Business Strategy and Outlook
Xcel Energy’s regulated gas and electric utilities serve customers across eight states and own infrastructure that ranges from nuclear plants to wind farms, making the company a barometer for the entire utilities sector. That barometer is signalling a clean energy future ahead. Xcel took an early lead in renewable energy development, especially wind energy across its central U.S. service territories. The company now plans to invest $26 billion in 2022-26, much of it going to renewable energy projects and electric grid infrastructure to support clean energy.
Xcel could spend more than $1 billion per year on renewable energy and other clean energy initiatives as its focus shifts from wind to solar. Transmission to support renewable energy represents about one third of its investment plan. Politicians and regulators in Colorado, Minnesota, and New Mexico are pushing aggressive environmental targets, which could extend Xcel’s growth potential. Xcel aims to deliver 100% carbon-free electricity by 2050.
Xcel’s investment plan gives investors a transparent runway of 7% annual earnings and dividend growth potential. Xcel has more regulatory risk than its peers because of its large investment plan.
Financial Strength
Xcel Energy has a strong financial profile. Its key challenge is financing $26 billion of capital investment during the next five years with minimal equity dilution. Most of Xcel’s planned investments benefit from favourable rate regulation partially offsetting their financing risk. However, regulatory lag remains a key issue. Xcel’s strong balance sheet has helped it raise capital at attractive rates.
Xcel’s consolidated debt/capital leverage ratio could creep toward 60% during its heavy spending in 2022-23, it is expected normal levels around 55%, which includes $1.7 billion of long-term parent debt.
Xcel has been issuing large amounts of new debt since 2019 at coupon rates around 100 basis points above U.S. Treasury yields. Xcel took care of its equity needs for at least the next three years with a forward sale that it executed in late 2020 to raise $720.9 million for 11.845 million shares ($61 per share). This followed a $459 million forward sale initiated in late 2018 at $49 per share. We think these were good moves with the stock trading far above our fair value estimate when the deals priced. After five years of $0.08 per share annualized dividend increases, the board raised the dividend by $0.10 in 2019 and in 2020 and by $0.11 to $1.83 for 2021.
Bulls Say’s
- Xcel has raised its dividend every year since 2003, including a 6% increase for 2021 to $1.83 per share. We expect similar dividend growth going forward.
- Renewable energy portfolio standards in Minnesota and Colorado are a key source of support for wind and solar projects.
- The geography of Xcel’s service territories gives it among the best wind and solar resources in the U.S. and a foundation for growth
Company Profile
Xcel Energy manages utilities serving 3.7 million electric customers and 2.1 million natural gas customers in eight states. Its utilities are Northern States Power, which serves customers in Minnesota, North Dakota, South Dakota, Wisconsin, and Michigan; Public Service Company of Colorado; and Southwestern Public Service Company, which serves customers in Texas and New Mexico. It is one of the largest renewable energy providers in the U.S. with one third of its electricity sales coming from renewable energy.
(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
Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud, which is now offered via a subscription model. The company has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation The benefits from software as a service are well known in that it offers significantly improved revenue visibility and the elimination of piracy for the company, and a much lower cost hurdle to overcome and a solution that is regularly updated with new features for users.
Adobe benefits from the natural cross-selling opportunity from Creative Cloud to the business and operational aspects of marketing and advertising. It is expected that Adobe will continue to focus its M&A efforts on the digital experience segment and other emerging areas. Adobe believes it is attacking an addressable market greater than $205 billion. The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher price point solutions, and cross sell digital media offerings.
Adobe’s ARR Slip-Up and Light Guidance for 2022 Leave Shares Attractive; FVE Up to $630
Adobe reported mixed fourth-quarter results, including revenue upside, messy billings, modest EPS upside, and light guidance. However, Morningstar analyst believe the outlook is better than it appears. After all, the 2022 outlook is just 1% below FactSet consensus, with pressure driven by having one less week than 2021 and foreign exchange combining to add a 300 basis point headwind to growth. After factoring guidance and results along with rolling with DCF forward, analyst of Morningstar have raised fair value estimate to $630 per share from $610.
Financial Strength
Adobe enjoys a position of excellent financial strength arising from its strong balance sheet, growing revenues, and high and expanding margins. As of November 2021, Adobe has $5.8 billion in cash and equivalents, offset by $4.1 billion in debt, resulting in a net cash position of $1.6 billion. Adobe has historically generated strong operating margins. Free cash flow generation was $6.9 billion in fiscal 2021, representing a free cash flow margin of 43.7%.Morningstar analyst believes that margins should continue to grind higher over time as the digital experience segment scales. In terms of capital deployment, Adobe reinvests for growth, repurchases shares, and makes acquisitions. The company does not pay a dividend. Over the last three years Adobe has spent $2.8 billion on acquisitions, $9.6 billion on buy-backs, while share count has decreased by 15 million shares. Morningstar analyst believes that the company will continue to repurchase shares as its primary means of returning cash to shareholders over the medium term and will continue to make opportunistic and strategic tuck-in acquisitions.
Bulls Say
- Adobe is the de facto standard in content creation software and PDF file editing, categories the company created and still dominates.
- Shift to subscriptions eliminates piracy and makes revenue recurring, while removing the high up-front price for customers. Growth has accelerated and margins are expanding from the initial conversion inflection.
- Adobe is extending its empire in the creative world from content creation to marketing services more broadly through the expansion of its digital experience segment. This segment should drive growth in the coming years.
Company Profile
Adobe provides content creation, document management, and digital marketing and advertising software and services to creative professionals and marketers for creating, managing, delivering, measuring, optimizing and engaging with compelling content multiple operating systems, devices and media. The company operates with three segments: digital media content creation, digital experience for marketing solutions, and publishing for legacy products (less than 5% of 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.
Investment Thesis
- Stands to benefit from the increased digitization of money with the global amount of payments made via card or digitally exceeding physical cash for the first time in 2016.
- Expansion of new flows and use cases.
- Visa stands to benefit from the improving momentum in Europe and India.
- Strong partnerships with first class financial institutions including increased ease in working with fintech partners (as Visa opens up its APIs to fintechs).
- Continued investment in technology and cyber security.
- Strong management team.
- Solid fundamentals with recurring revenues, high incremental margins, low capital expenditure and high free cash flow.
Key Risks
- Cyber security attacks.
- Increased regulatory environment and government-imposed restrictions on payment systems. Antitrust remains a hot topic in the market.
- Margin deterioration due to intense competition from alternative payment processing providers.
- Higher expenses and incentives.
- Deterioration in global growth or consumption.
FY21 Results Highlights
V’s FY21 results beat consensus estimates with net revenue of $24.1bn (vs $24bn), driven by the continuation of the recovery in many global economies and the increased diversification of revenue with new flows and VAS. Cashflow generation remained strong (FCF up +50% over pcp) and shareholder returns continued with the Board authorizing a +17% increase in the quarterly dividend in addition to conducting $8.7bn in repurchases (has $4.7bn of remaining authorized funds for share repurchase). Maintain Buy – solid top-line growth over the medium term amid buildout of new payment types – BNPL, cryptocurrency and B2B – with recovering credit and crossborder travel and new flows in VAS (amid strong demand for cybersecurity, marketing and data analytics) driving further acceleration. In the near-term, a faster than expected recovery in cross-border travel could represent upside to management (expected to reach 2019 levels by summer 2023) and consensus earnings estimates.
Outlook
Management expects: (1) 1Q22 net revenue growth in the high teens (will moderate through the year), client incentives as a percentage of gross revenue to be 26- 27% (in-line with 4Q21), operating expenses growth in the mid-teens amid sustained investment spending combined with low comparable in pcp, non-operating expense of $120- 130m, and tax rates of 19-19.5%. (2) FY22 value-added services growth of high teens and client incentives as a percent of gross revenues of 26-27% (consistent with 4Q21 levels, gradually reaching pre-Covid growth of +50-100bps each year due to the impact of new deals and renewals), which combined with the expected benefit from revenue mix improvement as cross-border travel continues to recover (cross-border travel is expected to recover steadily through FY22 and reach 2019 levels by the summer of 2023). Partially offset by the lapping of incentive reductions from FY21 due to the Covid impact, resulting in high end or mid-teens net revenue growth (including over 0.5% of exchange rate drag from the strengthening dollar). Operating expenses to grow in the low teens, with expense growth higher in 1H22 and moderate in 2H22 as the Company lap the resumption of investment spending in FY21, non-operating expense to be $120-130m each quarter and tax rate to be 19-19.5%.
Company Profile
Visa Inc. (NYSE: V) is the world’s leader in digital payments and one of the most recognized brands around the world, with a mission to connect the world through innovative, reliable and secure payment networks, enabling individuals, businesses and economies to thrive. The Company’s advanced global processing network, VisaNet, facilitates authorization, clearing and settlement of payment transactions, providing secure and reliable payments across borders and within countries. The Company operates in party models, which include card issuing financial institutions, acquirers and merchants. The Company’s products/services include core products, processing infrastructure, transaction processing services, digital products, merchant products, and risk products and payment security initiatives. Its relentless focus on innovation is a catalyst for the rapid growth of connected commerce on any device, and a driving force behind the dream of a cashless future for everyone, everywhere.
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:
Lennar’s investments in ancillary businesses, such as its multifamily business and technology startups, distinguishes the company from many other homebuilders. Management announced plans to spin off its multifamily, single-family for rent, and land businesses, likely during the second or third quarter of fiscal 2022. Whether the market will place a higher multiple on SpinCo as a standalone entity has yet to be seen, but this transaction will result in meaningful value creation for Lennar’s remaining businesses. However, management’s narrowed focus on RemainCo operations could improve its prospects. Furthermore, the separation of these ancillary businesses, which tend to generate lumpier earnings, should also dampen Lennar’s earnings volatility.
In February 2018, Lennar completed its merger with CalAtlantic, the nation’s fourth-largest homebuilder. The deal was valued at $9.3 billion, and the combined entity surpassed D.R. Horton as the largest homebuilder (by revenue) in the United States. Based on our analysis, the Lennar-CalAtlantic has created shareholder value
Financial Strength:
The fair value of this stock has been increased by the analysts on account of optimistic near-term return on invested capital outlook and its significant debt reduction.
At the end of fiscal fourth-quarter 2021, Lennar had approximately $4.7 billion in outstanding homebuilding debt and $2.7 billion in homebuilding cash on hand, which equates to a 8.4% net homebuilding debt/capital ratio. In addition to the $2.7 billion of homebuilding cash on hand, $2.5 billion is available on Lennar’s revolving credit facility. Lennar has a strong balance sheet and plenty of liquidity. Homebuilding debt maturities are staggered through 2027 with approximately $5.1 billion due between 2022 and 2027. Lennar’s operating cash flow has improved substantially over the past three years, from $508 million in 2016 to $3.8 billion in 2020.
Bulls Say:
- Current new-home demand is booming, and inventory of existing homes remains tight. The supply/demand imbalance will take years to address and will support pricing power for homebuilders.
- Demand for entry-level housing should increase as the large millennial generation forms households. Lennar is well positioned to capitalize on this growing market.
- Lennar’s multifamily segment is an underappreciated asset, which could get more market recognition after it is spun off.
Company Profile:
After merging with CalAtlantic in February 2018, Lennar has become the largest public homebuilder (by revenue) in the United States. The company’s homebuilding operations target first-time, move-up, and active adult homebuyers mainly under the Lennar brand name. Lennar’s financial-services segment provides mortgage financing and related services to its homebuyers. Miami-based Lennar is also involved in multifamily construction and has invested in numerous housing-related technology startups.
(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
CSL is one of three tier one plasma therapy companies who benefit from an oligopoly in a highly consolidated market. All the players are vertically integrated as plasma sourcing is a key constraint in production. The plasma sourcing market is currently in short supply, however, CSL is well-positioned having invested significantly in plasma collection centres, owning roughly 30% of collection centres globally.
One major threat to plasma products is recombinant products. Recombinants are quickly replacing plasma products in haemophilia treatment despite being more expensive. CSL has an excellent R&D track record and has developed recombinant products for haemophilia. However, we expect revenue growth to slow in the haemophilia segment based on competitor Roche’s successful launch of recombinant Hemlibra. Immunoglobulin product sales are key to CSL.
This market is not yet impacted by recombinants although both CSL and competitors are pursuing R&D in Fc receptor-targeting therapy to treat autoimmune diseases.
However, gene therapy represents the biggest risk to the plasma industry as it aims to cure rather than treat diseases. While the potentially prohibitive cost may result in slow adoption, CSL has strategically expanded its scope via the acquisition of Calimmune in fiscal 2018 and licensing a late-stage Haemophilia B gene therapy, EtranaDez, from UniQure in fiscal 2020.
CSL is the second largest influenza vaccine manufacturer, behind Sanofi, and is on the forefront of changes in influenza vaccines where manufacturing is shifting from egg-based to cell-based culturing. It’s also conducting preclinical testing of mRNA influenza vaccines.
The company has demonstrated good sense for R&D and evaluates spend based on the commercial outlook. The strategy for CSL Behring has been to target rare diseases, a typically low volume and high price and margin business. There is little reimbursement risk in this area or in the vaccine business, Seqirus.
Financial Strength
CSL is in good financial health and can fund all its capital and R&D spending, currently a combined 26% of revenue, as well as maintain a dividend payout ratio of 44% without requiring additional debt. Following the acquisition of Vifor Pharma, financial leverage is expected to increase to 2.3 in fiscal 2023. However, it is forecasted that the net debt/EBITDA may fall within CSL’s target range of 1.0-1.5 by fiscal 2026. This leaves CSL flexible to pursue organic or acquisitive growth opportunities as they present in the evolving biotech industry.
Free cash flow conversion has remained depressed over the last five years as working capital investment and capital spending to add manufacturing capacity was elevated above long-term levels, combined with higher R&D spending. We forecast free cash conversion to improve but still average 52% over the next five years as we anticipate CSL to prefer growing organically rather than acquisitively.
Bulls Say’s
- CSL is investing in both physical capacity and R&D, leaving it well-positioned to take advantage of growth opportunities in the key immunoglobulins market.
- The acquisition of Calimmune’s gene therapy platform in fiscal 2018 and UniQure’s late-stage haemophilia B gene therapy candidate in fiscal 2020 will help defend against emerging competition.
- CSL has a strong R&D track record, and the ongoing rate of investment is ahead of major competitors.
Company Profile
CSL is one of the largest global biotech companies and has two main segments. CSL Behring either uses plasma-derived proteins or recombinants to treat conditions including immunodeficiencies, bleeding disorders and neurological indications. Seqirus is now the world’s second largest influenza vaccination business and was acquired in fiscal 2015. CSL has a strong R&D track record, and the product portfolio and pipeline include non-plasma products as the firm continues to broaden its scope. Originally formed in Australia as a government-owned entity, CSL now earns roughly half its revenue in North America and a quarter in Europe
(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.
