Business Strategy & Outlook
Since opening its first fasteners store in 1967, Fastenal has built one of the largest industrial distribution businesses in the United States. For many years, Fastenal’s growth story was driven by its branch count, which now stands just under 1,800. While this expansive footprint is still an important component of Fastenal’s business model, other strategies–including expanding its product portfolio, its vending and inventory management services, and, most recently, its on-site program–have become increasingly important growth drivers. The benefits of Fastenal’s vending, inventory management, and on-site services are twofold: Not only do these services drive incremental revenue, they also embed Fastenal in its customers’ procurement processes, which supports higher retention rates and pricing power. Fastenal has a first-mover advantage in both vending and on-site services, introducing the former in 2008 and the latter in 1992 (although the on-site strategy did not become a focused strategy until the past few years), and a long growth runway for both offerings can be seen. In addition to growth through its vending and on-site initiatives, Fastenal is well positioned to benefit from customer consolidation trends.
In recent years, customers have been consolidating their maintenance, repair, and operations, or MRO, spending with large distributors to leverage their purchasing power and increase operational efficiency. With its national scale, broad product portfolio, and inventory management services, Fastenal can capitalize on this trend and take market share from smaller and less capable distributors. Because Fastenal’s sales mix is increasingly skewing more toward large national accounts, on-site programs, and more price-competitive MRO products, the company’s gross margins are likely to come under pressure. However, the combination of higher sales volume and containment of selling, general, and administrative costs provides Fastenal the opportunity to realize strong operating leverage and expand operating margins. Fastenal’s operating margin is to reach 21% by midcycle year.
Financial Strengths
Fastenal has an outstanding debt balance of approximately $390 million. It is leveraged at only 0.1 times 2021 EBITDA, which is very conservative relative to the other industrial distributors. Fastenal’s earnings provide substantial headroom to service debt obligations. During fiscal 2021, Fastenal incurred only about $10 million of interest expense and generated about $1.4 billion of EBITDA, which equates to an extremely comfortable interest coverage ratio. Even with its expansive store footprint and cyclical end markets, Fastenal has a proven ability to generate free cash flow (defined as operating cash flow less capital expenditures) throughout the cycle. Indeed, it has generated positive free cash flow every year since 2003. Given its conservative balance sheet and consistent free cash flow generation, Fastenal’s financial health is satisfactory.
Bulls Say
- Vending and on-site programs should provide a long growth runway for Fastenal.
- Fastenal can capitalize on its national scale, broad product portfolio, and inventory-management services to take market share from smaller and less capable distributors.
- Despite serving cyclical end markets, Fastenal’s business model generates strong free cash flow throughout the cycle. Fastenal is likely to continue to use its cash flow to fund a shareholder-friendly capital allocation strategy.
Company Description
Fastenal opened its first fastener store in 1967 in Winona, Minnesota. Since then, Fastenal has greatly expanded its footprint as well as its products and services. Today, Fastenal serves its 400,000 active customers through approximately 1,760 branches, over 1,400 on-site locations, and 14 distribution centers. Since 1993, the company has added other product categories, but fasteners remain its largest category at about 30%- 35% of sales. Fastenal also offers customers supply-chain solutions, such as vending and vendor-managed inventory.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Business Strategy & Outlook
Lam Research is a major vendor of semiconductor fabrication tools. The firm is the leader in dry etch, a critical step in the chip making process where material is selectively removed. Lam has a wide economic moat as a result of cost advantages and intangible assets related to equipment design. Lam’s leadership position creates scale advantages that fuel research and development spending at levels only Applied Materials and Tokyo Electron can match. At the end of 2021, Lam had an installed base of 75,000 units, up from 40,000 in 2015. This large installed base creates stickiness and offers Lam an intimate look into problems faced by chipmakers, providing valuable information it can use to implement solutions and additional capabilities in future tools. Chipmakers that have continued along the trajectory prescribed by Moore’s law have endured significant challenges in terms of cost and complexity. Equipment providers are vital to making the pursuit more economical via advanced chip manufacturing tools. Lam has benefited from the sharp rise in etch, deposition, and clean steps required as a result of major inflections, including FinFET transistors and planar to 3D NAND, that feature multiple patterning and vertical layers well suited for Lam’s advanced etch and deposition offerings.
Consequently, Lam is poised to grow faster than the overall equipment industry, as it can capture a larger share of the market with technically superior tools. The volatile nature of demand for semiconductors directly affects the cyclicality of the equipment market. Lam, along with its peers, has benefited from an increase in service revenue in recent years, which will mitigate the volatility of equipment orders. Specifically, maintenance and engineering costs and spare parts are tied into service contracts that deliver a stable revenue stream distinct from tool purchases. As traversing Moore’s law becomes increasingly difficult, the service segment will grow as chipmakers increase their reliance on field service engineers from Lam and its peers, while also helping entrench vendors’ installed base of tools at customer facilities.
Financial Strengths
Lam is in a solid financial position. As of March 27, 2022, the firm had $4.2 billion in cash and equivalents, versus $5.0 billion in long-term debt. The firm typically keeps a substantial cash position on its balance sheet, which is appropriate for chip equipment firms. During cyclical downturns, the cash cushion allows Lam to continue investing heavily in research and development in order to maintain its leading technology and competitive positions.
Bulls Say
- Lam is a leader in the dry etch and deposition markets and counts major chipmakers, such as Samsung Electronics and Taiwan Semiconductor Manufacturing, as customers.
- Lam has achieved superior share gains in recent years due to its strong equipment offerings in etch and deposition, combined with the 3D NAND and multiple patterning inflections that require more of those particular tools.
- Demand is strong for advanced etch and deposition tools, because they help chipmakers continue down the path prescribed by Moore’s law.
Company Description
Lam Research manufactures equipment used to fabricate semiconductors. The firm is focused on the etch, deposition, and clean markets, which are key steps in the semiconductor manufacturing process, especially for 3D NAND flash storage, advanced DRAM, and leading-edge logic/ foundry chipmakers. Lam’s flagship Kiyo, Vector, and Sabre products are sold in all major geographies to key customers such as Samsung Electronics, Micron, Intel, and Taiwan Semiconductor Manufacturing.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Business Strategy & Outlook
While COVID-19 and inflation have potential to impact near-term travel demand in many regions of the world, Marriott can be expected to expand room and revenue share in the hotel industry over the next decade. The constructive stance is driven by a favorable next-generation traveler position supported by renovated and newer brands, as Marriott has added several new brands since 2007 and renovated a meaningful percentage of core Marriott and Courtyard hotels in the past few years. Also, Marriott is having an industry-leading loyalty program, with over 160 million members (as of the end of 2021), which incentivizes third-party hotel owners to join the company’s brands. Additionally, the acquisition of Starwood (closed in September 2016) has strengthened Marriott’s long-term brand advantage, as Starwood’s global luxury portfolio complemented Marriott’s dominant upper-scale position in North America. A room growth for Marriott can be seen averaging mi single digits over the next decade (above the 1.8% increase model for the U.S. industry the next 10 years), supported by the company having 18% of all global industry rooms under construction, well above its high-single-digit existing unit share, as of the end of 2021.
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 cancellation costs for owners. Cyclicality and overbuilding in the industry present risks for shareholders. Typically, U.S. lodging recoveries last five to nine years, but the upcycle ending 2019 lasted 10 years.
Financial Strengths
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 acted 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 travel demand recovered in 2021, so too did Marriott’s debt leverage, with debt/adjusted EBITDA ending the year at 4.5 times. If demand once again plummeted, Marriott has enough liquidity to operate at zero revenue through 2023. The banking partners will work to provide Marriott any additional liquidity as needed, given the company holds a brand advantage (source of its narrow moat), which will drive healthy cash flow as travel demand returns. Marriott’s debt/adjusted EBITDA is to average 2.0 times over the next five years. The company is generating over $15.0 billion in free cash flow (operating cash flow minus capital expenditures) over the next five years (2022-26), which it will use to reduce debt, fund dividends equal to around 35% of its earnings during that time (dividend payments have resumed in 2022), as well as repurchasing shares (repurchase activity has started again in 2022).
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. The constructive stance is formed by higher income occupations being the most likely industries to continue to work from remote locations.
- Marriott has a high exposure to recurring managed and franchised fees, which have high switching costs and generate strong ROICs.
Company Description
Marriott operates about 1.5 million rooms across roughly 30 brands. At the end of 2021, luxury represented 10% of total rooms, while full service, limited service, and timeshares were 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)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.