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BorgWarner Q3 Results Take Chip Crunch Hit

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and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. The acquisition of Delphi Technologies on Oct. 1, 2020, supports our thesis.

BorgWarner is also well positioned for growth in hybrids and battery electric vehicles. The Delphi acquisition adds electric and electronic controls to BorgWarner’s electric motors and driveline technologies. Regardless of the powertrain automakers chose, BorgWarner’s revenue growth potential remains unchanged. BorgWarner’s drivetrain business includes wet dual-clutch and torque transfer technologies. Dual-clutch transmissions, which contain eight or more gears, compared with older technology automatic transmissions equipped with four gears, can generate 5%-15% in fuel savings.

Financial Strength:

BorgWarner maintains a solid balance sheet and liquidity that, relative to many other parts suppliers, makes for strong financial health. Despite being acquisitive, the company has pursued a conservative capital strategy as total debt/total capital has averaged less than 15% over the past 10 years. Total adjusted debt/EBITDAR, which takes into consideration operating leases and rent expense, averaged less than 1 times over the same period. However, the company could have taken more advantage of the benefits of financial leverage without incurring the pitfalls of excessive debt. BorgWarner has adequate liquidity and can generate sufficient free cash flow to weather cyclical turns and to meet its financial obligations. The company refinanced a $251 million senior note that was due in September 2020.

Bulls Say:

  • Global clean air legislation enables BorgWarner’s topline growth to exceed worldwide growth in demand for light vehicles. 
  • The popularity of sport utility and crossover vehicles around the globe supports growth in BorgWarner’s torque transfer technologies. 
  • Volkswagen, Ford, and Hyundai are BorgWarner’s three largest customers and, on average, make up about one third of revenue.

Company Profile:

BorgWarner is a Tier I auto-parts supplier with four operating segments. The air management group makes turbochargers, e-boosters, e-turbos, timing systems, emissions systems, thermal systems, gasoline ignition technology, powertrain sensors, cabin heaters, battery heaters, and battery charging. The e-propulsion and drivetrain group produce e-motors, power electronics, control modules, software, automatic transmission components, and torque management products. The two remaining operating segments are the eponymous fuel injector and aftermarket groups. The company’s largest customers are Ford and Volkswagen at 13% and 11% of 2020 revenue, respectively. Geographically, Europe accounted for 35% of 2020 revenue, while Asia was 34% and North America was 30%.

(Source: Morningstar)

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Marriott’s Demand Set to Rebound Further in 2022, Aided by Global Leisure and Corporate Pick-Up

that Marriott to expand room and revenue share in the hotel industry over the next decade, driven by a favorable next-generation traveler position supported by renovated and newer brands, as well as its industry-leading loyalty program. Additionally, the acquisition of Starwood has strengthened Marriott’s long-term brand advantage, as Starwood’s global luxury portfolio complemented Marriott’s dominant upper-scale position in North America.

Marriott’s intangible brand asset and switching cost advantages are set to strengthen. Marriott has added several new brands since 2007, renovated a meaningful percentage of core Marriott and Courtyard hotels in the past few years, and expanded technology integration and loyalty-member presence; these actions have led to share gains and a strong positioning with millennial travelers. Starwood’s loyalty member presence and iconic brands should further strengthen Marriott’s advantages.

Future Outlook

It is expected that room growth for Marriott averaging midsingle digits over the next decade  supported by the company having around 20% of all global industry rooms under construction, well above its high-single-digit existing unit share, as of the end of 2020.

With 97% of the combined rooms managed or franchised, Marriott has an attractive recurring-fee business model with high returns on invested capital and significant switching costs for property owners. Managed and franchised hotels have low fixed costs and capital requirements, along with contracts lasting 20 years that have meaningful cancelation costs for owners.

Marriott’s Demand Set to Rebound Further in 2022

Marriott’s third-quarter revenue per available room, or revPAR, improved to 74% of 2019 levels ,up from 56% last quarter ,driven by rate recovering to 96% of prepandemic marks. 

Meanwhile, Marriott’s brand advantage remains intact. Marriott’s EBITDA margins improved to 17.3% from 14.5% a year ago. It is observed that high-teens operating margins in 2030, compared with the low-double-digit prepandemic average, aided by cost efficiency offsetting wage inflation.

It is expected that leisure travel to remain robust, but we expect business travel to recover in 2022. In this vein, Marriott noted that business travel bookings have recently picked up, and that group 2022 revenue on books is down about 20% from 2019, with rooms down 23% and rate up 4%.

Financial Strength

 Marriott’s financial health remains in good shape, despite COVID-19 challenges. Marriott entered 2020 with debt/adjusted EBITDA of 3.1 times, as its asset-light business model allows the company to operate with low fixed costs and stable unit growth, but reduced demand due to COVID-19 caused the ratio to end the year at 9.1 times. During 2020, Marriott did not sit still; rather, it took action to increase its liquidity profile, including suspending dividends and share repurchases, deferring discretionary capital expenditures, raising debt, and receiving credit card fees from partners up front. As a result, Marriott has enough liquidity to operate at zero revenue through 2022, and at second half of 2020 demand levels the company was around cash flow neutral. 

 Bulls Say  

  • Marriott is positioned to benefit from the increasing presence of the next-generation traveler through emerging lifestyle brands Autograph, Tribute, Moxy, Aloft, and Element. 
  • Marriott stands to benefit from worker flexibility driving higher long-term travel demand. Our constructive stance is formed by higher income occupations being the most likely industries to sustainably work from remote locations. 
  • Marriott has a high exposure to recurring managed and franchised fees (97% of total 2019 units), which have high switching costs and generate strong ROICs.

Company Profile

Marriott operates nearly 1.5 million rooms across roughly 30 brands. Luxury represents around 9% of total rooms, while full service, limited service, and time-shares are 43%, 46%, and 2% of all units, respectively. Marriott, Courtyard, and Sheraton are the largest brands, while Autograph, Tribute, Moxy, Aloft, and Element are newer lifestyle brands. Managed and franchised represent 97% of total rooms. North America makes up two thirds of total rooms. Managed, franchise, and incentive fees represent the vast majority of revenue and profitability for the company.

 (Source: Morningstar)

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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.

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Australian Brokers Call – 03 November 2021

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Quantitative Equities Continue to be a Drag on Janus Henderson’s Fund Flow Recovery

leaving them more dependent on market gains to increase their assets under management. With USD 419.3 billion in AUM at the end of September 2021, Janus Henderson has the size and scale necessary to be competitive in the industry and is structurally set up to hold on to assets regardless of market conditions, being somewhat diversified across its four main asset class segments–equities (two thirds of managed assets), fixed income (close to a fifth), multi-asset and alternatives (the remainder). 

During that same period, the firm’s organic growth rate averaged negative 5.1%, with a standard deviation of 2.4%, which was worse than the average of its publicly traded peers, with revenue growth and operating margins both trailing the average results for the U.S.-based asset managers. Janus Henderson’s organic growth to be in a negative 2%-4% range annually during 2021-25, with revenue growth and operating margins affected by industry fee compression and the need to spend more to enhance performance and distribution.

Financial strength

Janus Henderson entered 2021 with USD 300 million of 4.875% senior notes due in July 2025, leaving it with a debt/total capital ratio of around 6%, interest coverage of more than 50 times, and a debt/EBITDA ratio (by our calculations) of 0.4 times. The company also had a USD 200 million unsecured revolving credit facility (with a maturity date of February 2024). Under the credit facility, the company’s financing leverage ratio cannot exceed 3 times EBITDA. There were no borrowings under the credit facility at the end of September 2021. Should the firm close out the year in line with our expectations, Janus Henderson will enter 2022 with a debt/total capital ratio of around 6%, interest coverage of close to 70 times, and a debt/EBITDA ratio (by our calculations) of 0.3 times.

The company declared an initial quarterly dividend of USD 0.32 per share during the third quarter of 2017 and has since raised it to USD 0.38 per share. As for share repurchases, the company repurchased approximately 4.0 million shares for USD 100 million during 2018, another 9.4 million shares for USD 200 million during 2019, and during 2020 picked up 8.7 million shares for USD 180 million. In February 2021, Janus Henderson repurchased 8.0 million shares of common stock (which was distinct from its corporate buyback program) from Dai-ichi Life Holdings for USD 230 million. The firm has also repurchased 1.8 million shares for USD 75 million as part of its buyback program since the start of 2021.

Bulls Say’s

  • Janus Henderson is the only offshore-based global wealth manager listed on the Australian Securities Exchange. It provides investors exposure to a growing global wealth sector, with a high bias toward equity strategies.
  • Operating leverage is high, capital demands are low, and when free cash flow generation is strong investors can be rewarded with a good mix of growth and income returns. 
  • Janus Henderson carries added currency risk compared with listed Australian peers, given the primary listing is on the New York Stock Exchange and the base currency is the U.S. dollar.

Company Profile 

Janus Henderson Group provides investment management services to retail intermediary (49% of managed assets), self-directed (21%) and institutional (30%) clients under the Janus Henderson and Intech banners. At the end of September 2021, fundamental equities (56%), quantitative equities (9%), fixed-income (19%), multi-asset (13%) and alternative (3%) investment platforms constituted the company’s USD 419.3 billion in assets under management. Janus Henderson sources 56% of its managed assets from clients in North America, with customers from Europe, the Middle East, Africa and Latin America (30%) and the Asia-Pacific region (14%) accounting for the remainder. Headquartered in London, JHG is dual-listed on the New York Stock Exchange and the Australian Stock Exchange.

(Source: Morningstar)

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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.

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Akamai’s Security Business Is on Fire as CDN Business Stagnates

The key to Akamai’s recent success has been the cybersecurity solutions it now offers. As the rest of its business struggles to produce revenue growth, security solutions have been growing about 30% annually and exceeded $1 billion in sales in 2020, making up one third of Akamai’s total sales. We think management is focusing on the right things and developing great products, but we fear the firm is susceptible to competitors’ CDNs.

The loss of so much business from the big Internet customers forced Akamai to look elsewhere for growth and rely less on the media business, which went from providing 58% of total revenue in 2014 to about 47% the past four years. Akamai now has a more robust web business, where it serves customers including retailers, financial services firms, travel-related companies, government agencies and others that benefit from having high-quality, interactive websites with significant traffic. Those firms also are particularly vulnerable to various hacking and security threats, which left an opportunity for Akamai to offer security products, and it is believed it will be the primary source of future growth.

Akamai’s Security Business Is on Fire as CDN Business Stagnates

Security continues growing at a rapid pace and has shown little sign of slowing down, even as it now makes up 40% of total revenue. The content delivery network, or CDN, business, which Akamai rebranded earlier this year as its Edge Technology Group, struggles to grow and is one where little opportunity for a competitive advantage exist.The most impressive aspect of Akamai to us is its ability to acquire small cybersecurity firms and integrate them into its own business.

Financial Strength 

Akamai is in excellent financial shape. At the end of 2020, it had $350 million in cash, about $750 million in marketable securities, and $1.9 billion in debt. The company typically trades with a gross debt/EBITDA ratio around 1.5. Akamai frequently makes small acquisitions, so its cash balance can frequently fluctuate. Akamai does not pay a dividend and does not intend to. It does return some cash back to shareholders via share repurchases, but the buybacks mostly just offset share dilution. 

Bulls Say 

  • Akamai is a major player in the exploding cybersecurity industry, so rapid growth there will more than offset a stagnant core CDN business. 
  • A major shift in viewing habits to Internet-based TV and video directly increases the need for content delivery networks, of which Akamai’s is second to none. 
  • The exodus of Akamai’s six Internet platform companies has stabilized, and they now represent well under 10% of sales, so they will no longer be a meaningful drag on growth.

Company Profile

Akamai operates a content delivery network, or CDN, which entails locating servers at the edges of networks so its customers, which store content on Akamai servers, can reach their own customers faster, more securely, and with better quality. Akamai has over 325,000 servers distributed over 4,000 points of presence in more than 1,000 cities worldwide. Its customers generally include media companies, which stream video content or make video games available for download, and other enterprises that run interactive or high-traffic websites, such as e-commerce firms and financial institutions. Akamai also has a significant security business, which is integrated with its core web and media businesses to protect its customers from cyber threats

 (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.

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Nexstar Well Positioned to Capitalize on Political Ad Spending Growth

Though it’s slightly declining in importance, advertising remains an important source of revenue for Nexstar. Just under 44% of total 2019 revenue came from nonpolitical advertising. Over 70% of non-political advertising revenue is generated at the local level by selling ad time to area businesses, including restaurants, auto dealerships, and retailers, which have suffered during the pandemic. Because of its size and geographic reach, Nexstar also sells advertising nationally to auto manufacturers, telecom firms, fast-food restaurants, and retailers via their ad agencies. The larger scale of the firm, along with increased political ad spending, has increased the importance of elections. Hence it is expected that Nexstar will continue to benefit from political ad spending growth offsetting slower local and national ad growth.

Over the past decade, retransmission revenue has grown rapidly as a source of revenue for local television stations. For Nexstar, retrans revenue was 45% of total 2019 revenue, up from 25% in 2014. While the growth in retrans revenue has been and will continue to be a growth driver for local station owners, and it is projected that national network owners will continue to raise both network affiliation fees and reverse compensation fees, decreasing the bottom-line benefit to Nexstar.

Financial Strength 

Nexstar is more highly leveraged than it has been traditionally, it is in decent financial shape. Overall debt increased as a result of the Tribune Media acquisition. The firm had $7.5 billion in debt as of September 2021, up sharply from $3.9 billion at the end of 2018. Nexstar continues to use its free cash flow to lower its debt load. It spent over $425 million in the first nine month of 2021 to reduce its debt load, lowering its first-line net leverage to 2.14times at the end of the quarter from 3.52 times at the end of 2019. The new level is well below the covenant level of 4.25 times. Total net leverage is at 3.4 times, well below the management’s target of 4.0 times. The firm had no bond maturities due until 2024, though some of its $4.7 billion first-lien loans will come due over the next three years.

Bulls Say  

  • Nexstar can drive local ad revenue growth via its duopoly markets. 
  • The increased reach provided by the Tribune merger will help attract more national advertisers and grow political ad spending. 
  • Nexstar has the heft and reach to strike more advantageous retransmission agreements with pay television distributors. 

Company Profile

Nexstar is the largest television station owner/operator in the United States, with 197 stations in 115 markets. Of its 197 full-power stations, 158 are affiliated with the four national broadcasters: CBS (50), Fox (43), NBC (35), and ABC (30). The 2019 merger with Tribune made Nexstar the top broadcast affiliate for both Fox and CBS as well as the number-two partner for NBC and number three for ABC. The firm now has networks in 15 of the top 20 television markets and reaches 69 million television households. Nexstar also owns WGN, a nationwide pay-television network, and a 31% stake in Food Network and Cooking Channel.

 (Source: Morningstar)

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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.

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Technology Stocks

Lyft’s Network Effect Strengthened the Platform’s Supply and Demand in Q3; Increasing FVE to $66

that it is  valued at over $550 billion (based on gross revenue) by 2024, from estimated of $224 billion in 2019. Lyft warrants a narrow economic moat and a stable moat trend rating, thanks to the network effect around its ride-sharing platform and intangible assets associated with riders, rides, and mapping data, which can drive Lyft to profitability and excess returns on invested capital.

From a strategic standpoint, Lyft is well on its way to becoming a one-stop shop for on-demand transportation. It has tapped into the bike and scooter-sharing markets, which will be worth over $12 billion by 2029, growing 7% annually. Lyft also appears to be aggressively pursuing the autonomous vehicle route as it understands that self-driving cars may help the firm to expand its margins; without drivers, it could recognize a bigger chunk of the fare as net revenue. In contrast to Uber, Lyft is not focused on food transportation or logistics.

Financial strength

Increasing Fair Value Estimate for Lyft by 5% to $66, which represents a 46% upside from the stock’s 2nd  November closing price. Third-quarter revenue came in at $864 million, up 73% from last year, driven by more riders (51% growth from last year) and more drivers (45%). In addition, 47% more new riders were activated on Lyft than last year. Net revenue stood at 90% of 2019 third-quarter levels (up from 88% in the second quarter and from 52% last year), while riders were at 85% (up from 79% last quarter and from 72% in 2020). Net revenue per rider grew 14% year over year to $45.63, driven by increase in the number of rides requested per rider, which more than offset decline in prices.

Strong revenue growth created operating leverage and lessened operating loss to $177 million, from second quarter’s $240 million and last year’s $453 million in losses. Management expects fourth-quarter net revenue between $930 million and $940 million, which implies $3.17 billion- $3.18 billion full-year net revenue. The firm expects fourth-quarter contribution margin to come in at 59%. Lyft also guided for adjusted EBITDA between $70 million and $75 million in the fourth quarter, equivalent to a full-year adjusted EBITDA of around $90 million. 

 At the end of 2020, Lyft had $1.6 billion in net cash on its balance sheet. It burned $1.4 billion in cash from operations in 2020, significantly more than the $106 million in 2019, mainly due to the impact of the COVID-19 pandemic. By 2030, it is estimate that Lyft’s cash from operations to approach over $4 billion, outpacing top-line growth due to operating leverage. Excluding a one-time $18 million benefit, Lyft’s third-quarter adjusted EBITDA was $47 million (6% margin).

Bulls Say’s

  • Lyft’s position in the autonomous vehicle race could equalize gross and net revenue, if it no longer needs to pay drivers. 
  • Lyft will profit from its do-good brand in comparison with competitor Uber. 
  • The company’s aggregation of multimodal offerings will drive in-app stickiness, making Lyft a one-stop shop for all transport needs.

Company Profile 

Lyft is the second-largest ride-sharing service provider in the U.S., connecting riders and drivers over the Lyft app. Lyft recently entered the Canadian market in an effort to expand its market outside the U.S. Incorporated in 2013, Lyft offers a variety of rides via private vehicles, including traditional private rides, shared rides, and luxury ones. Besides ride-share, Lyft also has entered the bike- and scooter-share market to bring multimodal transportation options to users.

(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.

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Bed Bath carves out new revenue opportunities to boost performance; shares skyrocket

Narrow moat Kroger is the leading American grocer, with 2,742 supermarkets (at the end of 2020) across multiple banners. While the entry into boxes is set to be “small-scale,” a more meaningful long-term opportunity exists if the initial efforts are well-executed. Not only does this partnership offer Bed Bath an incremental distribution network for its products, but it also provides visibility to customers who want a one stop omnichannel option tied into their grocery transactions.

Second, Bed Bath is launching a digital marketplace for the home and baby categories that will offer curated third-party brand products that fit into the firm’s digital platform. While the economics of these projects were not offered, a benefit should fall to both the top line and the bottom line (as scale helps absorb costs).

Financial Strength:

The dividend yield by the company during the year 2020 was a whopping 6.3% and PE ratio was 23.5.

Bed Bath now plans to complete its $1 billion share buyback in 2021, two years ahead of schedule. Depending on the acquisition prices, Bed Bath could purchase its equity at premiums to the analyst’s fair value estimate, which would not be viewed as prudent. However, this move is appreciated by the analysts as it signals management’s long-term belief surrounding the stability of the business, and that the turnaround is well underway.

Company Profile:

Bed Bath & Beyond is a home furnishings retailer, operating around 1,000 stores in all 50 states, Puerto Rico, Canada, and Mexico. Stores carry an assortment of branded bed and bath accessories, kitchen textiles, and cooking supplies. In addition to 813 Bed Bath & Beyond stores, the company operates 132 Buy Buy Baby stores and 54 Harmon Face Values stores (health/beauty care). In an effort to refocus on its core businesses, the firm has divested the online retailer Personalizationmall.com, the One Kings Lane business and Christmas Tree Shops and That (gifts/housewares), Linen Holdings, and Cost Plus World Market.

(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.