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Supply Chain Disruptions Pressure Graco’s Margins

Post author By lvc-admin
Post date October 22, 2021
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The company differentiates itself by manufacturing specialized products that handle difficult-to-move liquids, often used for niche applications where competition is limited.

Graco’s relentless cost control and commitment to lean manufacturing allow it to leverage shared components across different product lines to operate its plants efficiently and lower the overall cost of its products. The high-mix, low-volume nature of the business and the relatively small size of many niche end markets act as a barrier to entry, as rivals would struggle to establish the scale needed to challenge Graco’s competitive position.

While Graco is a high-quality business protected by a wide economic moat, the main challenge is generating growth, as the firm mostly competes in mature end markets growing at low-single-digit rates. Historically, Graco’s organic growth rate has outpaced GDP growth because of its commitment to research and development, which has allowed the company to generate additional sales by developing new products, penetrating adjacent markets, and capturing market share from competitors.

We think that Graco can continue to increase sales 100-200 basis points faster than GDP growth thanks to its strategic initiatives, and we project mid-single-digit average organic sales growth over the next five years.

Demand Remains Strong but Supply Chain Issues Pressure Graco’s Third-Quarter Margins

Margins were adversely affected by supply chain interruptions and cost inflation, especially in the contractor segment.

Graco’s third-quarter sales were up 9% year over year. While demand remains robust, supply chain constraints persist and continue to pressure margins for the remainder of the year. Graco’s third-quarter gross margins compressed 110 basis points year over year due to higher product costs, including material, labor, and freight. Graco implements price increases on an annual basis, so cost inflation will likely remain a headwind in the fourth quarter. However, Graco, affords the firm strong pricing power because of customer switching costs and intangible assets .

Financial Strength

Graco maintains a healthy balance sheet. The company ended 2020 with $150 million in long-term debt while holding approximately $379 million in cash and equivalents. Debt maturities are reasonably well laddered over the next few years, with no major payments due in 2021, and we believe the firm is adequately capitalized to meet its debt obligations and maintain its dividend. Management has indicated that it will prioritize organic growth, M&A opportunities, and increasing the dividend while allocating excess capital to opportunistic share repurchases.

Bulls Say

Graco has a large installed base and leading market share across a wide range of niche products.
Graco has a healthy level of recurring revenue, generating roughly 40% of its sales from aftermarket parts and accessories, which reduces the volatility of its earnings from cyclical end markets.
The company generates strong free cash flows, averaging around 17% of revenue over the last decade.

Company Profile

Graco manufactures equipment used for managing fluids, coatings, and adhesives, specializing in difficult-to-handle materials. Graco’s business is organized into three segments: industrial, process, and contractor. The Minnesota-based firm serves a wide range of end markets, including industrial, automotive, and construction, and its broad array of products include pumps, valves, meters, sprayers, and equipment used to apply coatings, sealants, and adhesives. The firm generated roughly $1.7 billion in sales and $410 million in operating income in 2020.

(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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Snap-on Continues to Benefit From Strengthening Vehicle Repair Demand

Post author By lvc-admin
Post date October 22, 2021
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a strong brand reputation among repair professionals. Customers value Snap-on’s high-quality and strong performing products, in addition to its high-touch mobile van network.

The company’s strategy focuses on providing technicians, shop owners, and dealerships a full line of products, ranging from tools to diagnostic and software solutions. Increasing vehicle complexity will be a tailwind for diagnostic sales as auto manufacturers are already tapping the company to develop new tools to service new EV models. We think repair work will shift away from engines to batteries, sensors, wiring, and advanced driver assistance systems.

Snap-on has exposure to end markets that have attractive tailwinds. In automotive, we think demand for vehicle repair work will be strong in the near term, largely due to vehicle owners taking in their cars for overdue servicing. Additionally, we believe the high average age of vehicles will support demand for repair work to keep them on the road. On the commercial and industrial side, end markets are starting to pick up in activity; which we think means an increase in repair work for heavy-duty vehicles, planes, and heavy machinery.

Financial Strength

Snap-on maintains a sound balance sheet. The industrial business does not hold any debt, but the debt balance of the finance arm stood at $1.7 billion in 2020, along with $2.1 billion in finance and contract receivables. In terms of liquidity, we believe the company’s solid cash balance of over $900 million can help it quickly react to a changing operating environment as well as meet any near-term debt obligations from its financial services business. In addition, we also find comfort in Snap-on’s ability to access $800 million in credit facilities. Snap-on’s solid balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth but also returns cash to shareholders via dividends and share repurchases.We believe Snap-on can generate solid free cash flow throughout the economic cycle. We expect the company to generate over $800 million in free cash flow in our midcycle year, supporting its ability to return its free cash flow to shareholders through dividends and share repurchases.

Bulls Say

The growth in vehicle miles driven increases the wear and tear on vehicles, requiring more maintenance and repair work to keep them on the road, benefiting Snapon.
Auto manufacturers continue to tap Snap-on to create new tools and products to service new EV models. This alleviates concerns that EV adoption will threaten Snap-on’s viability.
Sales representatives can add new customers on their designated service routes, increasing revenue per franchise.

Company Profile

Snap-on is a manufacturer of premium tools and software for professional technicians. Hand tools are sold through franchisee-operated mobile vans that serve auto technicians who purchase tools at their own expense. A unique element of its business model is that franchisees bear significant risk, as they must invest in the mobile van, inventory, and software. At the same time, franchisees extend personal credit directly to technicians on an individual tool basis. Snap-on currently operates three segments—repair systems and information, commercial and industrial, and tools. The company’s finance arm provides financing to franchisees to run their operations, which includes offering loans and leases for mobile vans.

(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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AT&T Delivers Solid Customer Growth During Q3 as Content and Network Investments Ramp Up

Post author By lvc-admin
Post date October 22, 2021
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AT&T also benefits from its ownership of deep network infrastructure across much of the U.S. and its ability to provide a range of telecom services, particularly among enterprise customers. The plan to extend fiber to 3 million homes and businesses annually through at least 2025 builds on this position and should allow it to serve those locations directly and enhance wireless coverage in the surrounding areas.

AT&T is also positioned to benefit as Dish builds out a wireless network as the firms recently signed a 10-year wholesale agreement that generates revenue for AT&T and gives it access to Dish spectrum. AT&T shareholders will own 71% of the new Warner Bros. Discovery. Warner remains a media powerhouse in its own right, with a deep content library and the ability to reach audiences across a wide variety of platforms. The firm’s direct-to-consumer plans around HBO Max are gaining momentum, which should nicely augment and eventually supplant traditional distribution channels like cable TV. Adding Discovery’s non-scripted prowess and international presence should give the new firm wider options to craft service offerings.

Wireless customer additions were impressively strong

AT&T’s third quarter earnings displayed several of the same themes as the last few quarters: solid momentum in the wireless business, continued growth at HBO Max, and steady gains in consumer broadband, set amid financial complexity as management deconstructs the firm’s former strategy. AT&T added 928,000 net postpaid phone customers, by far its strongest quarter of the past decade, leaving its base nearly 5% bigger than a year ago. Prepaid net customer growth (351,000) was also the strongest since 2018. Average revenue per postpaid phone customer declined 0.6% year over year as the amortization of phone discounts hits this metric.

HBO Max added 1.9 million net new customers, a sharp slowdown versus past three quarters. With several European launches coming, Warner should easily hit its target of 70 million-73 million global Max customers by the end of the year. As a result, the WarnerMedia EBITDA margin was stable at 26%. On a cash basis, however, content investment has ramped up sharply during 2021, with cash spending year to date increasing more than $4 billion versus the first three quarters of 2020. Total revenue declined 5.7% year over year due to the spinoff of the DirecTV television business during the quarter. Adjusted EBITDA declined only 2.2%, however, reflecting strength across AT&T’s major operating segments. Free cash flow has totaled $18.0 billion thus far in 2021, down from $19.8 billion the year before.

Financial Strength

AT&T ended 2020 with net debt of $148 billion, down from $177 billion immediately after the Time Warner acquisition closed in mid-2018. The firm’s purchase of C-band spectrum for $23 billion, excluding around $4 billion of future clearing and relocation costs, pushed the net debt load back up to $168 billion, taking net leverage to 3.2 times EBITDA from 2.7 times. In addition, the firm has issued more than $5 billion of general preferred shares. The WarnerMedia spin-off will take $43 billion of debt with it, taking AT&T’s net debt to about $125 billion, which management expects will shake out in the range of 2.6 times EBITDA. The firm will use the Warner spin-off to adjust its dividend policy, targeting a payout of around 40% of free cash flow, down from more than 60% in 2020, leaving substantial excess cash to reduce leverage or take advantage of opportunities, including share repurchases. In total, management will target a payout of around $8 billion-$9 billion annually, down from nearly $15 billion in 2020.

Bulls Say’s

AT&T has pulled together assets no telecom company can match. The firm has direct contact with more than 170 million customers across various products, providing an opportunity to build deeper relationships.
Within the wireless business, AT&T holds the scale needed to remain a strong competitor over the long term. With Sprint and T-Mobile merging, industry pricing should be more rational going forward.
WarnerMedia holds a broad array of content rights and has a strong reputation with content creators. Shareholders will own 71% of this firm after it merges with Discovery.

Company Profile

Wireless is AT&T’s largest business, contributing about 40% of revenue. The firm is the third-largest U.S. wireless carrier, connecting 66 million postpaid and 17 million prepaid phone customers. WarnerMedia contributes a bit less than 20% of revenue with media assets that include HBO, the Turner cable networks, and the Warner Brothers studios. AT&T plans to spin Warner off and merge it with Discovery to create a new stand-alone media firm. The firm recently sold a 30% stake in its traditional television business, which serves 15 million customers and generates about 17% of sales. This business will be removed from AT&T’s financials going forward. Fixed-line telecom services provided to businesses and consumers account for about 20% of revenue, serving about 15 million broadband customers.

(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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HP Capitalizing on Record Demand for Hybrid Work PC and Printing Necessities

Post author By lvc-admin
Post date October 22, 2021
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in our view. Industry shifts toward using mobile devices as computer supplements or replacements and fewer printing tasks being performed for economic and environmental reasons may create headwinds for HP. HP’s growth initiatives will expand its market share within the PC and printing industries as consolidation occurs, but we expect cost competitiveness among the remaining vendors to limit potential upside. HP’s personal systems business, containing notebooks, desktops, and workstations yields a narrow operating margin that we do not foresee expanding.

The company’s growth focus areas of device-as-a-service, or DaaS, and expanding its gaming and premium product offerings should help stem losses from its core expertise of selling basic computer systems. HP’s contractual managed print services, in additional to focusing on graphics, A3, and 3D printers are moves in the correct direction, but the overarching trend of lower printing demand should stymie revenue growth within printing, in our view. HP is combatting the challenge of lower-cost generic ink and toner alternatives in the marketplace. The company is innovating in a mature market, but competitors can mimic HP’s successes or cause price disruption. HP’s scale may enable success within the 3D printing market; even though HP is late entrant, its movement into printing metals could cause customer adoption.

Financial Strength

Raising fair value estimate for no-moat HP Inc. to $27 from $25 after its 2021 analyst day provided fiscal 2022 earnings and free cash flow guidance that was higher. HP also confirmed its previously stated fiscal fourth-quarter guidance. HP’s commitment to returning at least 100% of free cash flow to investors through dividends and share repurchases. For fiscal 2021, HP’s dividend was increased by 29% year over year to $1 per share and modest increases in future years. HP will continue to rapidly repurchase shares, with over $8 billion authorized for buybacks remaining, which will help achieve HP’s stated earnings targets. For fiscal 2022, HP is targeting adjusted earnings of $4.07-$4.27 and at least $4.5 billion in free cash flow.

HP’s leverage to decrease as retained earnings increase and the company pays off debt on schedule. HP spends about 8%-9% of its revenue on SG&A and about 2%-3% of its revenue on R&D, the expenditure trends to remain consistent. HP has a solid track record of repurchasing shares, and the company will continue to invest in buybacks. Additionally, as part of thwarting Xerox’s 2020 takeover attempt, HP targeted $16 billion in shareholder returns, with the majority being share repurchases. At the end of fiscal 2020, the defined benefit plans and post-retirement plan were underfunded by $1.6 billion.

Bulls Say’s

Expected challenges within the printing and PCs markets may be overstated. Enterprises adopting managed print services and Device-as-a-Service over hardware purchases could expand HP’s margins.
HP’s innovation in notebooks and tablets could moderate concerns about a lengthening computer upgrade cycle. With an invigorated brand, HP is making inroads with premium and gaming PC buyers.
Existing 3D and A3 vendors could be disrupted via HP’s scale. HP’s 3D materials open platform could make HP the preferred choice while offering A3 products opens up a $55 billion market.

Company Profile

HP Inc. is a leading provider of computers, printers, and printer supplies. The company’s three operating business segments are its personal systems, containing notebooks, desktops, and workstations; and its printing segment which contains supplies, consumer hardware, and commercial hardware; and corporate investments. In 2015, Hewlett-Packard was separated into HP Inc. and Hewlett Packard Enterprise and the Palo Alto, California-based company sells on a global scale.

(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.