VMware has the right products and strategy to lock customers into its ecosystem as organizations look for a simpler transition to the cloud, the ability to develop and manage applications in a secure manner across any cloud location, and choose a neutral vendor to get the best of every public cloud, private cloud, on-premises, and edge location.
VMware is hitting the pedal on its subscription and SaaS journey, expecting fiscal 2024 to be an inflection year in subs and SaaS, that should drive at least 10% annual growth for fiscal 2025. While expectations for fiscal 2023 will be coming on the next quarterly call, we believe VMware is positioned to achieve these longer-term targets as more of its core portfolio transitions from licenses to subs and SaaS to buoy growth coming from native subs and SaaS offerings, and the company gains leverage as these solutions scale.
As part of the spin-off from Dell, VMware’s special dividend to all shareholders will be $11.5 billion while retaining an investment grade credit rating. VMware also announced a newly authorized $2 billion share repurchase program that runs through fiscal 2024. While we expect most of VMware’s cash flow to go toward paying down debt taken on in conjunction with the Dell spin-off in the immediate term, we positively view the decision to authorize a new repurchase program
As part of its VMworld virtual conference, VMware showcased new releases that centered around its strategic areas of being the simple path of developing, deploying, and managing applications and IT infrastructure across multi and hybrid-cloud environments. We believe the announcements are aligned with VMware’s strategy of lowering complexities associated with moving applications to the cloud and ensuring organizations have the flexibility of moving between various cloud, on-premises, and edge locations in a simplistic fashion. In our view, VMware is uniquely positioned in a hybrid- and multi-cloud world, where enterprises want to have flexibility on their cloud choice but need a conduit to freely move between locations. We expect VMware’s bread-and-butter vSphere solution now being offered as cloud managed and via subscription could be the strong catalyst in migrating customers to subs and SaaS, as well as being a strong up and cross-selling component for the cloud strategy.
Additionally, we were excited to see further announcements around cybersecurity and edge networks. VMware has over 30,000 security customers, and we believe the push to showcase zero trust security, whereby nothing is implicitly given trust, is the correct decision. In our view, VMware’s security opportunity is underappreciated as it spans from the data center with endpoint protection and micro segmentation to the remote worker’s computer and phone. Combined with device visibility via its end user compute portfolio, we believe VMware is becoming a larger participant in the security market, and that IT infrastructure organizations will start increasingly adopting VMware’s products for zero trust environments. For edge, we expect a proliferation of applications and workloads being requested and generated closer to the end user and believe that VMware’s solutions for software-defined wide area networking and telco cloud will be sought after to enable these connections with centralized control.
(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.
Accor’s growing room share is being driven by an increased presence in higher-end luxury/upscale rooms, which were 29% of its total in 2020. This higher luxury presence diversifies Accor from its core economy/midscale exposure, which more directly competes against Airbnb and other alternative accommodations.
Accor sold a meaningful portion of its owned assets in 2018-19, leaving the remaining company with 96% of its rooms tied to asset-light franchisee and managed business as of the end of 2020, up from 58% of the mix in 2014. These asset-light rooms offer high returns on invested capital and contract lengths of 30 years that are costly to terminate, resulting in a switching cost advantage for the company. Additionally, recent asset sales have infused Accor’s balance sheet with several billion euros in cash, which provides the company enough liquidity to operate into 2022 at near zero revenue demand levels, even before tapping upon its remaining EUR 1.76 billion revolver or needing to raise financing.
Financial Strength
While the pandemic makes near-term industry travel demand uncertain, Accor’s financial health is far clearer. We calculate that since 2018, Accor’s disposal of owned assets and investments has provided between EUR 6 billion-EUR 7 billion in cash, which provides the company with enough liquidity into 2022 at near zero revenue generation, even before tapping the remaining availability on its EUR 1.76 billion under its revolver. Accor’s 2020 debt/adjusted EBITDA turned negative in 2020, as the pandemic stalled demand. This compares with 2019’s 4.5 times level. As demand fully recovers by 2023, we see Accor’s debt/adjusted EBITDA reaching 2.9 times in that year. Accor has suspended dividends and share repurchases until demand visibility improves, which we believe is being done out of extreme caution–not out of necessity.
Bulls Say’s
- Accor’s mid-single-digit share of hotel industry rooms is set to increase, as the company controls about 10% of the rooms in the global hotel industry pipeline.
- Accor’s recent investments (Fairmont and Raffles, Mantra, Mantis, Movenpick, and Atton) have diversified it in the attractive growth segment of international luxury brands.
- Accor has sold its the vast majority of its HotelInvest (owned assets) portfolio in 2018-19 and Orbis and Movenpick owned portfolio in 2020, which leaves a more asset-light company with higher margins.
Company Profile
Accor operates 762,000 rooms across over 30 brands addressing the economy through luxury segments, as of June 30, 2021. Ibis (economy scale) is the largest brand (38% of total rooms at the end of 2020), followed by Novotel (14%) and Mercure (15%). FRHI offers additional luxury and North American exposure. After the sale of the majority of HotelInvest (owned assets) in 2018-19, the majority of total EBITDA comes from HotelServices (asset-light). Northern Europe represents 23% of rooms, Southern Europe 21%, Asia-Pacific region 32%, Americas 13%, and India, Middle East, and Africa 12%. Economy and midscale are 74% of rooms.
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.
FactSet is best known for its research solutions, which include its core desktop offering geared toward buy-side asset managers and sell-side investment bankers. Research makes up about 41% of the firm’s annual subscription value, or ASV, but is FactSet’s slowest growing segment due to its maturity and pressures on asset managers.
FactSet’s fastest-growing segments are its data feed business, known as content and technology solutions, or CTS (13% of ASV), and its wealth management offerings (11% of ASV). Rather than through an interface, users of CTS access data through feeds or application programming interfaces, or APIs. FactSet’s adjusted operating margins have been range bound (31%-36%) over the last 10 years as it continues to invest in new content and occasionally brings in new acquisitions at lower margins.
Financial Strength
FactSet has no net debt ($682 million in cash compared with $575 million in debt). FactSet’s balance sheet is arguably under-leveraged, and the firm has capacity for larger acquisitions. Before COVID-19, FactSet has not been shy about share repurchases and returning cash to shareholders. FactSet’s revenue is almost all recurring in nature and as a result it’s weathered the uncertainties of COVID-19 fairly well. FactSet’s client retention is typically over 90% as a percent of clients and 95% as a percent of ASV. FactSet also has low client concentration (largest client is less than 3% of revenue and the top 10 clients are less than 15%). In addition, compared with the financial crisis, FactSet has diversified its ASV from research desktops to analytics software, wealth management solutions, and data feeds.
Bull Say’s
- FactSet has done a good job of growing organic annual subscription value, or ASV, and incrementally gaining market share.
- FactSet’s data feeds business, known as content technology solutions, or CTS, and wealth management business represent a strong growth opportunity for the firm.
- There’s been a flurry of large deals in the financial technology industry and FactSet’s recurring revenue would make it an attractive acquisition candidate.
Company Profile
FactSet provides financial data and portfolio analytics to the global investment community. The company aggregates data from third-party data suppliers, news sources, exchanges, brokerages, and contributors into its workstations. In addition, it provides essential portfolio analytics that companies use to monitor portfolios and address reporting requirements. Buy-side clients account for 84% of FactSet’s annual subscription value. In 2015, the company acquired Portware, a provider of trade execution software and in 2017 the company acquired BISAM, a risk management and performance measurement provider.
(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.
Aptiv’s high-growth technologies include advanced driver-assist systems, autonomous driving, connectivity, data services, and high-voltage electrical distribution systems for hybrids and battery electric vehicles.
Aptiv’s ability to regularly innovate and commercialize new technologies bolsters sales growth, margin, and return on investment. A global manufacturing presence enables Aptiv to serve customers around the globe, capitalizing on the economies of scale inherent in automakers’ plans to use more global vehicle platforms. Lean manufacturing discipline and a low-cost country footprint enable more favorable operating leverage as volume increases.
Aptiv enjoys relatively sticky market share, supported by integral customer relationships and long-term contracts. Engineering and design for the types of products that Aptiv provides necessitate highly integrated, long-term customer relationships that are not easily broken by competitors’ attempts at market penetration. New Car Assessment Programs are used by governments around the world to provide an independent vehicle safety rating that require the addition of ADAS features as standard equipment through the end of this decade. If automakers intend certain models to achieve a 4- or 5-star safety rating, some ADAS features must be part of that vehicle’s standard equipment to even qualify for certain rating levels.
Aptiv Lowers 2021 Guidance on Chip Shortage and Lingering COVID-19 Effect; Maintaining $105 FVE 11 Oct 2021
On Oct. 11, Aptiv reduced 2021 guidance. Due to the microchip shortage and lingering effects of COVID-19, the company sees second-half 2021 global light-vehicle production at 38 million units, down 14% from its prior guidance that had assumed 44 million units
Management’s reduced 2021 guidance includes revenue in a range of $15.1 billion-$15.5 billion, down 6% at the midpoint from $16.1 billion-$16.4 billion prior guidance. The adjusted EBIT margin guidance range was lowered to 7.6%-8.4%, contracting 205 basis points at the midpoint from the 9.9%-10.2% prior guidance range.
Aptiv could reach its previous revenue target given the firm’s substantial backlog but had anticipated sporadic customer production resulting in our margin assumption at the low end of Aptiv’s prior guidance.
We maintain our $105 fair value estimate on the shares of Aptiv after reviewing management’s reduced 2021 guidance.
Company Profile
Aptiv’s signal and power solutions segment supplies components and systems that make up a vehicle’s electrical system backbone, including wiring assemblies and harnesses, connectors, electrical centers, and hybrid electrical systems. The advanced safety and user experience segment provides body controls, infotainment and connectivity systems, passive and active safety electronics, advanced driver-assist technologies, and displays, as well as the development of software for these systems. Aptiv’s largest customer is General Motors at roughly 13% of revenue, including sales to GM’s Shanghai joint venture. North America and Europe represented approximately 38% and 33% of total 2019 revenue, respectively.
(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.
security assessments and updates, managed security, and training. Its software-as-a-service solutions include continuous security validation, managed defense, threat intelligence and automated defense. We expect robust demand for Mandiant’s services and subscriptions due to a persistent cybersecurity talent dearth and cybercriminals continually evolving their threats, causing organizations to look for assistance from experts.
By selling off its products division in October 2021, we believe Mandiant is making the prudent decision to focus on its world-class incident response, threat intelligence, and security validation offerings, as we think strong competition from other leading cybersecurity players’ holistic security platforms and spry best-of-breed upstarts hindered its legacy products’ success. In our view, being independent of its former product division could enhance its technology partner relationships and improve threat intelligence and enhanced customer engagements.
Financial Strength
Mandiant is in mediocre financial shape, with an improving free cash flow profile and its cash balance outweighing its convertible note obligations. Mandiant sold its FireEye products division for $1.2 billion in October 2021, the sale was helpful to fuel internal investments and potential shareholder returns. The company has never paid, nor has any intention to pay, a dividend. Its share count rose from 142 million shares in 2014 to 229 million in 2020, but we expect share dilution to temper in the next few years. As part of selling its products division, Mandiant announced a $500 million share repurchase program. Besides the acquisitions of Verodin for $250 million in 2019, iSight Partners for $275 million in 2016, and Mandiant (when the company was FireEye) for over $1 billion in 2013, which were partly funded with cash, most of FireEye’s funds have been used for operating expenses. FireEy has made some small acquisitions, which we presume will continue. We expect cash deployment to remain focused on operating costs, but for the firm to drive operating leverage as it matures.
Bulls Say
- With a skills gap in cybersecurity, customers may prefer to outsource security to Mandiant’s managed services.
- Mandiant’s security experts provide a unique selling proposition for breach response and security posture assessments, and the expertise could become relied upon by customers.
- Heightened threat environments and digital transformations may make organizations uneasy regarding security, driving up demand for Mandiant’s security posture validation.
Company Profile
Mandiant (formally FireEye,) is a pure-play cybersecurity firm that focuses on incident response, threat intelligence, automated response, and managed security. Mandiant’s security experts can be used on demand or customers can outsource their security to Mandiant. The California-based company sells security solutions worldwide, and sold its FireEye products division in October 2021.
(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.
quick fulfillment across channels, and tech solutions to more problems than ever before. As a result, Best Buy’s “Building the New Blue” strategy continues to resonate, with the firm leveraging its physical footprint for fulfillment and post-sale services, emphasizing its differentiated service offering, and experimenting with newer store formats, as the “one size fits all” retail model across trade areas appears antiquated.
With more than 40% of sales coming through digital channels in calendar 2020, the firm’s recent supply chain and e-commerce investments look prescient. Next-day delivery now covers 99% of U.S. zip codes, allowing the firm to compete on more level ground against e-commerce competitors, like wide-moat Amazon-as buy-online-pick-up-in-store (BOPIS) volumes, at 40% of e-commerce sales, remain challenging for online-only stores to replicate.
Best Buy Health remains intriguing, with lower price elasticity and auspicious tailwinds from an insurer pay model. However, competition in the space remains rife, as a number of moaty firms with extensive healthcare aspirations (Google, Microsoft, Amazon, Apple, Facebook) have invested heavily in the segment, as well.
Financial Strength:
The fair value of Best Buy has been increased by the analysts from $101 to $116 reflecting a longer horizon for excess returns, the time value of money, and the impact of high-single-digit anticipated comparable store sales growth through 2021. It also implies forward price/earnings of 12.1 times and an EV/2022 EBITDA of 5.4 times.
Best Buy’s financial strength is sound, with the firm maintaining a net cash position at the end of the second quarter of fiscal 2022 and an investment-grade credit rating. With leverage well under 1 turn (0.4 debt/EBITDA at fiscal 2021 year-end), strong interest coverage (46 times at year-end 2021), and no meaningful maturities until 2028, very little financial risk is seen for the firm in the near to medium term. Access to a $1.25 billion credit facility adds a further degree of insulation.
Best Buy pays an attractive dividend, with a 2.6% yield at current market prices, and we anticipate 12.8% average growth over the next five years as the firm returns to its historical dividend payout ratio target (35%-45% of earnings).
Bulls Say:
- With digital sales volumes projected to remain roughly double pre-COVID-19 levels, Best Buy should better compete for online volumes that it historically ceded to online-only competitors.
- Improving route densities should improve the margin profile of small parcel e-commerce sales, with 35% of store “hubs” now handling 70% of ship-from-store volume.
- The Best Buy Beta program should increase touchpoints with the firm’s best customers, increasing spending relative to pre-program behavior.
Company Profile:
With $47 billion in 2020 sales, Best Buy is the largest pure-play consumer electronics retailer in the U.S., with roughly 10% share of the aggregate market and nearly 40% share of offline sales, per our calculations, CTA industry, and Euromonitor data. The firm generates the bulk of its sales in-store, with mobile phones and tablets, computers, and appliances representing its three largest categories. Recent investments in e-commerce fulfillment, accelerated by the COVID-19 pandemic, have seen the U.S. e-commerce channel roughly double from prepandemic levels, with management estimating that it will represent a mid-30% mix of sales moving forward.
(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.
