Tag: Recommendations

Categories
Technology Stocks

Envestnet’s Wealth Solutions Had Secular Growth but Margin Expansion Has Been Lackluster

Business Strategy & Outlook:   

Envestnet was founded in 1999 to offer independent advisors access to a comprehensive wealth-management platform. The firm’s founder, the late Jud Bergman, recognized two major trends in the industry. The first was the move away from the wirehouse firms. The second was the move from a commission-based toward a fee-based model. Wealth solutions represents about 75% of the firm’s net revenue.About half of this consists of asset-based fees with the fee rate dependent on the level of services provided. The factors such as product mix, new client onboardings, and switches from an asset-based to subscription model can affect the fee rate. The other half of wealth solutions include the Tamarac platform geared toward registered investment advisors, subscription software to enterprises, recently acquired financial planning software MoneyGuidePro, and professional services.

Tamarac’s popularity with RIAs has been a strong driver of growth. In 2015, Envestnet acquired Yodlee, which makes up the firm’s data and analytics segment. Yodlee’s revenue consists of its core data aggregation, alternative data to asset managers, and analytics to advisory firms. This segment is less moaty, as Yodlee faces competition from Plaid and MX Technologies as well as many alternative data providers. Following Visa’s announced (but ultimately nixed) acquisition of Plaid at a high, media reports have indicated that Envestnet is looking to sell Yodlee. For now, Envestnet is comfortable keeping Yodlee in its product portfolio. Envestnet believes marketplace exchanges can add to growth. In 2019, the company launched an insurance exchange with six national carriers to connect an advisor’s clients with annuity products. In addition to the insurance exchange, Envestnet launched Advisor Credit Exchange to help advisors address the lending needs of their clients. Envestnet is also focusing on growing asset-based revenue by providing value-added services such as impact portfolios, direct indexing, and tax overlays

Financial Strengths:  

Envestnet’s financial strength is sound. The company has used leverage for acquisitions. As of Dec. 31, 2021, Envestnet has approximately $429 million of cash and $849 million in convertible debt. This equates to a net leverage ratio of about 1.6 times EBITDA. While it’s true that the firm’s wealth solutions segment contains asset-based revenue, net of direct asset-based cost of revenue, these fees are less than 40% of the firm’s revenue. In addition, it is estimated that 40% of Envestnet’s AUM/A are not in equities. And given the fact that most of Envestnet’s remaining revenue is essentially recurring, with the company’s debt levels.

Bulls Say:

  • Envestnet has leading market share, and its product suite offers greater breadth than competitors.
  • Envestnet could pursue strategic alternatives with Yodlee.
  • Envestnet should continue to benefit from the trend of advisors leaving wire house firms to start their own practices and the shift from commission-based to fee- based advice.

Company Description:

Envestnet provides wealth-management technology and solutions to registered investment advisors, banks, broker/dealers, and other firms. Its Tamarac platform provides trading, rebalancing, portfolio accounting, performance reporting, and client relationship management software to high-end RIAs. Envestnet’s portfolio management consultants provide research services and consulting services to assist advisors, including vetted third-party managed account products. In November 2015, Envestnet acquired Yodlee, a provider of data aggregation.

(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.

Categories
Technology Stocks

Xero Continuing to Create Value Despite Technology Sector Malaise

Business Strategy and Outlook

Xero has grown quickly since incorporation in 2006 to become the largest provider of accounting software as a service, or SaaS, to the SME market in Australia and New Zealand. The company is expected to continue leveraging this strong position to expand quickly in other regions such as the United Kingdom and the United States. SME accounting software users have historically shown little inclination to switch providers, and Xero enjoys annual customer retention rates of over 80%. The inconvenience and operational risks of switching accounting software providers have tended to outweigh the relatively modest potential benefits. The highly fragmented nature of SME and accountant customers and the relatively small annual value per customer mean that suppliers need scale to support ongoing research and development and marketing costs.

Incumbent providers typically have economic moats based on customer switching costs, with large enterprise software providers, like SAP and Oracle, reluctant to enter the SME market because of the level of customer fragmentation and switching costs. However, the transition from desktop- to cloud-based products offers a rare opportunity for relatively new providers to win market share via the transition of customers to cloud-hosted SaaS products that offer material productivity improvements. Switching costs are expected to recapture their earlier resilience once customers transfition to cloud products and accounting software becomes more integrated with third-party software. Relatively low profits are an acceptable price to pay for rapid growth and associated strategic benefits. The capital-light business model should enable returns on invested capital, or ROICs, to comfortably exceed the weighted average cost of capital, or WACC, from fiscal 2020, supporting the narrow economic moat rating. A revenue CAGR of 15% is forecasted over the next decade, driven by an 10% CAGR in subscribers, and an average revenue per user, or ARPU, CAGR of 3%.

Financial Strength

Xero is in good financial health but needs to maintain high revenue growth rates to increase profits and justify its market capitalisation. The company had net cash of NZD 51 million and available liquid resources of NZD 1.1 billion as at March 31, 2022. EBIT margins are projected to expand to around 26% by fiscal 2032, in line with peer companies. As the company matures, the capital-light business model is anticipated to enable strong cash generation. Strong customer retention rates of over 80% should mean earnings volatility will be relatively low in the long term.

Bulls Say’s

  • Xero is experiencing strong revenue and customer growth driven by the transition of desktop accounting software to the cloud, a trend projected to continue for at least the next decade. 
  • Xero operates in the software sector, which is typically an industry with low capital intensity and strong cash generation. Xero is expected to generate strong returns on invested capital and free cash flow in the long term. 
  • Xero has already achieved dominant positions in the New Zealand and Australian cloud accounting markets and is a leading competitor in the U.K. and U. S. markets.

Company Profile 

Xero is a provider of cloud-based accounting software, primarily aimed at the small and medium enterprise, or SME, and accounting practice markets. The company has grown quickly from its base in New Zealand and surpassed local incumbent providers MYOB and Reckon to become the largest SME accounting SaaS provider in the region. Xero is also growing internationally, with a focus on the United Kingdom and the United States. The company has a history of losses and equity capital raisings, as it has prioritised customer growth.

(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.

Categories
Technology Stocks

Labor Constraints Derailing Norfolk Southern’s Carloads but Improvement Likely and Pricing Healthy

Business Strategy & Outlook

Norfolk Southern is a well-managed enterprise, and from the start of the rail renaissance in 2004 through 2008, it posted the highest margins among U.S. Class I railroads. However, its operating ratio

(expenses/revenue) deteriorated to 75.4% in 2009 and remained stuck between 69% and 73% from 2010 to 2015. This pales in comparison to progress made by peers Union Pacific and Canadian Pacific, which lack Norfolk’s exposure to Appalachian coal. However, by 2017 the rail was back on track, and it has achieved record ORs in each year since, including an adjusted 60.1% in 2021. In recent years, Norfolk renewed its commitment to pricing discipline and margin gains, particularly via precision railroading initiatives, which have driven more efficient use of locomotive assets, labor, and fuel. The incremental gains as the firm continues to refine its PSR playbook. Of note, in late 2019, former Canadian National CEO Claude Mongeau (2010-16) joined Norfolk’s board of directors to help bolster the rail’s PSR efforts.

Norfolk hauls coal from Illinois and Appalachian mines, and transfers Powder River Basin coal eastward from the Western rails. Thus, coal-demand headwinds and changes in environmental regulations will probably remain a factor over the long run, despite near-term improvement off pandemic lows. That said, coal runs in unit trains hauling exclusively coal (often using customers’ cars), thus the rail can continue to adjust its train and crew starts to match demand conditions. Norfolk generated healthy volume growth near 5% on average within its intermodal franchise over the past decade. In fact, intermodal revenue surpassed coal in 2014 and is now the highest-volume segment (roughly 60% of 2020-21 carloads versus 9% for coal). Capital projects targeting capacity and velocity improvement have helped the rail capitalize on net positive truck-to-rail conversion activity over the years. Norfolk’s domestic intermodal volume face labor and congestion-related constraints lingering into first-half 2022, but the intermodal as a key long-term growth opportunity.

Financial Strengths

At year-end 2021, Norfolk Southern held an ample $839 billion of cash and equivalents compared with $13.8 billion of total debt ($12.1 billion in 2020). Historically, the rail generates steady free cash flow, despite investing heavily in its network (capital expenditure averaged 16% of revenue over the past five years). Norfolk deploys this cash on dividends and share repurchases, and occasionally borrows to boost these returns to shareholders. Share repurchases eased briefly 2020 due to pandemic risk to cash flow, but they ramped back up by year-end, and the repurchase activity to remain active in the years ahead. Norfolk Southern operates with a straightforward capital structure composed mostly of senior notes. In terms of liquidity, the rail also has an $800 million revolving credit facility and a $400 million accounts receivable securitization program for short-term needs–both programs are fully available and undrawn as of third-quarter 2021.

Bulls Say

  • Norfolk Southern reignited operating ratio improvement in 2016 after stagnating over the preceding six years. With help from precision railroading, the rail reached OR records in each of the past four years.
  • Norfolk Southern runs one of the safest railroads in the U.S., as measured by injuries per hours worked; this boosts service levels and helps to keep costs down.
  • Compared with trucking, shipping by rail is less expensive for long distances (on average) and is four times more fuel-efficient per ton-mile. These factors should help support longer-term incremental intermodal growth.

Company Description

Class-I railroad Norfolk Southern operates in the Eastern United States. On roughly 21,000 miles of track, the firm hauls shipments of coal, intermodal traffic, and a diverse mix of automobile, agriculture, metal, chemical, and forest products.

(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.

Categories
Technology Stocks

Synopsys Outperforms With IP Sales Leading the Way Amid Rising Technical Complexity; FVE Up to $334

Business Strategy & Outlook:   

Synopsys provides electronic design automation (EDA) software, intellectual property (IP), and software integrity (SI) products that are critical to the semiconductor chip design process. As secular trends toward artificial intelligence, 5G communications, autonomous vehicles, and cloud computing, among others, accelerate, Synopsys will benefit from both the rising complexity of chip designs and the advancing digitalization of various end markets. The narrow-moat Synopsys has a long growth runway ahead as it continues to make strategic organic and inorganic investments to expand its platform amid a growing semiconductor landscape. Synopsys’ products are transformational in enabling increasingly complex integrated circuit (IC) and system-on-chip (SoC) design. Advancing technologies require these more powerful, precise, and efficient chips, for which EDA software informs the end-to-end process. Synopsys is the largest player in the EDA space, and specifically in digital design as well. With a larger digital exposure, and it is discovered that Synopsys privy to higher growth vectors and as a result expect growth greater than that of top competitor Cadence. Outside of core EDA, Synopsys’ IP and SI businesses as benefiting from industry trends. As systems companies increasingly design their own differentiated silicon in-house, and Synopsys to benefit as its customer base expands beyond traditional semiconductor designers. This trend in achieving technological differentiation through chip customization to support IP adoption, as leveraging IP blocks for standardized components allows for significant time and resource savings and reallocation to differentiating components. Further, given the rising complexity of chip design, rising cost of failure, and increasing importance of software security, Synopsys’ growing SI business presents an important point of differentiation for the company. Reflecting the mission criticality of EDA tools, Synopsys exhibits negligible churn, with customer retention consistently at approximately 100%, and has relationships with all major chip design companies in the United States.

Financial Strengths:  

Synopsys is in a very healthy financial position. As of January 2022, Synopsys had $1.1 billion in cash and cash equivalents versus $24 million in debt. The firm repaid its $75 million outstanding term loan balance in 2021 and is now solely liable for a 12-year credit agreement of approximately $33 million in aggregate, of which about $24 million is outstanding as of January 2022. Approximately 90% of Synopsys’ revenue is of a recurring nature, given that the firm primarily sells time-based licenses. Synopsys’ average license length is approximately three years, with periodic software updates delivered throughout the license’s term ensuring continual access to Synopsys’ evolving technology. The ratable revenue of time-based licenses tends to smooth returns compared with utilizing a perpetual license model, allowing for better visibility into the future of the business. Synopsys is profitable on both a GAAP and non-GAAP basis and demonstrates strong cash flows. Free cash flow margin has grown from 21% in fiscal 2017 to 33% in fiscal 2021, and return on invested capital is increasingly widening its spread above cost of capital. 

Bulls Say:  

  • Secular tailwinds in chip design such as 5G, Internet of Things, AI, and others should increase demand for EDA tools and support growth for Synopsys.
  • The growing Software Integrity business enables a larger TAM for Synopsys and addresses expanding demand for real-time identification of security vulnerabilities across the entire software development lifecycle.
  • Synopsys provides mission-critical EDA software, having relationships with all major domestic chip designers and retention rates of approximately 100%.

Company Description: 

Synopsys is a provider of electronic design automation (EDA) software, intellectual property (IP), and software integrity (SI) products. EDA software automates the chip design process, enhancing design accuracy, productivity, and complexity in a full-flow end-to-end solution. The firm’s growing SI business allows customers to continuously manage and test the code base for security and quality. Synopsys’ comprehensive portfolio is benefiting from a mutual convergence of semiconductor companies moving up-stack toward systems-like companies, and systems companies moving down-stack toward in-house chip design. The resulting expansion in EDA customers alongside secular digitalization of various end markets benefits EDA vendors like Synopsys.

(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.

Categories
Dividend Stocks

A less Uncertain Future for Australian Banks, particularly on the Downside

Business Strategy & Outlook:  

National Australia Bank is one of four major banks operating in oligopolistic Australia and New Zealand markets. It is Australia’s biggest business bank, offering a full range of banking and financial services to the consumer, small business, and corporate sectors, with significant operations in New Zealand. The bank has consistently held onto its large share of business loans, and continued investment shows a clear intention to retain this position. The banks greater investment into specialist credit teams across areas such as agriculture, health, education, franchising, as well as business banking centres, sets the bank apart. This ultimately led to a better understanding of the customers’ requirements, faster turnaround times, and higher approval rates. Capacity to make investments into digital onboarding and fast access to unsecured lending ensure the bank retains high satisfaction amongst small business customers. While risks directly related to COVID-19 have abated, wage pressures, labour, and supply chain challenges, and high inflation pose challenges as the cash rate increases. The main current influences on earnings growth are modest credit growth and widening margins as the banks reprice lending rates in a rising cash rate environment. Operating expenses will continue to rise as the bank invests to capture growth opportunities, this despite productivity improvements being realised. After enjoying super low impairment charges pre-2020, large loan losses expected due to COVID-19 resulted in large provisions in fiscal 2020. It is expected a return to midcycle levels around 0.18% in fiscal 2025. The MLC wealth divestment completed in May 2021 after reaching an agreement with IOOF for AUD 1.44 billion as the bank simplifies and refocuses on its core banking operations.

Financial Strengths: 

National Australia Bank is in good financial health, with common equity Tier 1 of 12.5% above the regulator’s 10.5% benchmark as at March 31, 2022. The bank slashed the fiscal 2020 dividend to AUD 60 cents per share on both lower earnings a reduced dividend payout ratio. The payout shall average 70% of earnings before notable items over the next five years, in line with the target range of 65%-75% introduced in 2020. National Australia Bank completed a AUD 2.5 billion buyback announced in July 2021, announcing an additional AUD 2.5 billion buyback in March 2022. Assuming completion of the second share buyback and the acquisition of Citigroup’s Australian consumer business, the bank should remain above its 10.75% to 11.25% target range.

Bulls Say: 

  • Management focus is on the successful, lower-risk, and profitable domestic banking. Economies of scale, pricing power, a strong balance sheet, and high credit ratings provide a robust platform to drive growth.
  • As Australia’s biggest business bank, National Australia Bank has the most to gain from the rebound in demand for business credit.
  • NAB has the ability to achieve significant cost savings and drive operational efficiency improvements.

Company Description:

National Australia Bank is the most business-focused of the four major banks, holding the largest share of business loans and the number-three spot in home loans. National Australia Bank is currently the third-largest bank by market capitalisation, with the franchise covering consumer, small business, corporate, and institutional sectors. Under the UBank brand the bank also owns one of Australia’s largest digital-only banks. Offshore operations in New Zealand round out the group.

(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.

Categories
Shares Small Cap

Stericycle’s self-help measures and significant exposure to the growing United States medical waste market

price of btc is going to breakout

Business Strategy and Outlook

Since its founding in 1989, Stericycle has been extremely acquisitive, having acquired over 500 companies. On the surface, this acquisitive strategy led to a lengthy period of impressive growth and the firm built unmatched scale. However, acquisitions began to stray from Stericycle’s core competencies and poor integration efforts caused inefficiencies to build. After decades of strong growth and profitability, Stericycle’s financial performance began to deteriorate in 2017. However, with a refreshed management team, led by CEO Cindy Miller, it is now seen Stericycle has turned the corner. With Miller at the helm, Stericycle has divested low-margin, noncore businesses, most notably, environmental solutions. The enterprise resource planning implementation project continues, and it is likely to be completed within the next couple of years. A common ERP system will streamline Stericycle’s operations and improve the firm’s financial planning and analysis. Finally, Miller has implemented much needed oversight and standardization, for example, customer contracts are now reviewed by a deal review committee. 

Management’s turnaround efforts are taking hold. Despite the global pandemic, Stericycle’s regulated waste and compliance services business reported 2% organic growth in 2020 (after flat organic growth in 2019 and a 2% organic decline in both 2018 and 2017), and consolidated gross margin improved 60 basis points year over year after six consecutive years of gross margin contraction. In 2021, RWCS registered nearly 6% organic revenue growth, and the secure information destruction services business reported 5% organic growth. 

Stericycle’s self-help measures and significant exposure to the growing United States medical waste market should result in solid top-line growth and margin expansion over the next five years. It is foreseen, Stericycle’s revenue to grow at about a 4% five-year compound annual rate and adjusted EBITDA margin to expand to around 23.5% by 2025-26 from (17.5% to 18.5% during 2019-21). Most importantly, it is alleged for return on new invested capital will rebound to the low double digits by 2024.

Financial Strength

Stericycle’s debt balance increased by over $1.5 billion in 2015 a result of the Shred-It acquisition. As the company’s financial performance deteriorated in subsequent years, the firm’s net debt/EBITDA ratio swelled to approximately 4.5. However, the current management team is committed to rightsizing the balance sheet, and the firm’s leverage ratios have already become more palatable (net debt/adjusted EBITDA was about 3.4 as of December 2021). Stericycle ended its first-quarter 2022 with $1.65 billion of net debt. The firm’s outstanding balance on its credit facility and term loan (approximately $540 million) is due in 2026, $600 million of 5.375% senior notes is due in 2024, and $500 million of 3.875% senior notes is due in 2029. Over the next five years, it is projected Stericycle will generate approximately $1.7 billion of free cash, so about the firm’s ability to service its outstanding debt is not a concern, and it is held, management’s goal of reducing its net debt/adjusted EBITDA ratio below 3 is achievable. Stericycle has plenty of liquidity with $60 million of cash on the balance sheet and over $790 million available on its $1.2 billion credit facility.

Bulls Say’s

  • Stericycle’s turnaround efforts will prove successful, materially improving the firm’s profitability and free cash flow. 
  • Medical waste volume should grow faster than U.S. GDP due to an aging population that requires more medical procedures. Stericycle’s leading position in an expanding market should improve the firm’s financial prospects. 
  • Stericycle is past the apex of pricing pressure related to private practice consolidation and a customer class action lawsuit. Going forward, the firm should realize annual price increases above inflation.

Company Profile 

Stericycle is the largest provider of medical waste disposal and data destruction (primarily paper shredding) services in the United States. Its next closest national competitor in the medical waste disposal space is Sharps Compliance, which generated $76 million of sales in fiscal 2021 (about 4% of Stericycle’s global regulated waste and compliance revenue). Stericycle’s data destruction business (Shred-It) is about twice the size of its closest competitor (Iron Mountain’s information destruction segment). Stericycle has a global presence, with about 20% of its revenue earned outside North America. 

(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 is 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.

Categories
Dividend Stocks

Sage Making Further Progress Toward the Cloud

Business Strategy & Outlook

The emergence of cloud-based software in the early 2000s, along with the proliferation of smartphones and tablets and the emergence of software-as-a-service, or SaaS, business models, revolutionized the global software market. Established software providers, such as Sage Group, which historically sold on-premises software via perpetual software licenses, experienced an increase in competition and disruption of established business models. The small and medium enterprise, or SME, accounting software market experienced numerous new cloud-native SaaS providers, such as Xero, which have rapidly grown and won market share from incumbent providers.

Although Sage entered the 2000s as the largest global provider of SME accounting software, the company had grown via acquisition to become a disparate group with numerous products stretched over a large global footprint. This enabled companies, such as Xero, to enter Sage’s domestic U.K. market and rapidly grow, thanks to its modern product, simple and clear value proposition, and a nimble business model.

Sage initially struggled to transition into a cloud-based SaaS provider but finally seems to be making progress. Its acquisition of cloud native accounting software provider Intacct in 2017 was a key step on this journey, which quickly added a strong product and cloud native mindset to the group. The rationalization of the group, both from a geographical and product perspective, is also an ongoing important transition, which will strengthen the group for the new market environment. Sage is likely to experience profit margin compression in the short term as it reinvests into product development and sales and marketing to keep pace with cloud native SaaS providers. However, this should secure the company’s long-term future and eventual profit margin expansion. Despite strong competition, the company is protected by a switching cost based economic moat, and the transition of its customers to cloud based SaaS will protect the business in the long term. Sage’s asset-light business model should enable strong cash generation in the long term, which to underpin dividends and a strong balance sheet.

Financial Strengths

Sage is in good financial shape. As at March 31, 2021, Sage had net debt of GBP 650 million. This implied a net debt/EBITDA ratio of just 1.6 and an EBIT/interest coverage ratio of 14. Generally speaking, Sage’s asset-light business model and economic moat should enable strong cash flow generation, which should support dividend payments and maintain a strong balance sheet.

Bulls Say

  • Sage has a renewed focus toward its core cloud accounting software offering and intends to exit businesses and products that do not align to this strategy, optimizing its research and development as well as its sales and marketing strategies in the process.
  • Sage’s software-as-a-service business model has low capital investment requirements and predictable recurring earnings leading to strong free cash flow generation.
  • The acquisition and integration of Intacct into the Sage group is driving an innovative software culture.

Company Description

Sage Group Plc is a U.K. based provider of accounting and enterprise resource planning, or ERP, software, predominantly to customers in the U.S., Europe, and South Africa. The company was founded in 1981 and historically sold on-premises software products with perpetual software licenses. However, the company is transitioning toward fewer cloud connected and cloud native products, sold via software-as-a-service, or SaaS, contracts. Sage’s main cloud native products include Sage Business Cloud Accounting, for small businesses, and Sage Intacct, which Sage acquired in 2017, for medium-size businesses.

(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.

Categories
Technology Stocks

Change of Analyst for Boral; Our FVE Decreased 9% but Shares Remain a Bargain

Business Strategy & Outlook

The broadly supportive of Boral’s strategy. Boral’s strategic priorities revolve around four key pillars. The first pillar is largely complete and involves refocusing Boral’s operations on its Australian construction materials business through divestments of noncore assets. Divestments include USG Boral, the North American building products and fly ash businesses, and Meridian Brick. Boral’s second strategic priority is its transformation program, which is aiming to add up to 250 million in annual EBIT to the Australian business net inflation. The third pillar involves decarbonizing Boral’s operations. The final pillar focuses on exploring and commercializing innovations over the long term. The Boral has divested noncore business units and is looking to remove inefficiencies from its Australian operations. Profitably decarbonizing Boral’s operations is likely to be a drawn-out effort but is appropriate give the increasing focus on environmental, social, and governance factors in investment appraisal.

The medium-term outlook for Boral is reasonably strong. Boral derives around two thirds of group revenue from infrastructure and nonresidential construction projects such as roads, highways, subdivisions, bridges, and commercial buildings. The remaining one third of revenue is largely from residential construction activity across detached housing, apartments, and renovations. Buoyed by relatively strong macroeconomic conditions and favorable monetary and fiscal policy, the pipeline of construction and building projects is healthy and should underpin solid demand for Boral’s construction materials.

 However, Boral’s outlook is not free of challenges. The combination of a strong construction pipeline and limited migration of skilled workers during the coronavirus pandemic is expected to result in raw material and labour shortages. These headwinds have the potential to exacerbate cost pressures while increasing lead times for existing projects and/or halting projects altogether.

Financial Strengths

Boral’s balance sheet is in a strong position. Divestments of noncore operations including USG Boral, the North American building products and fly ash businesses, Meridian Brick, and Australian Timber, generated more than USD 4 billion in proceeds. Following AUD 3.1 billion in capital returns to shareholders throughout fiscal 2022, a modest net debt position of approximately AUD 200 million at year-end (including lease liabilities).

The Boral’s targeted level of leverage is manageable. In the longer term, Boral is seeking to maintain a net debt range of 2 times to 2.5 times EBITDA. An average dividend payout ratio of 70% over our forecast horizon, at the upper end of management’s 50%-70% target. The Boral will appropriately determine ordinary dividend payments subject to its financial position and broader construction market conditions.

Bulls Say

  • A strong pipeline of construction projects will stimulate demand for Boral’s construction materials over the medium term.
  • Boral’s transformation program will expand the profitability of the Australian operations and increase return on invested capital.
  • Boral’s divestments of noncore businesses leave management free to focus on generating value from the core Australian operations.

Company Description

Boral is an Australian vertically integrated building materials company with operations across quarries, cement, concrete, and asphalt. Having recently divested its noncore operations including its North American building products and fly ash businesses, USG Boral, and Meridian Brick, Boral’s operations are now focused on the Australian construction market.

(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.

Categories
Shares Small Cap

Demand for Boats Remains Strong, Boosting Selling Prices and Profits at Narrow-Moat Malibu

Portrait of handsome man smiling and listening to female manager while discussing contract in meeting, copy space

Business Strategy & Outlook: 

Malibu is a long-established name in performance sport boats, venturing into the sterndrive and saltwater segments via acquisitions in recent years. It is believed that its brand, innovative products, and consistent pricing power contribute to a brand intangible asset, which underpins the narrow moat rating. Supporting its market leadership, it’s demonstrated an ability to meet evolving customer preferences, bringing new products to market quickly, with new models and 30-40 new features rolled out annually in the performance sport segment. And it has capitalized on its brand strength by expanding into adjacent categories, such as trailers and accessories, which shall continue. However, Malibu hasn’t rested only on innovation to grow profits, also curating savings through streamlined production and rising efficiencies (through vertical integration). As evidence, efforts at Pursuit’s new plant had increased the EBT margin at the brand to 14% in 2021 (from 9% in 2020). With continuous improvements to the manufacturing process, Malibu should be able to limit expense growth over time. Additionally, Malibu shall grow via strategic acquisitions. 

The addition of Cobalt, Pursuit, and Maverick within the last five years has provided robust sales growth for the firm (averaging 33%), thanks to a strategy based on fit and the ability to raise shareholder value. As a result, the model expects tie-ups every other year in the $140 million price range, providing a volume bump of more than 500 incremental units on average. While such transactions should drive sales growth, and remain confident in Malibu’s ability to also maintain consumer interest in its legacy brands. The Malibu’s sales shall grow 10% on average over the next decade, including acquisitions. While demand for outdoor recreational products has been elevated with social distancing measures due to the pandemic, and maintained sales growth stemming from market share gains and expansion into whitespace categories. As a result of its success, Malibu should generate competitive adjusted returns on invested capital, including goodwill, that average 24% over the next decade.

Financial Strengths:

Malibu has maintained a healthy balance sheet, with leverage historically rising modestly as a result of its acquisition strategy. However, with adjusted EBITDA growing faster than debt in recent years, the leverage ratio has remained at less than 1 at the end of fiscal 2021, barring the pursuit of any transformational acquisitions. For access to liquidity, Malibu has a $170 million revolving credit facility (2024 maturity) and a $100 million term loan (2022-24 maturity). The company drew down its revolver as a precaution as COVID-19 spread domestically, but had repaid the loan prior to 2020 year-end (and now has around $57 million outstanding as of March 31). In normal operating periods, expecting cash on hand, cash from operations, and utilization of the credit facility to allow Malibu to fund its capital expenditures, which finance projects, tooling, and production improvements. In addition, the firm has agreements with third-party lenders to provide floor plan financing for dealers. Furthermore, Malibu has historically maintained flexibility in its capital structure through stock repurchases. The board of directors authorized the repurchase of up to $70.0 million of Class A Common Stock and the LLC Units, which is valid until Nov. 8, 2022. However, the modest repurchases over the near term, given the team’s penchant to spend strategically on acquisitions. Over the long term, Malibu should be able to generate enough free cash flow to finance both acquisitions and consistent share repurchases.

Bulls Say:  

  • Vertical integration across the brand portfolio could provide margin expansion.
  • The firm’s long-term annual sales growth goal of 10% should be attainable thanks to Malibu’s penchant for consistent acquisitions in underpenetrated categories. 
  • Malibu’s strong balance sheet, with low leverage and healthy free cash flow/equity, should offer the company the flexibility to withstand cyclical downturns and finance bolt-on acquisitions from cash on hand.

Company Description: 

Malibu Boats is a leading designer and manufacturer of power boats in the United States. It is the market leader in performance sport boats, sold under its Malibu and Axis brands. It acquired Cobalt Boats, a leading producer of sterndrive boats, in 2017 number-one market share position in the U.S. in the 24-foot to 29-foot segment), and Pursuit Boats, which makes high-end offshore and outboard motorboats in 2018. In 2021, it purchased Maverick Boat Group, a leading seller of flat fishing boats, with exposure to bay, dual-console, and center-console boats. Malibu has also expanded into boat trailers and accessories, and in 2020 began producing its own engines for its performance sport boats. Malibu’s target market includes a wide range of water enthusiasts who embrace active lifestyles.

(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.

Categories
Dividend Stocks

Ferguson set out to clean up its balance sheet following the great financial crisis

Business Strategy and Outlook

 Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Between 2008 and 2020, Ferguson’s exposure to the U.S. RMI market (as a percentage of sales) increased from 31% to 60%, while U.S. new construction revenue exposure decreased from 58% to 32%. It is forecasted that the U.S. R&R spending to grow at a 4%–5% compound annual rate this decade. While R&R spending surged during the pandemic, and don’t think demand for home projects is set to stall. Instead, it is believed that the pandemic stepped sales up to a structurally higher base for more normalized growth going forward. In terms of U.S. residential construction, it is believed to have a 1.6 million-unit production pace is maintainable for much of the decade, and the forecast is 15.7 million cumulative starts between 2022 and 2031.

Ferguson has built leading positions across most of its end markets through its roll-up acquisition strategy. The company typically acquires local competitors, gaining access to new brands, suppliers, regions, and customers. It is expected that Ferguson will continue to this strategy, which should augment its scale-driven competitive advantage. Ferguson’s pricing strategy has transformed from being primarily localized to more standardized across the group over the past decade. In the past, branch managers had more discretion over pricing in order to react to local competitive dynamics. Today, the company employs a more disciplined approach to pricing, allowing it to take better advantage of its economies of scale. Ferguson sold its Wolseley U.K. business for approximately $420 million in February 2021. This business struggled to generate value for the group despite being one of the largest distributors in the United Kingdom. There were very few synergies between geographies and little overlap in suppliers. Ferguson’s strategic shift to the United States will be a tailwind for the firm’s prospects, and  Ferguson’s primary listing on the New York Stock Exchange could increase interest from U.S. investors.

Financial Strength

Ferguson set out to clean up its balance sheet following the great financial crisis, and its improved net debt/EBITDA from 3.5 times before the 2008 crisis to 0.8 times as of Jan. 31, 2022. Net debt at the end of the second quarter of fiscal 2022 (January 2022) was $2.2 billion. Ferguson’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy that augments growth with acquisitions but also returns cash to shareholders. In terms of liquidity, it is believed that the company can meet its near-term debt obligations, given its strong cash balance. Its cash position at the end of the second quarter of fiscal 2022 stood at $828 million. It also found comfort in Ferguson’s ability to tap available lines of credit to meet any short-term needs. Also, it was encouraged by the countercyclical nature of industrial distributors’ free cash flow generation, which results from the ability to drawdown inventory during times of economic malaise. Ferguson generated over $1 billion of free cash flow during the great financial crisis, and is expected that the current economic weakness to push free cash flow levels materially higher as working capital requirements ease.  Ferguson enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  •  Ferguson’s roll-up strategy in the U.S. should lead to market share gains, boosting revenue growth in excess of the market average. 
  • Ferguson’s strategic shift to the U.S. away from international markets has strengthened group operating margins. 
  • Ferguson generates strong free cash flow throughout the economic cycle despite serving cyclical end markets

Company Profile 

Ferguson distributes plumbing and HVAC products primarily to repair, maintenance, and improvement, new construction, and civil infrastructure markets. It serves over 1 million customers and sources products from 34,000 suppliers. Ferguson engages customers through approximately 1,600 North American branches, over the phone, online, and in residential showrooms. In fiscal 2021, Ferguson derived 94% of its nearly $23 billion of sales in the U.S. According to Modern Distribution Management, Ferguson is the largest industrial and construction distributor in North America. The firm sold its U.K. business in 2021 and is now solely focused on the North American market.

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.

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