Categories
Shares Small Cap

Kellogg Company Benefited From Pandemic-Related Gains

Stock market information

Kellogg’s dividend growth has been modest over the past five years, at an annualized rate of 2.9%. However, Morningstar analysts anticipate a higher rate going forward: “We forecast Kellogg will raise the shareholder dividend in the mid-single-digit range annually on average during the next 10 years.”

In their Best Ideas report, the analysts made the following case for the stock, which trades at an 18% discount to fair value: “Kellogg has benefited from pandemic-related gains in the retail channel (which drives 90% of its sales) as consumers continue to spend more time at home. Even before the pandemic, we thought Kellogg was taking steps to profitably reignite its top-line trajectory: abandoning direct-store distribution in favor of warehouse delivery, divest-ing noncore fare and stock-keeping units, and upping investments in its manufacturing capabilities and brands.

Although we expect more muted gains over a longer horizon, we think the company is using the current backdrop to sharpen its edge.

“We believe actions to expand its category exposure beyond cereal (with 50% of sales now from on-trend snacks versus 20% from North American cereal) will prop up its sales growth potential longer term. Further, we like the changes to its pack formats to include more on-the-go offerings, which should allow for increased penetration in alternative outlets. We also think recent acquisitions (including smaller, niche startups like RXBAR) afford the opportunity to grease the wheels of Kellogg’s innovation cycle to more nimbly respond to ever-changing consumer trends as they relate to health and wellness and taste.”

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.

Categories
Commodities Trading Ideas & Charts

NiSource Accelerated Investment Should Lead to Growth

From the Best Ideas report:

“Natural gas utility share prices have lagged the Morningstar US Utilities Index as the economy recovers from COVID-19, due in part to environmental con-cerns about the long-term use of natural gas. However, we believe the electrification of building space and water heating has significant technical and economic obstacles and the market’s misperception of the future of nature gas results in an attractive price for NiSource shares.

“The fully regulated company derives about 60% of its operating income from its six natural gas distribution utilities and the remaining 40% from its electric utility business in Indiana. NiSource has accelerated the pace of gas pipeline restoration investment following a tragic natural gas explosion in 2018, and this will reduce risk and cut methane emissions. Its electric utility will close its last coal-fired power plant in 2028 and replace the capacity with wind, solar, and energy storage.

As a result of favorable regulation and renewable energy investments, we expect NiSource to step up its capital expenditures to almost $12 billion over the next five years, almost 40% higher than the pre-vious five years. The accelerated investment should result in better than 7% EPS growth, strong dividend growth, an improved ESG profile, and reduced risk for investors.”

NiSource Inc. is one of the largest fully regulated utility companies in the United States, serving approximately 3.5 million natural gas customers and 500,000 electric customers across seven states through its local Columbia Gas and NIPSCO brands

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.

Categories
Dividend Stocks Shares

Telstra Corp – Show Off Infrastructure Strength

The strategic intent is taking shape: segregate the AUD 200 million EBITDA-generating InfraCo Towers for potential monetisation (akin to Optus’ current moves to do the same), maintain the optionality of keeping the AUD 1.5 billion EBITDA-generating InfraCo Fixed stand-alone (as NBN mulls its future ownership), and continue refocusing the AUD 5.7 billion EBITDA-generating ServeCo on its transformation to become a more simple, efficient, and digital-centric competitor.

Rather than having investors obsess over the ebbs and flows of Telstra’s near-term earnings still suffering from the margin-crunching impact of NBN and competition, the restructure is likely to shift investor focus to the group’s underlying asset values. We expect a flurry of favourable sum-of-parts asset valuations to hit the market over the coming months, underpinned by the current low-interest rate environment and possibly “inspired” by the lucrative investment banking and advisory fees on offer.

The cloud surrounding Telstra’s near-term earnings is also clearing. Management not only reiterated fiscal 2021 earnings guidance (second-half-weighted and driven by cost-cuts, COVID-19 recovery, mobile earnings growth), but also provided encouraging signs for beyond. Return to underlying EBITDA growth in fiscal 2022 (excluding one-off NBN receipts) and an upgrade to fiscal 2023 return on invested capital, or ROIC, to 8% (from 7%) are all broadly in line with our unchanged estimates. But they are still comforting, especially after the shock of the August update when management (too conservatively) trimmed fiscal 2023 ROIC target to 7%-plus (from 10% previously).

As an illustration of the type of sum-of-parts valuation that investors may see in the coming months, traditional infrastructure entities typically trade at low-to-mid-teen EBITDA multiples. We see no reason why Telstra’s InfraCo Towers and InfraCo Fixed won’t attract similar multiples, given their recurring, predictable and indexed earnings growth (at margins of well over 60%) and likely long-term contracts with Telstra and NBN as anchor tenants. Applying, say, a 12 times multiple to both InfraCo Towers’ fiscal 2020 pro forma AUD 200 million EBITDA and InfraCo Fixed’s AUD 1.5 billion EBITDA, and 8 times to the still-rationalising ServeCo’s AUD 5.7 billion EBITDA produces total enterprise value of AUD 66.0 billion. Subtract AUD 16.8 billion in net debt and one can come up with an asset-based valuation of around AUD 4.10 per share for Telstra. And we are likely to witness much more creative ways to boost this value from the investment community in the future. Our unchanged AUD 3.80 fair value estimate for Telstra will remain based on a discounted cash flow methodology.

 (Source: Morningstar)

Disclaimer

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.

Categories
Dividend Stocks Shares

Merck MRK High-Margin Drugs and Vaccines

Human hand stacking generic coins over a black background with hexagonal golden shapes. Concept of investment management and portfolio diversification. Composite image between a hand photography and a 3D background.

Management expects Organon, after it’s spun off in the second quarter, “to pay a meaningful dividend that will be entirely incremental to that of Merck.” It also intends to keep Merck’s payout ratio in the 47%–50% range. Based on consensus earnings for 2021 and 2022, Merck should be able to maintain solid dividend growth while remaining within that range.

“Merck’s combination of a wide lineup of high-margin drugs and vaccines along with a pipeline of new drugs should ensure strong returns on invested capital over the long term. Merck is well positioned to gain further entrenchment in immuno-oncology with Keytruda, which holds a strong first-mover advantage in the large first-line non-small-cell lung cancer market with excellent data. Also, we expect Keytruda to gain ap-provals in early-treatment settings, which should open up underappreciated sales potential.

“Merck’s vaccines look ready to drive further gains, led by human papillomavirus vaccine Gardasil, which continues to generate excellent clinical data. While the firm’s late-stage pipeline lacks several new blockbusters, we expect early-stage assets focused on cancer to move through trials rapidly.

Even though Merck faces some patent losses over the next five years, including diabetes drug Januvia, we expect new drug launches and gains from currently marketed products to more than offset generic competition.

Merck & Co., Inc., d.b.a. Merck Sharp & Dohme outside the United States and Canada, is an American multinational pharmaceutical company headquartered in Kenilworth, New Jersey. It is named after the Merck family, which set up Merck Group in Germany in 1668. Merck & Co. was established as an American affiliate in 1891. 

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.

Categories
Property

Transurban Group – Recovery Is a Little More U-Shaped Than Previously Expected

Portrait of Vietnamese young stock broker talking on the phone with coworker

The weighted average concession life of the portfolio is around 30 years. Under the leadership of Scott Charlton, Transurban has aggressively expanded its portfolio through a combination of acquisitions and greenfield projects. Toll roads have high barriers to entry and benefit from rising traffic volumes and tolls, which increase in line with the consumer price index or higher. Traffic volumes are recovering strongly from COVID-19 lockdowns. Nonetheless, distributions fell 20% in fiscal 2020 and are not expected to fully recover until fiscal 2023.

Key Considerations

  • Cash flow is typically defensive and increases strongly, as solid revenue growth is leveraged over a fixed cost base. Profitability benefited from falling debt costs because of low global bond rates, but we think rates are likely to trend higher. Coronavirus remains a headwind.
  • The core Australian roads generate strong returns on initial investments. Upgrades, such as widening these assets, should also generate good risk-adjusted returns.
  • Finite life concessions require the firm to add new roads to extend its existence, introducing high forecasting risk for developments and leading to the need for ongoing equity issues.
  • Core Australian roads generate defensive revenue that grows with traffic volumes and toll price increases, which are at a minimum pegged to inflation.
  • Solid revenue growth and a high fixed-cost base translate to strong cash flow and distribution growth.
  • Transurban owns high-quality infrastructure assets with limited regulatory risk.
  • There are attractive organic growth opportunities, such as potential widening of roads.
  • Building and acquiring new roads can destroy equity value as a result of overbidding and overly optimistic traffic forecasts.
  • Transurban faces risk from the coronavirus outbreak, given high financial leverage coupled with a major hit to revenues as countries go into lockdown to prevent the spread of the disease.
  • Bond yields are likely to trend higher, detracting from profitability and the attractiveness of its distribution yield.
  • Transurban is expanding aggressively late in the cycle, increasing risk.

 (Source: Morningstar)

Disclaimer

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.