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M&T Bank reported solid third quarter earnings; Aims to create value via acquisition with People’s United

Post author By lvc-admin
Post date October 18, 2021
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efficient operations, and savvy acquisitions. The bank’s main stronghold is its commercial real estate operations in the northeast. M&T has a history of good underwriting and deep, on the ground relationships. M&T has also recently announced it will acquire People’s United Bank, further expanding its geographical reach in the northeast and its product offerings. We like the pricing of the deal and expected cost savings, and hope the acquisition will lead to some added organic growth in the future as well.

M&T derives about two thirds of its income from net interest income, and with the bank’s cheaper deposit base, it is more sensitive to movements in interest rates. The remaining one third of revenue comes from non banking businesses like wealth management or deposit service fees. Much of the company’s loan book is composed of commercial loans.

The bank has an especially strong position within its commercial real estate operations in the northeastern United States. M&T has one of the largest CRE exposures under our coverage, and this has come under more scrutiny as the pandemic has developed. While certain CRE assets have come under unique pressure, M&T’s underwriting remains solid, and we expect losses to be very manageable.

M&T Bank reported solid third quarter earning; the acquisition and integration of People’s United remains the next catalyst for value creation for M&T Bank

M&T Bank reported solid third-quarter earnings. The bank beat the FactSet consensus estimate of $1.64 per share with reported EPS of $1.90. This equates to a return on tangible common equity of 17.5%. M&T Bank benefitted from a provisioning benefit once again as chargeoffs remain exceptionally low and the bank released some additional reserves.

Nonperforming assets remained stable. Expenses, however, came in a bit hotter than expected, up roughly 9% year over year during the quarter. Management attributed most of this to higher incentive based compensation, which is understandable. On the positive side, fees have done quite well. Net interest income, meanwhile, was essentially in line with our expectations.

The acquisition and integration of People’s United remains the next catalyst for value creation for M&T Bank.

Key attraction of the transaction

Unique strategic position and enhanced platform for growth: The merger will create the leading community-focused commercial bank with the scale and share to compete effectively.
Shared commitment to local communities: Both companies have been long recognized for their community commitments and longstanding support of civic organizations.
Compelling financial impacts: M&T expects the transaction to be immediately accretive to its tangible book value per share. It is further expected that the transaction will be 10-12% accretive to M&T’s earnings per share in 2023, reflecting estimated annual cost synergies of approximately $330 million.

Financial Strength

We think M&T is in good financial health. The bank withstood the crisis better than peers and has maintained a credit cost advantage over the current economic cycle. Deposits fund roughly three fourths of total assets. We believe the bank is adequately capitalized, with a common equity Tier 1 ratio over 10% as of September 2021.

Bull Says

M&T’s acquisition of People’s United was at a good price and should drive additional future growth.
A strong economy, higher inflation, and potentially higher rates are all positives for the banking sector and should propel results even higher.
M&T has loyal customers, and good management, and investors shouldn’t have to worry much about being burned by bad underwriting.

Company Profile

M&T Bank is one of the largest regional banks in the United States, with branches in New York, Pennsylvania, West Virginia, Virginia, Maryland, Delaware, and New Jersey. The bank was founded to serve manufacturing and trading businesses around the Erie Canal.

(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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Sensient Is Well Positioned to Meet Growing Demand for Natural Ingredients

Post author By lvc-admin
Post date October 18, 2021
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Sensient has been focused on optimizing its portfolio, divesting less profitable, commodity-like business lines primarily in the flavors and extracts segment.Longer term, we expect consumer preferences will continue to shift toward natural flavors and colors and away from synthetic ingredients. However, with a growing natural ingredient portfolio, we think the company is well positioned for the transition.

Although Sensient serves both large and small customers, it primarily targets middle-market customers rather than large consumer packaged goods customers. The company’s most valuable business relationships involve the manufacture of customized formulations from proprietary technologies that allow Sensient to be a sole supplier.

Sensient reports three segments. The color segment is the largest .This business produces natural and synthetic color systems for a variety of end markets, including food, beverage, cosmetics, and pharmaceutical applications. The flavors and extracts segment (a little more than 40% of profits) sells both natural and synthetic taste and texture ingredients.

Financial Strength

Sensient is in very good financial condition. At the end of the third quarter of 2021, net debt/adjusted EBITDA was around 2 times. Sensient has historically remained safely below the leverage ratio and above the coverage ratio.We forecast the company will continue to generate healthy free cash flow, which it has consistently done over the last decade. Sensient should have no problem servicing existing debt. The company has only a small pension liability and no other major liabilities that will require material cash outflows in the coming years. Sensient has historically maintained a low cash balance, preferring to return excess cash to shareholders via dividends (management targets a 30%-40% payout ratio) or share repurchases.

Bull Says

Sensient’s restructuring program will lead to materially higher margins and ROICs as low-margin facilities are closed.
The demand shift to natural colors from synthetic colors should drive higher volume for Sensient, boosting profits.
Management’s 20% long-term operating margin goal is achievable as specialty colors and flavors will generate an increasing proportion of total sales, driving a mix shift-based margin expansion.

Company Profile

Sensient Technologies manufactures and markets natural and synthetic colors, flavors, and flavor extracts. The company has a widespread network of facilities around the globe, and its customers operate across a variety of end markets. Sensient’s offerings are predominantly applied to consumer-facing products, including food and beverage, cosmetics and pharmaceuticals.

(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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Air Products contribute long-term contract and high switching cost to gas industries

Post author By lvc-admin
Post date October 18, 2021
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Industrial gases typically account for a relatively small fraction of customers’ costs but are a vital input to ensure uninterrupted production. Demand for industrial gases is strongly correlated to industrial production. As such, organic revenue growth will largely depend on global economic conditions.

Since Seifi Ghasemi was appointed CEO in 2014, new management has launched several initiatives that drastically improved Air Products’ profitability, raising EBITDA margins by over 1,500 basis points. Air Products is poised for rapid growth over the next few years due to its 10-year capital allocation plan. The industrial gas firm aims to deploy over $30 billion during the decade from fiscal 2018 through fiscal 2027 and has already either spent or committed roughly $18 billion of that amount.

Financial Strength

Narrow-moat-rated Air Products announced that it will invest $4.5 billion in a blue hydrogen complex in Louisiana, expected on stream in 2026. The project will produce over 750 million standard cubic feet per day of blue hydrogen. A portion of the blue hydrogen will be injected into Air Products’ existing 700-mile Gulf Coast pipeline network, which is fed by around 25 projects including the firm’s Port Arthur facility (a blue hydrogen project that has been operational since 2013). Air Products recently announced its updated capital deployment plan and aims to invest over $30 billion during the 10-year period from fiscal 2018 to fiscal 2027.

Management has indicated that maintaining an investment-grade credit rating is a priority. The company has used proceeds from its divestments of noncore operations (including the spin-off of its electronic materials division as Versum Materials in 2016 and the sale of its specialty additives business to Evonik in 2017) to reduce debt and fuel investment.The company held roughly $8 billion of gross debt as of Dec. 31, 2020, compared with $6.2 billion in cash and short-term investments. Liquidity includes an undrawn $2.5 billion multicurrency revolving credit facility, which is also used to support a commercial paper program.

Bulls Say’s

Air Products is poised for rapid growth due to business opportunities that drive its ambitious $30 billion capital allocation plan.
After acquiring Shell’s and GE’s gasification businesses in 2018, Air Products is the global leader in this segment and is poised to benefit from growing coal gasification in China and India.
The company’s focus on on-site investments will result in a derisked portfolio with more stable cash flows.

Company Profile

Since its founding in 1940, Air Products has become one of the leading industrial gas suppliers globally, with operations in 50 countries and 19,000 employees. The company is the largest supplier of hydrogen and helium in the world. It has a unique portfolio serving customers in a number of industries, including chemicals, energy, healthcare, metals, and electronics. Air Products generated $8.9 billion in revenue in fiscal 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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Netflix’s Growth Will Increasingly Come From Outside the U. S

Post author By lvc-admin
Post date October 18, 2021
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fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

The firm has used its scale to construct a massive data set that tracks every customer interaction. It then leverages this customer data to better purchase content as well as finance and produce original material such as “Stranger Things.

We believe that many consumers use, and will continue to use, SVODs like Netflix as a complementary service, especially as SVOD prices increase and pay television bundle prices decrease. Larger firms like Disney and WarnerMedia have launched their own SVOD platforms to compete against Netflix. We think this usage pattern and increased competition will constrain Netflix’s ability to raise prices without inducing greater churn.

We expect that Netflix will expand further into local-language programming to offset the weakness of its skinny offering in many countries. This will likely generate a competitive response from the firm’s global and local rivals, which will augment their own first-party content budgets. In turn, we think Netflix’s international expansion will continue to hamper margin expansion.

Netflix’s Growth Will Increasingly Come From Outside the U. S.

Netflix reported decent third-quarter results as subscriber growth beat the low guidance issued a quarter ago but this is below the previous two years. The lower subscriber growth reflects not only saturation in its largest markets but strong competition in the regions with the most potential growth remaining, including Latin America and India.

While we now project that EMEA will have more members than the U.S. by the first quarter of 2022, its revenue and implied margin contribution will remain much lower as its ARPU only hit $11.65 in the quarter. We continue to project price increases for the region but still expect a large gap between it and the U.S. to persist over the next five years.

Asia-Pacific, Netflix’s supposed long-term growth engine, increased revenue year over year by an impressive 31% in the quarter but ARPU remained under $10 and actually declined sequentially. We expect ARPU to decline going forward as the firm rolls out low-price plans in more countries across the region.

Financial Strength

Netflix’s financial health is poor due to its weak free cash flow generation, large number of content investments that require outside funding (primarily debt), and content obligations. Debt has been taken on to fund additional content investments and international expansion. The company’s weak free cash flow due to this spending is a concern, as we don’t see the need to spend decreasing in the near future. As of June 2021, Netflix has $14.9 billion in senior unsecured notes that do not have borrowing restrictions, but a relatively small amount due in the near term ($500 million due 2021, $700 million due 2022, $400 million due 2024, and $800 million due 2025), as the firm generally issues debt with a 10-year maturity. Netflix also has a material quantity of noncurrent content liabilities ($2.7 billion recognized on the balance sheet and over $15 billion not yet reflected on the balance sheet).

Bull Says

Netflix’s internal recommendation software and large subscriber base give the company an edge when deciding which content to acquire in future years.
Netflix has built a substantial content library that will benefit the firm over the long term.
International expansion offers attractive markets for adding subscribers.

Company Profile

Netflix’s primary business is a streaming video on demand service now available in almost every country worldwide except China. Netflix delivers original and third-party digital video content to PCs, Internet-connected TVs, and consumer electronic devices, including tablets, video game consoles, Apple TV, Roku, and Chromecast. In 2011, Netflix introduced DVD-only plans and separated the combined streaming and DVD plans, making it necessary for subscribers who want both to have separate plans.

(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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Weatherford to benefit from oil market’s recovery from COVID-19

Post author By lvc-admin
Post date October 18, 2021
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When CEO Mark McCollum came aboard in March 2017, many wondered whether it was the dawn of a new era for Weatherford International. McCollum made solid progress in turning Weatherford around in 2018, with rapid improvement in profitability thanks to the companywide transformation plan. But this improvement wasn’t quick enough for the highly leveraged company’s creditors, which forced Weatherford into bankruptcy in 2019.

Weatherford emerged from bankruptcy in December 2019 having shed most of its debt. Shortly after, the coronavirus oil market downturn battered the company just as it was getting back on its feet. Given many abortive attempts at turning Weatherford around, many investors are refusing to give the company another chance. While McCollum left in 2020, he laid the groundwork for improvement that should be carried on by the company’s new leadership under CEO Girish Saligram.

Financial Strength:

Weatherford’s balance sheet is somewhat weak, but it is expected to ride out the rest of the oil market downturn without major financial distress. Weatherford has about $1.2 billion in available cash and no debt coming due until 2024. The company posted solid free cash flow of $135 million in 2020 despite very weak oil markets. In 2021, the company won’t have the benefit of working capital inflows, but it is still expected to be slightly positive in total free cash flow. In any case, it should have enough liquidity to meet any cash outflows as COVID-19 wreaks havoc on oil markets in 2021. Improving profitability in subsequent years should drive Weatherford solidly into positive free cash flow territory, despite a very heavy interest burden.

Bulls Say:

Weatherford has some hidden gems in its portfolio whose value will be revealed with the divestiture of loss-making business lines and streamlining the company.
The company’s managed pressure drilling technology will become increasingly sought after as wellbores move into deeper, harsher environments.

Company Profile:

Weatherford International provides a diversified portfolio of oilfield services, with offerings catering to all geographies and different types of oilfields. Key product lines include artificial lift, tubular running services, cementing products, directional drilling, and wireline evaluation.

(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.