decreased API fair value estimate by 13% to AUD 1.53, back in line with standalone assessment of API and Wesfarmers’ takeover offer.
Financial Strength
API is in a sound financial position with net debt/adjusted EBITDA of 0.6 times at fiscal 2021. We forecast leverage to remain under 1.0 over our forecast period, with API comfortably able to afford a 70% dividend payout ratio and continue to expand its retail footprint. We forecast a total of AUD 250 million in capital expenditures over the next five years, and also factor in the final AUD 32.9 million payment for Clear Skincare still outstanding.Working capital management has improved over a number of years, almost halving the net investment in working capital to 5.6% of sales over the 10 years to fiscal 2021. We forecast investment to be roughly maintained at an average of 6.2% of sales.
Bull Says
- The Priceline and Clear Skincare offerings are relatively high-margin segments and pitched in the beauty and personal-care market which is growing at a mid-single-digit pace.
- API’s corporate Priceline stores offers higher margin and more product opportunity than the purely franchise business model of peers Sigma and EBOS.
- Management has demonstrated that it is opportunistic and having deleveraged the balance sheet, is looking to invest for growth. Value-additive acquisitions could present upside to our fair value estimate.
Company Profile
Australian Pharmaceutical Industries, or API, is a major Australian pharmaceutical wholesaler and distributor. In addition, it is the franchisor of the Priceline Pharmacy network and directly owns and operates stand-alone Priceline stores which sell personal care and beauty products. In an effort to diversify away from the highly regulated low growth and low margin pharma distribution business which contributes 74% of revenue, API is actively growing a consumer brands portfolio and also acquired Clear Skincare, a skin treatment chain. These two emerging businesses each contribute approximately 1% of revenue but are higher margin than the core distribution segment.
(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 Goldman Sachs ActiveBeta U.S. Large Cap Index underpinning this fund spins a broad portfolio that pursues four factors: value, quality, momentum, and low volatility. This fund’s mixing approach–which combines four equally weighted distinct sleeves, each focused on a different factor–is simple and transparent.
Approach
While this portfolio’s factor exposure is modest, it is well-diversified and boasts low turnover. This index constructs four separate factor sleeves that start with the Solactive U.S. Large Cap Index, a broad, market-cap-weighted portfolio of large-cap stocks. Each factor sleeve adjusts stocks’ weight based on the strength of their exposure to value, quality (gross profits/total assets), momentum (11-month risk-adjusted return), or low volatility (12-month standard deviation of returns). Stocks with pronounced traits may see their weight materially increase within each sleeve, while those with poor exposure may be eliminated. After the index establishes each sleeve, it weights each of them equally at the portfolio level.
Portfolio
This broad portfolio looks very similar to the S&P 500. The market’s largest stocks receive the most investment, but the fund bends toward those that score well in several of its intended factors. Many stocks carry factor traits that offset, which leaves this fund with mild overall factor exposure. Its quality tilt has been the most defined. In profitability measures like return on invested capital, this fund has outshined the S&P 500. Momentum exposure has been quiet but detectable. The fund’s value tilt has been the weakest of the factors, likely because its quality and momentum sleeves pull it toward more richly valued companies.
Top Holdings
People
Goldman Sachs ActiveBeta® ETFs are managed by our Quantitative Investment Strategies team, comprised of over 95 Portfolio Management and Research professionals, with an average of over 15 years of experience. Raj Garigipati and Jamie McGregor are the named managers on this fund. Gagrigipati has managed this fund since its inception in September 2015, while McGregor joined in April 2016, replacing Steve Jeneste. Garigipati is the head of ETF portfolio management at Goldman Sachs. McGregor was a portfolio manager at Guggenheim for a year prior to joining Goldman Sachs as a portfolio manager in July 2015.
Performance
The fund has come alive recently, outpacing its category benchmark by more than 2 percentage points from May 2021 through December 2021. Its value-oriented consumer discretionary stocks picked up steam, and highly profitable firms like Visa V and Mastercard MA helped it outperform in the tech arena. Steady portfolio management has kept this fund in line with its benchmark index. Over the trailing five years through December 2021, it trailed its benchmark by 13 basis points annualized, a margin slightly wider than its 0.09% expense ratio.
(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
Ramsay’s strong Australian business enabled its global acquisitions but the market fundamentals offshore are far less attractive. The key differentiator is the proportion of private health insurance, or PHI, coverage of the population. According to data from the Australian Prudential Regulation Authority, 45% of the Australian population have PHI resulting in roughly 80% of Ramsay’s Australian revenue flowing from PHI versus 20% or less in its other geographies. This has a direct impact on profits earned as providers are price-takers in publicly outsourced work.
Despite various pandemic pressures weighing on Ramsay, the firm is increasing its capital expenditure to better position itself for long-term growth. The key areas of investment are brownfield and greenfield expansions in Australia, and digital overseas. Ramsay is focusing on increasing its day surgery capacity as the proportion of day surgeries at Australian private hospitals has increased to roughly 65% from 60% in the last 10 years. The firm also sees opportunity for integrated care and higher-margin non-surgical ancillary services such as rehabilitation and mental health.
Financial Strength
Ramsay’s planned acquisition of Spire Healthcare in 2021 didn’t eventuate leaving the company in a stronger financial position as a result with pro forma net debt/EBITDA pre-AASB 16 of 0.7 at July 2021. However, due to the pandemic weighing on earnings, the acquisition of Elysium, and sustained elevated planned capital expenditures, it is forecasted leverage to peak at 3.3 in fiscal 2022 but fall under 2.0 by fiscal 2026. As Ramsay Australia owns most of its properties, the group has extra optionality if ever capital constrained. While free cash flow conversion of earnings averaged 98% over the last five years, it was boosted in fiscal 2020 due to the French government prefunding all outsourced work which contributed to a working capital inflow of AUD 526 million.
The dividend is largely underpinned by the Australian business.The capital structure includes AUD 252 million of Convertible Adjustable Rate Equity Securities, or CARES, on which Ramsay pays a fully franked dividend equivalent to a margin of 4.85% over the 180-day bank bill swap rate after tax which is high in the current funding environment. The CARES funding is not material in terms of the capital structure of the business overall, but it is unclear to us why the securities were allowed to step up to this high rate rather than being refinanced given the availability of cheaper debt. Review of the largest CARES holders doesn’t reveal any material related parties.
Bulls Say’s
- Ramsay boasts leading market positions in most of its geographies and benefits from negotiating power with payers and cost advantage derived from scale.
- Ramsay is a stable compounder with its healthcare services being highly defensive and underpinned by strong demographic factors.
- Its premium Australian business is being diluted by lower-margin and lower-return businesses overseas with higher exposures to publicly outsourced work and associated regulatory risk.
Company Profile
Ramsay Health Care is one of the largest private healthcare providers in the world, with over 460 facilities across 10 countries. The key markets in which it operates are Australia, France, the U.K., and Sweden. It is the largest private hospital group in each of these markets except for the U.K. where it ranks fifth. Ramsay Sante, which operates the European regions other than the U.K., is a 52.5%-owned subsidiary of Ramsay Health Care. The company typically earns about 60% of consolidated earnings in Australia and 30% in France. Ramsay Health Care undertakes both private and publicly funded healthcare.
(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.
