Categories
Dividend Stocks

Equitrans Highlights Need for Permitting Reform to Move MVP Forward

Business Strategy & Outlook: 

Equitrans’ biggest challenge is moving the deeply troubled Mountain Valley Pipeline, or MVP, into service. Equitrans sees Sen. Joe Manchin’s support as helpful and has been in frequent contact with the West Virginia Democratic senator. The recently announced proposed energy permitting provisions (separate legislation from the Inflation Reduction Act of 2022) contains direct benefits for MVP, thanks to Senator Manchin’s support, given the pipeline’s presence in West Virginia. A similar legislative proposal has also been introduced by the republican senator of West Virginia, Shelley Moore Capito. The Fourth Circuit remains the primary roadblock presently, as it has overruled state and federal agencies’ technical conclusions more than 10 times at this stage. Both legislative proposals address the judicial review. Manchin’s proposal moves the MVP case to the DC Circuit court, while Capito’s simply states that none of the approvals issued by the federal agencies as it relates to the MVP are subject to judicial review. It is observed that the two legislative proposals are indicative of fairly broad support for overall pipeline permitting reform. If either version were to pass as written, they would move the MVP into service, so it is seen the uncertainty primarily around obtaining enough political support to pass likely via adding or deleting certain provisions, which will likely be a razor-thin margin given the current political environment.

Risk and Uncertainty: 

The Mountain Valley Pipeline represents the largest risk to Equitrans from a financial and reputational perspective, given the numerous permitting issues it faces. The pipeline also recently resolved an over two-year criminal investigation into its activities without any issues. Another investigation was settled with $2.15 million in fines and court-ordered monitoring. The MVP bet is made bigger because of the over $500 million committed to several related projects that are explicitly tied to the MVP becoming operational. Customer concentration risk with EQT is a concern, as EQT makes up about 70% of Equitrans’ revenue. The firm recently resolved a dispute regarding the Hammerhead pipeline via an arbitration panel. The firm wrote off over $1.2 billion in 2018 and 2019, and another $2.5 billion in 2021 and 2022 related to MVP. Given the difficulty in valuing long-term 10- to 20-year contracts for gathering and processing assets due to the challenges in planned drilling and production,it is believed future write-downs are possible. From an ESG perspective, it is considered a major risk to Equitrans to be managing its carbon emissions profile and stakeholder management. Equitrans’ carbon emissions profile becomes important especially if the United States seeks to implement a national carbon tax. From a stakeholder management perspective, the legal, community, and regulatory challenges over the MVP have added billions of dollars in costs to the pipeline, and the damaged stakeholder relationships could also influence future projects.

Bulls Say:

  • The integration of Rice Energy Midstream offers optimization opportunities, given the geographic closeness of the assets, representing $300 million to $500 million in potential capital avoidance over the next five years. 
  • With the cancellation of the Atlantic Coast Pipeline, the MVP can take advantage of higher shipper demand and launch additional expansion efforts. 
  • Equitrans has been very successful at driving down unit costs at its gathering operations, with a 45% decline since 2015.

Company Description:

Equitrans acquired EQM Midstream in mid-2020, consolidating the midstream family. Equitrans now own EQM assets directly versus just unit ownership. EQM Midstream provides gathering, transmission, and water services to primarily Appalachian producers in Pennsylvania, West Virginia, and Ohio. 

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

DoorDash Reports Solid Q3 Results as Consumer Demand Remains Strong as Pandemic Wanes

Business Strategy & Outlook: 

DoorDash holds the number one position as an online food order aggregator in the U.S., ahead of Uber Technologies’ Uber Eats and Grubhub. The firm is at the early stages in trying to attract a larger piece of what is estimated to be $1 trillion worth of goods and services by 2025 to its platform. DoorDash benefits from the network effects between merchants, deliverers (or “dashers”), and consumers, plus intangible assets, in the form of data, which together warrant narrow moat ratings. Consumers use DoorDash’s app to order food for pickup or delivery from restaurants. Based on data from Second Measure, DoorDash currently is the market leader in the U.S., with 56% share, above Uber’s 26% and Grubhub’s 18%. The firm has over 450,000 merchants, more than 20 million consumers, and more than 1 million dashers on its platform. It is seen that the primary market DoorDash is targeting aggressively, consumer spending on food and beverages away from home, as attractive and expect it to grow 4%-5% annually during the next five years. DoorDash has also begun to provide similar service to businesses in verticals other than restaurants, such as grocery, retail, pet supplies, and flowers. With strengthening of the network effect, it is expected that DoorDash will maintain its leadership position in a market where there will be only one other viable player, Uber Eats, in the long run. The firm’s network effect should also lower consumer and deliverer acquisition costs, resulting in further operating leverage and GAAP profitability in 2023. 

Risk and Uncertainty: 

DoorDash is also susceptible to blame for possible missteps in data utilization and/or lack of data privacy and security, which is also considered an ESG risk. In addition, as deliveries to consumers by DoorDash on behalf of merchants are made mainly by gig workers, the firm is likely to face continuing pressure from lawmakers to provide higher pay and more benefits, and to possibly categorize those contractors as employees, all of which is seen as another ESG risk. While voters in California sided with firms such as DoorDash and with gig workers in 2020 by approving Proposition 22, it remains uncertain what actions other voters, and other states, and federal lawmakers are likely to take. Whether the immediate change in consumer dining behavior that was observed in 2020, mainly driven by the COVID-19 pandemic, will last is also a risk. A return to the pre-pandemic normalcy could decelerate or completely stop DoorDash’s growth.

Bulls Say:

  • Consumer behavior will continue to shift away from in-restaurant dining as the variety of food and speed of delivery available at home increase. As demand for DoorDash services pushes higher, the firm should quickly reach profitability. 
  • DoorDash will succeed in delivering other goods and services, strengthening its number-one position in the U.S. 
  • More regulations such as minimum wages or more benefits may pass, but they will also create a barrier to entry and force out subscale players.

Company Description:

Founded in 2013 and headquartered in San Francisco, DoorDash is an online food order demand aggregator. Consumers can use its app to order food on-demand for pickup or delivery from merchants mainly in the U.S. The firm provides a marketplace for the merchants to create a presence online, market their offerings, and meet demand by making the offerings available for pickup or delivery. The firm provides similar service to businesses in addition to restaurants, such as grocery, retail, pet supplies, and flowers. At the end of 2020, DoorDash had over 450,000 merchants, 20 million consumers, and over 1 million dashers on its platform. In 2020, the firm generated $24.7 billion in gross order volume (up 207% year over year) and $2.9 billion in revenue (up 226%)

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Equity Residential Should Continue to Report High Revenue Growth While Inflation Remains Elevated

Business Strategy & Outlook: 

Equity Residential has repositioned its portfolio over the past decade to focus on owning and operating high-quality multifamily buildings in urban, coastal markets with demographics that allow the company to maintain high occupancies and drive strong rent growth. The company has sold out of inland and southern markets and increased its operations in high-growth core markets: Los Angeles, San Diego, San Francisco, Washington, D.C., New York, Boston, and Seattle. These markets exhibit traits that create demand for apartments, like job growth, income growth, decreasing homeownership rates, high relative cost of single-family housing, and attractive urban centers that draw younger people. The company regularly recycles capital by selling non core assets or exiting markets and using the proceeds for its development pipeline or acquisitions with strong growth prospects, a strategy that has produced strong returns. While Equity Residential has repositioned its portfolio into markets with strong demand drivers, it is advised to be cautious on its long-term growth prospects, given that many markets have historically seen high supply growth. The urban, luxury end of the apartment market where Equity Residential traditionally operates has seen the highest amount of new supply, competing directly with the company’s portfolio. Additionally, the pandemic has caused many millennials to consider moves to the suburbs, either into suburban apartments or their own single-family homes, though demand for new urban apartments has remained resilient. Equity Residential has created significant shareholder value through development, though rising interest rates may cut into the expected return on new projects. However, high inflation has driven revenue significantly higher as apartment leases are generally only a year long, allowing Equity Residential to push rate growth that has matched inflation. While revenue growth is expected to decelerate as inflation growth is brought under control and also expect a period of higher than normal expense growth, the company’s funds from operations per share are already above pre pandemic levels and continued same-store growth is expected to push FFO even higher

Risk and Uncertainty: 

Demand for multifamily assets in urban, coastal markets has benefited over the past decade from demographic trends such as a falling homeownership rate, the rising relative cost of single-family housing, and urban gentrification. Millennials have been driving many of these trends, and as the generation acquires enough capital to own single-family homes or if tastes change significantly, these trends could reverse and hurt demand for apartments. The company’s portfolio is also sensitive to any changes to the economies of its core markets. If job growth slows or industries experience significant layoffs, then demand for apartments falls. The Northern California and Seattle markets have seen significant job and income growth generated by the technology industry, which has created substantial apartment demand. A downturn in this industry would significantly affect the economies of these markets and affect the fundamentals for Equity Residential’s assets. Many of Equity Residential’s markets are seeing significant new supply. While the current level of supply is expected to be absorbed by existing demand growth and help moderate the market, increased new supply will pressure operations and asset values. Equity Residential has around $860 million in development project commitments scheduled for delivery over the next few years. The economics of these projects have marginal room for error and will depend heavily on market conditions at delivery meeting today’s expectations.

Bulls Say:

  • Equity Residential’s portfolio of high quality assets should see relatively consistent levels of demand long term from high-income earners and will likely see just a small hit to fundamentals during the current pandemic as most residents have not experienced job losses. 
  • Equity Residential has a history of finding accretive development opportunities to bolster its growth prospects. 
  • While current supply deliveries are near peak levels, rising construction costs and tighter lending standards should lead to lower supply growth. 

Company Description:

Equity Residential owns a portfolio of 308 apartment communities with around 80,000 units and is developing five additional properties with 1,361 units. The company focuses on owning large, high-quality properties in the urban and suburban submarkets of Southern California, San Francisco, Washington, D.C., New York, Seattle, and Boston. 

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Baxter Announces Renal Spinoff to Unlock Value in Discounted Shares

Business Strategy & Outlook: 

Following the spinoff of Baxalta in mid-2015, Baxter’s new management team has focused on increasing efficiencies and innovating in medical products. That focus has resulted in much-improved profitability and cash flow generation since then. In the intermediate term, the company aims for mid-single-digit sales growth primarily through new product launches and for double-digit adjusted earnings per share and free cash flow growth compounded annually. Acquisitions, like the recent combination with Hill Rom (medical equipment like hospital beds with digital connection capabilities), could add to those prospects. Baxter’s renal and acute care technology supports patients with failing organs, most often kidneys. Baxter generates most of its revenue in these segments from at-home patients using its peritoneal dialysis, or PD, tools. However, it also sells hemodialysis products to dialysis clinics and continuous renal replacement therapy and other organ support equipment to intensive care units, which saw a boost in demand during the coronavirus pandemic. While some new product launches were delayed during the pandemic, this segment should continue to benefit from new hemo-and peritoneal-dialysis launches in the future. Additionally, increased demand for at-home dialysis tools should benefit Baxter in PD generally. Baxter also provides many injectable therapies. In pharmaceuticals, Baxter is pursuing an ambitious growth strategy to roughly double the number of molecules it sells through a variety of delivery options, including premixes. In advanced surgery, Baxter sells wound closure and bleeding control products. New products aim to help clinicians save time in the operating room. In medication delivery and nutrition, management has turned around these operations after recent hurricanes and regulatory concerns damaged Baxter’s reputation as a reliable supplier of these critical therapies. New product launches, including several infusion pumps, may boost growth in these segments in a post pandemic environment, too.

Risk and Uncertainty: 

It is believed that Baxter shed its riskier assets through the Baxalta spinoff, leaving a well-diversified company that participates in markets with limited risk of significant disruption. However, some of Baxter’s product lines, particularly IV solutions, nutritional products, and generic injectables, have been commodified and face significant quality control issues that contribute to the firm’s environmental, social, and governance risks. If new competitors decide to make the substantial up-front and ongoing investments needed to participate in these markets, it is thought pricing pressures, which have been manageable through volume increases or mix benefits on differentiated delivery systems, may accelerate, especially in an increasingly cost conscious healthcare system—another one of Baxter’s key ESG-related risks. It is also believed that Baxter must innovate to maintain its competitive advantages, particularly in renal care, infusion pumps, acute therapy, and advanced surgery. If the company does not invest appropriately in these product sets, its peers may surpass Baxter’s technology enough to affect market share eventually. The Hill Rom acquisition has also put some pressure on Baxter’s ROICs and added leverage to its balance sheet, which highlights another ESG risk for Baxter: corporate governance-related risks surrounding acquisitions. 

Bulls Say:

  • New management has revved up Baxter’s growth engine, primarily around evolutionary goals in all of the major business lines. 
  • Emerging markets are a prime source of growth for many of Baxter’s products, especially its peritoneal dialysis and nutrition solutions. 
  • The company continues to strive for even higher profitability, which should keep earnings growth above sales growth for the foreseeable future

Company Description:

Baxter offers a variety of medical instruments and supplies to caregivers. It enhanced its portfolio of hospital-focused offerings by acquiring Hill Rom in late 2021. Legacy Baxter offers tools to help patients with acute and chronic kidney failure. It also sells a variety of injectable therapies for use in care settings, such as IV pumps, administrative sets, and solutions; nutritional products; and surgical sealants and hemostatic agents. The company offers contract manufacturing services to pharmaceutical companies. The Hillrom transaction has added basic equipment, including hospital beds, to the portfolio, although about half of Hillrom’s 2021 revenue came from more digitally connected offerings like its smart beds and Voalte medical communications app.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

FIS Is Trying to Get Back on Track

Business Strategy & Outlook: 

Fidelity National Information Services’ acquisition of Worldpay in 2019 was one of three similar deals that took place in short order. It is not believed that the move was especially attractive relative to the other two, and not believed the company materially strengthened its competitive position as a result. However, it is thought there is a valid strategic rationale for these deals, and the introduction of Worldpay’s acquiring business should boost overall long-term growth, given the ongoing shift toward electronic payments. The integration of Worldpay seems to have been completed without any major hiccups, with the company achieving its stated cost synergy targets. However, the COVID-19 pandemic illustrated one negative of the merger, in that the acquiring business is significantly more macro-sensitive than FIS’ legacy operations. Although cost synergies from the acquisition appear to have helped the company maintain its margins, the pandemic resulted in a modest organic revenue decline in 2020. But results from FIS and peers suggest payment volume has steadily improved and has bounced back fairly quickly, as the long-term secular tailwind appears to be reasserting itself and the worst seem to be past the industry. That said, if the economic environment takes a sharp negative turn, new headwinds could appear in the near term. Moreover, FIS’ performance has lagged peers a bit, suggesting the company may need to make some changes and increase investment to get back on track. From a long-term perspective, the pandemic could benefit the industry, as it appears to have accelerated consumers’ shift away from cash. Additionally, it may be plausible that a part of the rationale for the acquisition was to strengthen the company’s position in online payments. This area has become too large to ignore, and the pandemic has only reinforced the importance of capabilities in this area. Overall, while the company’s near term issues are recognized, the long-term picture of FIS looks good. The company’s segments could all be characterized as industry leaders with attractive margins and fairly stable revenue, and limited capital needs should allow FIS to generate strong free cash flow.

Risk and Uncertainty: 

Any weaknesses in the banking sector could lead banks to defer technology purchases, hurting FIS’ top line, and any dramatic changes in the structure of the banking industry could have hard-to-predict consequences for FIS. Aging core processing systems and increased needs for system flexibility could lead to higher replacement rates and erode the company’s moat. The payment processing industry is evolving, and while the position of the acquirers within the current dominant framework is well established, disruption could lessen the profitability the industry can generate or cut the acquirers out altogether. As the company’s revenue is directly tied to revenue at its merchant customers, FIS’ acquiring operations are sensitive to macroeconomic conditions. It is seen that the company’s largest environmental, social, and governance risk as data security. Historically, the industry has experienced significant system breaches at times, which creates event risk. The risk of breaches is likely higher on the acquiring side, but a breach on the bank technology side could have greater consequences. Finally, management has historically been aggressive when it comes to mergers and acquisitions, which can lead to integration risk and high financial leverage at certain points.

Bulls Say:

  • The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts. 
  • The shift toward electronic payments will continue to create room for acquirers to see strong growth without stealing share from each other.
  • With healthy operating margins and limited reinvestment needs, FIS throws off a good amount of free cash flow and actively returns it to shareholders

Company Description:

Fidelity National Information Services’ legacy operations provide core and payment processing services to banks, but its business has expanded over time. By acquiring Sungard in 2015, the company now provides recordkeeping and other services to investment firms. With the acquisition of Worldpay in 2019, FIS now provides payment processing services for merchants and holds leading positions in the United States and United Kingdom. About a fourth of revenue is generated outside North America.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Broadridge’s Franchises Are Robust Amid the Current Environment

Business Strategy & Outlook: 

Broadridge has been the dominant proxy and interim service provider for broker/dealers for more than 20 years. Broadridge’s regulated proxy and interim business is its crown jewel, and a disproportionate amount of the firm’s net income comes from its fiscal third and fourth quarter during proxy season. In addition, Broadridge generates about 30% of its fee revenue and profit from its global technology and operations or GTO segment, which provides securities processing solutions. Amid COVID-19, Broadridge has benefited from higher engagement of retail investors through higher position growth and elevated trading volumes. Since its spinoff from ADP in 2007, Broadridge has streamlined its operations and expanded into adjacent markets. After years of losses in its clearing business, Broadridge sold it in 2010 to Penson Worldwide. Operationally, Broadridge entered into an IT-services agreement with IBM in 2010 to increase efficiency. Expanding on its mailing, data security, and processing capabilities, Broadridge has completed numerous acquisitions. Since 2010, Broadridge has completed at least 25 acquisitions. Notable acquisitions include DST’s North American customer communications business for $410 million in 2016 and RPM Technologies for $300 million in 2019. The NACC business provides print and digital communication solutions, content management, postal optimization, and fulfillment to a variety of sectors, including financial-services firms, utilities, and healthcare firms. RPM Technologies provides enterprise wealth management software solutions and services. In May 2021, Broadridge acquired Itiviti, a provider of order and execution management trading software and order routing networking and connectivity solutions, for $2.5 billion. It is believed that the acquisition complements its existing GTO segment and while not cheap, should be accretive given low interest rates. During its December 2020 investor day, Broadridge laid out its three-year per year goals including recurring revenue growth of 7%-9% (organic: 5%-7%), adjusted operating margin expansion of 50 basis points, and adjusted EPS growth of 8%-12%. Thus far, Broadridge has largely achieved these goals.

Risk and Uncertainty: 

The biggest risk to near-term revenue and profits is equity proxy position and mutual fund interim growth. During the financial crisis, the number of equity proxy positions was down only 2% (for year ending June 30, 2009). Given the recurring nature of the equity proxy and mutual fund interims business, It is believed Broadridge’s business is relatively recession-proof. Given the regulated nature of proxy and interim communications, the fees that Broadridge can charge issuers on behalf of its broker/dealer clients is overseen by the NYSE Working Proxy Group. The last fee reviews went into effect on Jan. 1, 2014, with a very modest impact on Broadridge. Though Broadridge has historically fared well in fee reviews, it could be negatively affected in a future review. Broadridge has modest client concentration. On a firm wide basis, the largest client accounts for 6% of revenue. Within the global technology and operations segment, the firm’s largest 15 clients account for 51% of segment revenue. Broadridge generally works with its largest clients across multiple segments. From a geographic perspective, Broadridge generates about 88% of its revenue in the United States. From an environmental, social, and governance perspective, a lot of risk is not observed arising from Broadridge’s business model. Broadridge’s software and solutions service millions of users, and as a result the firm must maintain strong product governance and data security

Bulls Say:

  • Broadridge has a dominant market share position on delivering proxies and interims to beneficial shareholders. Direct indexing and the rise of the retail investor can continue to support position growth. 
  • During the financial crisis, Broadridge’s equity position count was down only 2% in 2009, indicating that its business model is close to recession-proof. 
  • Broadridge’s global technology and operations offerings are sticky and with the move toward outsourcing, Broadridge should be able to grow faster than the addressable market.

Company Description:

Broadridge, which was spun off from ADP in 2007, is a leading provider of investor communications and technology-driven solutions to banks, broker/dealers, asset managers, wealth managers, and corporate issuers. Broadridge is composed of two segments: investor communication solutions and global technology and operations.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Despite Recent Litigation Headwinds on Zantac, GSK Remains Well Positioned for Earnings Growth

Stock market digital graph chart on LED display concept. A large display of daily stock market price and quotation. Indicator financial forex trade education background.

Business Strategy & Outlook: 

As one of the largest pharmaceutical and vaccine companies, GSK has used its vast resources to create the next generation of healthcare treatments. The company’s innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat. The magnitude of GSK’s reach is evidenced by a product portfolio that spans several therapeutic classes. The diverse platform insulates the company from problems with any single product. Additionally, the company has developed next-generation drugs in respiratory and HIV areas that should help mitigate both branded and generic competition. It is expected GSK to be a major competitor in respiratory, HIV, and vaccines over the next decade. On the pipeline front, GSK has shifted from its historical strategy of targeting slight enhancements toward true innovation. Also, it is focusing more on oncology and the immune system, with genetic data to help develop the next generation of drugs. The benefits of these strategies are showing up in GSK’s early-stage drugs. It is expected this focus will improve approval rates and pricing power. In contrast to respiratory drugs, treatments for cancer indications carry much strong pricing power with payers. From a geographic standpoint, GSK is strategically branching out from developed markets into emerging markets. Its vaccine segment positions the firm well in these price-sensitive markets. While this strategy is likely to create some challenges, like the potential legal violations that arose in early 2013 in China, it is believed the fast-growing emerging markets will help support long-term growth and diversify cash flows beyond developed markets. GSK’s decision to divest its consumer business will likely unlock value over the long run. GSK divested its consumer group (called Haleon) in July 2022. Given the strong valuations of consumer healthcare companies, it is expected this unit will yield a stronger valuation than what is implied within the GSK structure before the divestment.

Risk and Uncertainty: 

Like all drug companies, GSK faces risks of drug delays or non approvals from regulatory agencies, an increasingly aggressive generic industry, and competition in the pharmaceutical industry. Overall, given all the diversification the company has across its platforms offsetting the variable outcomes for drug development and competitive challenges to the firms’ leading products. GSK is not materially affected by environmental, social, and governance risks, although it is seen access to basic services (tied to drug pricing) as the biggest ESG risk that the firm needs to manage. GSK generates close to one half of total sales from U.S. prescription drug sales, so additional major pricing reforms could weigh on sales and margins. Additionally, it is assumed a more than 50% probability of GSK seeing future costs related to product governance ESG risks (such as off-label marketing or litigation related to side effects) and model base case annual legal costs at 2% of non-GAAP net income (at the midrange relative to peers based on GSK’s product portfolio having average exposure to future potential litigation). As part of these costs, litigation expenses have been factored in for the increasingly concerning Zantac litigation.

Bulls Say:

  • GSK’s next-generation respiratory drugs and HIV drugs look poised for strong growth over the next five years. 
  • GSK faces relatively minor near-term patent losses, setting up steady long-term growth. 
  • The firm’s well-positioned Shingrix vaccine should support strong long-term growth based on excellent efficacy and limited competition.

Company Description:

In the pharmaceutical industry, GSK ranks as one of the largest firms by total sales. The company wields its might across several therapeutic classes, including respiratory, cancer, and antiviral, as well as vaccines. GSK uses joint ventures to gain additional scale in certain markets like HIV.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Used-Vehicle Industry Problems Crush CarMax’s Fiscal Q3, but We See Issues as Temporary

Business Strategy & Outlook: 

CarMax’s revenue has increased at a compound annual rate of about 13% since fiscal 2000 because of the success of customer-friendly sales practices and use of information technology. The firm targets a 12%-19% annual growth rate for fiscal 2021-26. Competing dealerships have tried no-haggle pricing and failed because their salesforces are trained to focus on selling vehicles that earn the highest possible gross profit rather than vehicles that customers actually want or need. A traditional dealership relies on profits from service to offset the typically lower margins it gets on new-vehicle sales. CarMax does not hire salespeople from the auto industry, and salespeople receive the same commission regardless of the vehicle sold. They do not even know the profit on the vehicle sold. The CarMax customer stays with the same salesperson throughout the transaction rather than being passed off to a finance department, receiving a buying experience that is hard to match at a dealership. This focus on customer satisfaction, combined with scale advantages that allow for a wide inventory selection and extensive pricing data, creates a narrow economic moat. Management has said repeatedly that it will give any further improvements in operating expenses back to the customer as a price decrease instead of seeking higher gross margins. This strategy is admired by professionals; CarMax’s scale allows it to price below smaller dealerships, and lowering prices should increase comparable-store sales while keeping competitors away, though some large dealers are copying CarMax’s shopping experience. The company can often make up any lost margin via its highly profitable finance arm, CarMax Auto Finance. CAF finances about 41% of unit sales. The company’s omnichannel program, which finished rolling out in the second quarter of fiscal 2021, enables consumers to shop in any combination of digital and in store that they like and should allow for fewer store openings over time. These factors should keep the company growing for many years, despite more competition from franchised dealers and online-only startups. Omnichannel is just over half of retail volume. 

Risk and Uncertainty: 

CarMax operates in the cyclical auto industry, and any downturn brings uncertainty as to the timing and extent of a recovery in demand for used vehicles. Also, nothing stops a competitor from trying to emulate CarMax; Lithia Motors’ and Asbury’s now-defunct L2 and Q Auto used-car stores are proof of that, as are AutoNation USA, Sonic’s EchoPark, and Penske’s CarShop stores. In 2013, franchise vehicle dealer Sonic announced plans to open its EchoPark standalone used-vehicle stores, which it did in 2014. Sonic wants to have a lot of stores over time and made it clear how much it admires CarMax. The industry is so fragmented that all these firms may find success, though it is thought competitors will need at least a decade to rival CarMax in size and expertise. When used-vehicle prices rise, management will likely keep the same target for gross profit dollars, which can hurt margin and cash flow as in fiscal 2022. It is thought highly of CarMax’s management and business model, so it is considered macroeconomic variables as the highest risk for the firm rather than company specific risk factors. Any major environmental, social, and governance concerns for CarMax are not viewed, provided that autonomous vehicles do not someday eliminate demand for used vehicles. It is believed that is highly unlikely, due to vehicle affordability for all Americans, and even if it occurred, it’s likely a very long way off. The company does get sued from time to time for accusations of unpaid wages or unfair labor practices, but any of these matters ever receiving a judgment that would reduce fair value estimate reduction is not seen. CarMax will need to ensure that its data security measures are ironclad as it moves into the omnichannel space with its customers sharing more personal information. Governance improvements in the past are that the board allowed the shareholder rights plan to expire in 2012 and removed the staggered board of director terms in 2013

Bulls Say:

  • CarMax has increased revenue and profitability at a remarkable rate, and it is thought that the company is positioned to gain market share in any environment. Omnichannel helps this story, as it lets consumers have maximum flexibility in their experience. 
  • In April 2022, CarMax announced aggressive growth plans to reach about $33 billion-$45 billion of revenue in fiscal 2026 and be the online leader in used-vehicle retailing. 
  • No competitors have successfully duplicated CarMax’s business model, providing the company with a considerable head-start on would-be imitators

Company Description:

CarMax sells, finances, and services used and new cars through a chain of over 230 used retail stores. It was formed in 1993 as a unit of Circuit City and spun off into an independent company in late 2002. Used-vehicle sales typically account for about 83% of revenue and wholesale about 13%, with the remaining portion composed of extended service plans and repair. In fiscal 2022, the company retail and wholesale 924,338 and 706,212 used vehicles, respectively. CarMax is the largest used-vehicle retailer in the U.S. but still estimates that it has only about 4% U.S. market share of vehicles 0-10 years old in 2021. It seeks over 5% share by the end of calendar 2025 and revenue of $33 billion-$45 billion by fiscal 2026. CarMax is based in Richmond, Virginia.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Zip’s Share Price Encapsulates Much Downside While Its Positives Are Being Overlooked

Business Strategy & Outlook: 

Zip’s focus is on maximizing its addressable market. Its business is more diversified than single-product buy now, pay later, or BNPL, players, with varieties in financing options, transaction limits, and repayment schedules. Customers enjoy simple sign-up and checkouts, high acceptance by retailers and flexible financing solutions to help better manage their cash flows. Merchant partners may benefit from increased conversion rates, basket sizes, and transaction frequencies. Zip has a revolving credit business in Australia. Core products are ZipPay, which finances up to AUD 1,000; and ZipMoney, which finances AUD 1,000 and above. It also boasts a broader merchant base including retail, home, electronics, health, auto, and travel. Around 70% of revenue is derived from customers, mainly from account fees and interest. Zip adopts an installment financing model overseas, helping it scale up faster and keep up with competition in the underpenetrated global BNPL landscape. The acquisition of U.S. based QuadPay materially boosts its growth prospects. It also operates in Canada, Europe, Mexico, and the Middle East. Zip enhances customer stickiness via ongoing product add-ons. It has a Pay Anywhere function that lets users transact at a wide variety of avenues without being confined to merchant partners. Users also benefit from promotional offers, cash-back deals, or free credits. Newer features include enhanced rewards programs, product protection insurance, or physical cards. For merchant partners, Zip invests in co-marketing to help them acquire new customers. Zip has strong earnings prospects, but it is believed its margins will be increasingly under pressure and it will not achieve the same penetration and transaction frequency overseas as it had domestically. While it benefits from the growth of e-commerce and increasing preference for more convenient/cheaper forms of financing, it is anticipated heightened competition to its products. The capital-intensive domestic business cannot scale up as quickly, its fee structure potentially creates friction for customers, and its product offering in the U.S lacks clear differentiation. 

Risk and Uncertainty: 

Zip is at risk of a large spike in bad debts. Both the long-dated nature of its revolving credit business and Pay Anywhere feature increases credit risk, as this results in Zip lacking control or information of its customers’ spending habits. With Zip potentially financing consumers with lower tolerance of credit stress and the fact that BNPL financing can lead to overcommitment in spending, it could see a substantial rise in hardship claims or non repayments and may have to write off a material portion of its receivables during a major credit event. Any regulation that alters the relationship between users and Zip could reduce the appeal of its product, lead to consumers opting for cheaper financing options, or lower signup rates and transaction frequency. This ties to product governance—a key ESG risk—where BNPL is at core credit, but are marketed as budgeting or lead generation tools. While low credit losses have to date helped blunt regulatory attacks, the potential for customers to use BNPL to spend excessively and fall into financial stress could necessitate more regulation. Material risks include the potential banning of no-surcharge rules applied by BNPL firms, or if BNPL is regulated to the same extent as traditional credit. Zip also needs external funding to support its receivables growth. Any dislocation in capital markets or an inability to meet hefty growth expectations could result in it being unable to obtain financing when required or having to secure funding at unfavorable terms. 

Bulls Say:

  • Zip is well placed to continue growing its transaction volume, given its variety in financing options and retailer base, as well as its Pay Anywhere model which provides a greater avenue to spend using its products. 
  • Zip benefits from an accelerated shift to e-commerce, increased adoption of cashless payments, and a growing need among merchants for effective marketing amid a challenging retail backdrop. 
  • It is thought Zip faces lower regulatory risks than its BNPL rivals, as it already conducts a greater degree of background checks and ZipMoney is already regulated by the National Credit Act. 

Company Description:

Zip is a diversified finance provider, offering consumer financing via a line of credit (via ZipPay and ZipMoney) and installment-based finance (via QuadPay, Spotii, Twisto, and PayFlex); as well as lending to small to midsize enterprises (via Zip Business). Zip’s fortunes are largely tied to the buy now, pay later, or BNPL, industry. Most of its products–ZipPay, QuadPay (Zip U.S.), and PayFlex–do not charge interest based on outstanding balances. Around 60%-70% of ZipPay’s/Zip Money’s revenue is derived from customers, mainly via account fees and interest. Meanwhile, its installment businesses primarily generate revenue by receiving a margin from merchants, which compensates it for accepting all nonpayment risk and for encouraging consumers to transact more frequently.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

ACCC Hangs Up on TPG-Telstra Regional Deal

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Business Strategy & Outlook: 

TPG Telecom is grappling with structural changes in the Australian telecommunications industry. Rollout of the national broadband network, or NBN, and take-up of high-traffic products such as internet protocol television and video streaming, will increase the demand for broadband and backhaul capacity. However, the NBN will also force TPG Telecom to become a reseller, impacting its consumer broadband margins. TPG Telecom’s price-leader strategy still sees the company delivering solid subscriber and market share performance. Product bundling has also become a key segment in the market, with all players using broadband as a lead-in product and cross-selling voice, mobile, pay-TV, and digital streaming services. The ownership of submarine cable between Australia and Guam offers the group broader cost advantages. Pricing is mainly a function of demand and supply, available capacity, and the length of cable. Economies of scale play a large part in pricing where costs are measured on per unit of volume. A longer cable results in increased material and maintenance costs, meaning cost per unit is higher. Cables with large capacity reduce costs per unit, as costs such as fixed construction and rollout costs are spread across a larger base. A sharp price decline in international traffic remains a risk. Contracts are structured in typical 15-year leases, providing some certainty in revenue. Clients are allocated a fixed bandwidth and have the right to on-sell capacity. The 2020 merger with Vodafone Australia (the third-ranked mobile player in the country) is one way TPG Telecom is trying to limit the impact of the NBN. Mobile offers a critical strategic path to future-proof the group in the face of onslaught from the NBN. The government entity is already wreaking havoc on the narrow-moat-rated group’s retail fixed-line broadband and could even potentially impact the lucrative enterprise segment

Risk and Uncertainty: 

The strategic imperative of the combination is clear, not only in ensuring a clear mobile pathway for TPG in an increasingly mobile-centric world, but as a route to bypass the National Broadband Network’s debilitating economics longer term. However, the merged entity is not without risks. It is expected that synergy benefits could take time to realise, with elimination of duplicated costs, benefits from leveraging each other’s infrastructure and economies of scale easier done on a spreadsheet than in the dynamic real world. More importantly, the nimble, entrepreneurial modus operandi of TPG (previously ruled with an iron fist by executive chairman David Teoh) does not mesh neatly with the traditional “corporate” customs of Vodafone Australia (presided over by Inaki Berroeta, who is the managing director and CEO of the merged entity). This view was vindicated by the sudden resignation of Chairman David Teoh from the board in March 2021. In terms of ESG risks, data privacy and security are the biggest issues facing TPG Telecom. The company receives, stores, and processes large volumes of sensitive customer data. This triggers exposure to data privacy and security breaches, which may result in regulatory actions, litigation, public scrutiny or loss of customer trust. It is seen that the probability of significant and prolonged breaches in these areas as less than 25%. If a breach does occur, limited materiality to the fair value estimate for TPG Telecom, as rectification response would be swift. Investments in network integrity and cybersecurity are also being stepped up post the merger between TPG Telecom and Vodafone Australia.

Bulls Say:

  • Cross-selling opportunities remain for both consumer and corporate markets. 
  • The merger with Vodafone Australia increases the scale of the combined entity and allow it to better compete against Telstra and Optus in the Australian market. 
  • Further rollout of its fibre network also boosts growth, while incremental cost from an additional user is small. 

Company Description:

TPG Telecom is Australia’s third-largest integrated telecom services provider. It offers broadband, telephony, mobile and networking solutions catering to all market segments (consumer, small business, corporate and wholesale, government). The group has grown significantly since 2008, both via organic growth and acquisitions, and in July 2020 merged with Vodafone Australia. It owns an extensive stable of infrastructure assets. 

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

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