Tag: Recommendations

Categories
Technology Stocks

GOOGL’s 4Q21 results highlighted the strength in Google’s Search business

85215903 - attractive businessman using mobile phone while having lunch

Investment Thesis:

  • Commands a strong market position in online advertising and online eyeballs. 
  • Search advertising increases its share of advertising spend. 
  • Leveraged to online video streaming and advertising via YouTube. 
  • Strong balance sheet with over US$130bn in cash, which gives flexibility to invest in growth options or undertake capital management initiatives. 
  • Focus on innovation across advertising businesses, which should help to sustain growth.
  • Strong management team.
  • Value accretive acquisitions in existing and new growth areas. 
  • Recent disclosure suggests GOOGLE’s Cloud business building good revenue momentum. 

Key Risks

  • Threat of increased regulatory scrutiny, including concerns around consumer privacy and personal data. 
  • Regulatory changes which impact the way GOOGLE does business (e.g. forced changes to products). 
  • Expenses such asTAC (traffic acquisition costs) increase ahead of expectations and which the company is unable to pass onto customers.
  • Deterioration in economic conditions, which would put pressure on the advertising revenue.
  • Competition from companies like Facebook Inc., Amazon etc. could put pressure on margins. 
  • Potential return from investment on new, innovative technology fails to yield adequate results

Key Highlights: 4Q22 group results. 

Relative to the previous corresponding period (pcp), group revenues of $75.3bn was up +32% (or up +33% in constant currency). Group cost of revenues of $32.9bn was up +26%, mostly driven by other cost of revenues (up +25% to $19.6bn). The drivers of this were: content acquisition costs (primarily driven by costs for YouTube’s advertising-supported content); costs for subscription content; hardware costs; and costs associated with data centers and other operations. Operating income of $21.9bn was up +40%, with operating margin at 29%. Net income of $20.6bn was up +36%. GOOGLE maintains an attractive free cash flow profile, delivering FCF of $18.6bn in 4Q21 and $67bn in FY21. The Company ended FY21 with $140bn in cash and marketable securities and repurchased a total of $50bn shares in FY21.

Google Services is driven by strong consumers: Overall Google Services revenue for FY21 of $237.5bn was up +41% YoY, a significant acceleration on FY20A growth of +11%. 4Q21 revenue of $69.4bn was up +31% YoY, “driven by broad-based strength in advertiser spend and strong consumer online activity.” Over 4Q21, “retail was again by far the largest contributor to year-on-year growth of our ads business. Finance, media and entertainment, and travel, were also strong contributors.”

Company Profile

Alphabet Inc is headquartered in Mountain View, California, and provides online advertising services across the globe. It offers performance and brand advertising services through Google and Other Bets segments. The Google segment offers products, such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure. This segment also offers digital content, cloud services, hardware devices, and other miscellaneous products and services. The Other Bets segment includes businesses, including Alphabet Inc is headquartered in Mountain View, California, and provides online advertising services across the globe. It offers performance and brand advertising services through Google and Other Bets segments. The Google segment offers products, such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure. This segment also offers digital content, cloud services, hardware devices, and other miscellaneous products and services. The Other Bets segment includes businesses, including Access, Calico, CapitalG, GV, Verily, Waymo, and X, as well as Internet and television services.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Calendar 2021 Guidance Met and Cash Can Now Begin to Flow Again for Cimic

Business Strategy and Outlook

Cimic has developed the ability, reputation, and balance sheet strength to undertake numerous large-scale contract mining and construction projects simultaneously and in different countries. Few companies, apart from Cimic, in the domestic contract mining and construction market have the reputation, skill, knowledge, or capability to undertake challenging megascale mining and infrastructure projects. But excess returns of the recent past look to be a function of the China-driven commodities boom.

Cimic’s annual operating revenue is split 60%-65% engineering and construction work, 20%-25% contract mining and 10%-15% services and property development work. Cimic’s contract mining business is highly capital-intensive but inherently lower risk than construction. Domestic and international mining contracts are normally schedule-of-rates style, with Cimic assuming risk on productivity and volumes. Cimic lowers operating risk on contract mining work by mainly undertaking open-cut mining at coal and iron ore sites with quality deposits for large resource companies. However, competition can be fierce for new contract mining work and renewals.

Financial Strength

Cimic is in strong financial health. The company finished December 2021 with AUD 502 million in net debt, leverage (ND/(ND+E)) of 32% and net debt to EBITDA a comfortable 0.6. The company sold a 50% stake in its Thiess mining contracting business to the U.K.’s Elliot in 2020, the transaction generating AUD 2.1 billion net cash proceeds. Cimic’s capital intensity is tempered with exposure to the equipment heavy mining contracting sector lessened. This should enhance the rate of cash conversion in future. 

In addition to the cash proceeds, the Thiess sell-down reduces Cimic’s lease liability balance by approximately AUD 500 million. Net operating cash flow exceeded AUD 1.0 billion in each of the nine fiscal years preceding 2019, and free cash flow was positive in each of the last seven of those fiscal years. But net operating cash flow fell to AUD 927 million in 2019, not helped by one-off BIC Contracting exit costs in the Middle East and has been negative through to June 2021 due to COVID-19 and unwind in factoring. Traditionally, the company has a strong balance sheet and cash flow, which provides the necessary flexibility to tender for large infrastructure and mining contract projects. 

Bulls Say’s

  • Cimic could remain under pressure due to slower demand for mining services. Mining construction often involves higher levels of risk, as a result of fixed-price, fixed-time, and long-duration contracts. 
  • Cimic’s CEO was confidently forecasting strong earnings before COVID-19 led to an about-face and withdrawal of guidance. But Cimic says it is now building positive cash flow momentum again with awarding of new work. 
  • Increased focus on infrastructure construction projects and maintenance has helped stabilise earnings during weak market conditions for the domestic mining and energy sectors.

Company Profile 

Cimic is Australia’s largest contractor, providing engineering, construction, contract mining services to the infrastructure, mining, energy, and property sectors. The business structure consists of construction, contract mining, public-private partnerships, and property, along with 45%-owned Habtoor Leighton. Cimic has exited its Middle East business. ACS/Hochtief owns 76% of Cimic.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Confident in Zebra’s Long-Term Fundamentals After Supply Constraints Abate; FVE Up to $449

Business Strategy and Outlook

Zebra Technologies is a key partner for supply chain, logistics, and operational efficiency for customers across industry verticals. Zebra has acquired and maintained a dominant share position in the automatic identification and data capture, or AIDC, marketby pivoting into higher-growth technologies over its life.

Morningstar analysts agree with the firm’s ongoing pivot into software, developing platforms internally and through acquisitions to augment and complement its existing portfolio.  Layering prescriptive software with machine learning and artificial intelligence on top of these solutions allows customers to focus on activities with higher return on investment and creates a stickier solution by further embedding Zebra’s technology in customer processes. Morningstar analysts think Zebra’s custom solutions give rise to steep customer switching costs, which underpin our narrow economic moat rating.

 Morningstar analysts expect Zebra to benefit from ongoing secular trends toward digitization and automation, notably in omnichannel retail, which has been accelerated by the COVID-19 pandemic and is a tailwind for the firm. Analysts consider the firm’s highest-growth opportunities will come from further building out its software portfolio and growing its base of recurring revenue, as well as from expanding its footprint in the healthcare market as health records and hospital workflows become digitized. The firm is done paying down its debt from its transformative 2014 Motorola deal, and management is now committing capital to bolt-on M&A and its heady research and development budget.

Confident in Zebra’s Long-Term Fundamentals After Supply Constraints Abate; FVE Up to $449

Morningstar analysts raise its fair value estimate for Zebra Technologies to $449 per share, from $430, after the firm reported solid fourth-quarter results and raised its long-term guidance. Morningstar analysts believe COVID-19 impacts have benefited Zebra’s growth through accelerating demand for digitized solutions and automated workflows, however, it has simultaneously resulted in cost headwinds for supply chain and logistics, pressuring margins. Morningstar analysts believe that the long-term outlook for Zebra to lead the market in end-to-end digital transformation solutions and durably grow margins will come to fruition, despite ongoing constraints and considered it as short term. Morningstar analysts have greater confidence in Zebra’s growing portfolio of high growth adjacent markets to bolster the top line and modestly raise its long-term growth expectations. Shares pulled back on weak short-term margin guidance, and Morningstar analysts now view them as fairly valued.

Financial Strength

The firm was highly leveraged following its 2014 acquisition of Motorola Solutions’ enterprise division, but in the years following it has steadily paid down its debt. As of Dec. 31, 2021, the firm carried $991 million in debt, making its ratio of net debt/trailing 12-month adjusted EBITDA 0.51 times, well below the top of its target range of 2.5 times. Morningstar analysts  forecast Zebra to generate an average of $1.4 billion in free cash flow each year through 2026 and  allow it to easily service its obligations. With the remainder, analysts  expect the firm to pursue additional bolt-on acquisitions and conduct opportunistic share repurchases. However, Morningstar analysts don’t anticipate a transformative deal (like Motorola) in the short term and anticipate Zebra to remain in its target debt/EBITDA range. Zebra engages in receivables factoring, mostly in its operations in Europe, to help fund working capital. If the firm were to encounter a cash crunch, it has over $800 million of its revolving credit facility, which doesn’t expire until 2024, currently untapped.

Bulls Say 

  • Zebra derives 80% of its sales from a robust ecosystem of channel partners, which can customize its technology to specific sub verticals. 
  • Zebra has the largest share of the AIDC market with over 40%, per VDC Research. 
  • Zebra’s pivot into software should enable it to pursue higher-growth opportunities, expand margins, and heighten switching costs at end customers.

Company Profile

Zebra Technologies is a leading provider of automatic identification and data capture technology to enterprises. Its solutions include barcode printers and scanners, mobile computers, and workflow optimization software. The firm primarily serves the retail, transportation logistics, manufacturing, and healthcare markets, designing custom solutions to improve efficiency at its customers

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Aristocrat Leisure Ltd to invest in R&D to defend its narrow economic moat and maintain Market position

Over the shoulder view of and stock broker trading online while accepting orders by phone. Multiple computer screens ful of charts and data analyses in background.

Business Strategy and Outlook

Aristocrat Leisure will continue to dominate the electronic gaming machine, or EGM, market. With a strong balance sheet and commanding market position, Aristocrat’s research and development expenditure is unmatched by peers. This investment is the lifeblood of any electronic gaming manufacturer, especially given rapidly changing technology, and allows Aristocrat to maintain game quality, differentiate products from lower-end competitors, and defend its narrow economic moat. 

Aristocrat is among the top three global competitors in the highly competitive EGM market, alongside International Game Technology and Scientific Games. Aristocrat’s North American ship-share has increased to around 23% in 2019, from around 13% in 2012. This trails leader Scientific Games but is broadly in line with International Game Technology. Aristocrat commands a number one position in class II and class III leased machines with around a third of the installed base, bolstered by the Video Gaming Technologies acquisition in 2014.

EGM sales have been particularly hard-hit as coronavirus-induced shutdowns, social distancing measures, and travel restrictions weigh on the firm’s customers. It is anticipated these casino, pubs, and clubs have been slowing capital expenditure prior to shutdowns to protect balance sheets, grinding EGM sales to a halt. Visitations fell well below pre-pandemic levels, and capital expenditure remains heavily restricted. 

However, Aristocrat’s fortunes aren’t entirely tied to its customers’ capital expenditure cycles. Leased, rather than purchased, machines represent most American land-based sales and attract a fee-per-day arrangement (which can be fixed or performance-based). In our view, this revenue is more naturally recurring than direct EGM sales. While it is expected venue shutdowns and lower visitations in the near term to weigh on leased machine profitability, Aristocrat’s customers don’t appear to be removing machines from floors to reduce costs, painting a brighter picture for leased machines to rebound as visitations recover.

Financial Strength

Aristocrat Leisure is in strong financial health. At Sept. 30, 2021, the company had AUD 0.8 billion net debt, equating to net debt/EBITDA of 0.5–down from AUD 1.6 billion in net debt, equating to net debt/EBITDA of 1.4 at Sept. 30, 2020. EBITDA interest cover is comfortable at 15 times. The AUD 1.3 billion capital raising to fund the AUD 5 billion acquisition of U.K.-listed Playtech–a deal which eventually failed to reach an appropriate level of shareholder support–leaves Aristocrat’s balance sheet extremely well-capitalised to explore further opportunities in real money gaming, or potentially return capital to shareholders. Aristocrat to ramp up paying out dividends from approximately 30% of underlying earnings from fiscal 2021, back to 40% by fiscal 2022. Rather than increasing this pay-out ratio in the near to medium term, it is expected that Aristocrat will instead increase investment in the business through research and development to maintain its market position and defend its narrow economic moat.

Bulls Say’s

  • Aristocrat operates in a market protected from new entrants as stringent regulatory licensing requirements in major markets create barriers to entry for new players. 
  • Unlike the mature electronic gaming machine industry, the fast-growing mobile gaming market provides an avenue of strong growth for Aristocrat. 
  • Already boasting a portfolio of highly regarded electronic gaming machines, Aristocrat outspends rivals on research and development allowing the firm to improve its competitive position and protect its narrow economic moat.

Key Investment Considerations:

  • Already boasting a portfolio of highly regarded electronic gaming machines, Aristocrat outspends rivals on research and development allowing the firm to improve its competitive position and protect its narrow economic moat. 
  • With less turnover likely up for grabs in the near-term, heavy discounting could weigh on Aristocrat’s profitability in the fiercely competitive electronic gaming machine industry. 
  • Aristocrat operates in a market protected from new entrants as stringent regulatory licensing requirements in major markets create barriers to entry for new players.

Company Profile 

Aristocrat Leisure is an electronic gaming machine manufacturer, selling machines to pubs, clubs, and casinos. The firm is licensed in all Australian states and territories, North American jurisdictions, and essentially every major country. Aristocrat is one of the top three largest players in the space along with International Game Technology and Scientific Games. Through acquisitions of Plarium and more recently Big Fish, Aristocrat now derives a significant proportion of earnings from the faster growing mobile gaming business.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Shares Small Cap

Stevanto’s Near Term Outlook Foresight Uncertain

Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.

Business Strategy and Outlook

Stevanato is the market leader in pen cartridges and presterilized vials and holds the number position in prefillable syringes (behind Becton Dickinson). The company is a key supplier in the drug delivery supply chain, and provides drug containment and primary packaging solutions to 41 of the top 50 global pharma companies. Primary packaging is the material that first envelops a drug product, and safe production of drug-delivery packaging is critical for the successful delivery of pharmaceutical products. 

Stevanato aims to increase the percentage of product sales from high value solutions, which refers to products with proprietary intellectual property and greater complexity, such as presterilized drug containment and integrated self-injector pen and wearable devices. The company is prioritizing investment in research and development and broadening its offering through M&A. Capacity expansion is also a key component of Stevanato’s long-term strategic plan, and capital expenditures are likely to remain elevated over the next year or two. Competition for skilled employees is extreme, and future growth will depend on effectively hiring and retaining talent. 

Both the biopharmaceutical and diagnostic segments are expected to benefit from an increased contribution in high value solutions over time, which has been growing 20% year over year and now represents about 23% of consolidated revenue. It is anticipated the ongoing shift to high-value will provide a material tailwind for margin over the next five to 10 years, and also contribute to robust top line growth. It is seen an uncertain near-term outlook for the business, with both positives and negatives related to the ongoing pandemic. Some drug trials have postponed or delayed, leading to lower sales growth for some customers’ drug portfolios. However, this has been mitigated by the pressing need for vaccines and treatments, which has allowed Stevanato to enjoy compound annual top line growth near 25% over the last two years. The company supplies vials and syringes to about 90% of currently approved vaccines.

Financial Strength

Stevanato has a sound financial position.As of September 2021, total cash position in excess of long-term debt on the balance sheet was EUR 154 million. This was mainly related to the firm’s IPO from July 2021, which raised EUR 154 million. In analysts’ view, Stevanato has more than sufficient capital to fund increasing capacity investment, and it can also be seen the potential for tuck-in acquisitions to broaden the firm’s value proposition in the drug delivery supply chain.In the near term, however, Stevanato’s expansion plan is likely to be the focus of capital deployment. Because of a higher level of capital investment, the company reported free cash flow of negative EUR 9.9 million for the third quarter of 2021. It is anticipated significant earnings and cash flow growth over the next few years, and while free cash flow is likely to be close to flat in 2022, it is anticipated free cash flow above EUR 20 million in 2023. It is believed that it’s possible that some additional debt might be needed to cover cash flow needs, but, considering Stevanato’s current low degree of financial leverage, it is not to be concerned with an increase in debt at or below EUR 500 million.

Bulls Say’s

  • Stevanato has room to bring customers up the value chain to higher-value products and services, giving it a lengthy tailwind for earnings growth and margin expansion. 
  • In contrast to peers, Stevanato can use in-house produced glass vials and syringes for integrated selfinjector systems, reducing the number of vendors for customers and providing Stevanato with a possible cost advantage. 
  • As large economies such as India and China implement more stringent pharmaceutical standards, Stevanato stands to become a key cog in the supply chain in those countries.

Company Profile 

Italy-based Stevanato Group is a provider of drug containment, drug delivery and diagnostic solutions to the pharmaceutical, biotechnology and life sciences industries. It delivers an integrated, end-to-end portfolio of products, processes, and services that address customer needs across the entire drug life cycle including development, clinical, and commercial stages. Stevanato’s revenue is geographically diversified, with 60% of sales from Europe, the Middle East and Africa (EMEA), 27% in North America, 10% in Asia-Pacific (APAC), and 3% in South America. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Shares Technology Stocks

ResMed reported 2Q22 results reflecting strong revenue growth to US$894.9m, up +12%, or +13%

Stock exchange market concept, stock broker looking at graph working and analyzing with display screen, pointing on the data presented and deal on a exchange, Businessman trading stocks online.

Investment Thesis

  • Global leader in a significantly under-penetrated sleep apnea market. 
  • High barriers to entry in establishing global distribution channels. 
  • Strong R&D program ensuring RMD remains ahead of competitors.
  • Momentum in new masks releases. 
  • Bolt-on acquisitions to supplement organic growth.
  • Leveraged to a falling Australian dollar. 

Key Risks 

  • Disruptive technology leading to better patient compliance.
  • Product recall leading to reputational damage.
  • Competitive threats leading to market share loss.
  • Disappointing growth (company and industry specific).
  • Adverse currency movements (AUD, EUR, USD).
  • RMD needs to grow to maintain its high PE trading multiple. Therefore, any impact on growth may put pressure on RMD’s valuation.

Key Highlights 2Q22 Results

  • Revenue increased 12% (13% in constant currency) to US$894.9m driven by higher demand for sleep and respiratory care devices and a major product recall by one of the Company’s largest competitors. Across geographies, revenue in the Americas climbed +14%, in Europe, Asia, and other markets it increased +12%, and RMD’s software-as-a-service business saw +8% revenue growth. By product segment, globally in constant currency terms device sales increased by 16%, while masks and other sales increased by 10%.  
  • Non-GAAP operating income of $267.7m, up +5%. This equated to US$1.47 per share, up 4%.
  • Net income was up +12% to US$201.8m. 
  • Gross margin declined 230 basis points to 57.6%.
  • Diluted earnings per share was up +11% to US$1.37.
  • The Board declared quarterly dividend of US42cps. 
  • RMD’s balance remains strong with cash balance of $194m, $680m in gross debt and $496m in net debt, whilst debt levels remain modest, and the Company retains ~$1.6bn for drawdown under its existing revolver facility.

Company Profile 

ResMed Inc (RMD) develops, manufactures, and markets medical equipment for the treatment of sleep disordered breathing. The company sells diagnostic and treatment devices in various countries through its subsidiaries and independent distributors. RMD reports two main segments – Americas and Rest of the World (RoW) – with US its largest market. The company is listed on the Australian Stock Exchange (ASX) via CDIs (10:1 ratio). 

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

SkyCity is priced attractively for patient investors

Business Strategy and Outlook:

COVID-19 continues to weigh heavily on the firm’s near-term outlook. The Auckland casino–SkyCity’s core property–waded through over 100 days in lockdown during the period, heavily affecting visitor numbers at the group’s venues in the first half of fiscal 2022. Additionally, visitor numbers to the group’s second-biggest venue in Adelaide were subdued as capacity restrictions and domestic border closures in South Australia persistent for most of the first half of fiscal 2022. These are viewed as short-term issues, and it is expected SkyCity to bounce back when restrictions ease. SkyCity’s long-dated and exclusive licences in Auckland and Adelaide create a regulatory barrier to entry, underpinning the firm’s narrow economic moat, and position the business well to participate in the recovery as restrictions ease.

The Adelaide casino has remained open, albeit with restrictions for much of the first half of fiscal 2022. Renovations are complete and the group is poised to receive extra income from additional parking spots once city visitors return at greater levels. For now, the parking spots are being given away for a song, subject to visiting the casino facilities. New Zealand moved to a traffic-light COVID-19 protection framework in December 2021. This will reduce lockdowns and restrictions as the country allows more freedom for those who are vaccinated. Under red, the most extreme level of the traffic light system, hospitality venues may remain open with restrictions. While preferable to a full closure, we think it will still dampen revenue as many visitors choose to stay home out of an abundance of caution.

Financial Strength:

With a balance sheet well-positioned to weather the storm, analysts think current depressed prices present an opportunity for patient investors to gain exposure to a high-quality gaming business at a discount. However, the path to full capacity is likely to be gradual and material short-term catalysts are lacking. The analysts expect the recovery of SkyCity’s EBITDA to its prepandemic levels to take until fiscal 2023. In the second half of fiscal 2022, it is expected that the combined benefit of additional parking bays and the casino renovation to raise Adelaide’s EBITDA margins to 20% from 16%, in line with guidance. Visitors to the city of Adelaide have been subdued, at around 50% of prepandemic levels in the year to August 2021. 

Company Profile:

SkyCity Entertainment operates a number of casino-hotel complexes across Australia and New Zealand. The flagship property is SkyCity Auckland, the holder and operator of an exclusive casino licence (expiring in 2048) in New Zealand’s most populous city. The company also owns smaller casinos in Hamilton and Queenstown. In Australia, the company operates SkyCity Adelaide (exclusive licence expiring in 2035).

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Shares Small Cap

Capri Has Suggested The Two Brands (Jimmy Choo and Versace), When Mature, Could Combine For Operating Profit Of $450 Million

Business Strategy and Outlook

It is probable Michael Kors lacks the brand strength (and ultimately pricing power) to provide an economic moat for Capri. Powered by store openings and retail expansion in the 2010-15 period, Michael Kors became one of the largest American handbag producers in sales and units. However, its sales have declined from peak levels due to markdowns at third-party retail, store closures, and weakness in some categories. While Capri has reduced distribution to limit discounting of its bags, competition in the American handbag market is fierce, and store closures in the region continue. Michael Kors, though, has good potential in Asia, which Bain & Company expects will compose 50% (up from 37% at present) of the worldwide luxury market by 2025. It is foreseen the brand stands to win favor with Chinese consumers, but it is not foreseen for the brand to reach Capri’s $1 billion Asia sales target (up from $448 million in fiscal 2021) in the next 10 years given its limited tenure in the region relative to Coach and others. 

Capri spent a steep $3.4 billion to purchase Jimmy Choo and Versace to boost its status as a luxury house and reduce its dependence on Michael Kors. However, it is not likely these deals have changed Capri’s no-moat status as the acquired brands have more fashion risk, less profitability, and narrower appeal than Michael Kors. Capri is investing in store remodels, store openings, and expanding the set of accessories for both Jimmy Choo and Versace, but it is not seen these efforts will yield the intended gains, particularly given the severe interruption it is probable from COVID-19. While Capri has suggested the two brands, when mature, could combine for operating profit of $450 million and account for 30% of its total, it is not probable for this to happen until the end of this decade.

Financial Strength

Capri has debt, but it is seen as it is very manageable. The firm took on significant debt to fund its Jimmy Choo and Versace acquisitions, which came with a combined price tag of $3.4 billion. At the end of December 2021, it had total short- and long-term debt of $1 billion, but it also had more than $261 million in cash and $1 billion in available borrowing capacity. Moreover, during the COVID-19 crisis, it amended its revolving and term loan credit agreement so that most of its term loan that was due in December 2020 was extended to December 2023. Thus, Capri has no significant debt maturities prior to 2023. The firm’s debt/adjusted EBITDA was a very manageable 2.3 at the end of fiscal 2021, and it is foreseen this will fall to 0.8 at the end of fiscal 2022 on greater EBITDA and debt reduction. Capri has resumed share repurchases, which were suspended during the pandemic. The firm averaged more than $500 million in annual buybacks in fiscal 2015-20. It is now foreseen its share repurchases at an annual average of about $740 million over the next decade. However, Capri does not pay dividends.Capri plans to open new stores and remodel existing stores for all three of its brands, although these efforts stalled in fiscal 2020 due to COVID-19. Analysts forecast its fiscal 2022 capital expenditures will rise to $205 million (3.7% of sales) from just $111 million (2.7% of sales) last year. Long term, Analysts forecast Capri’s annual capital expenditures as a percentage of sales at 4.1% as management works to improve the performance at Jimmy Choo and Versace.

Bulls Say’s

  • Michael Kors is one of the largest brands in terms of units and sales in the high-margin handbag market, and it is likely, this positioning should aid its prospects as it looks to grow in complementary categories like footwear. 
  • Michael Kors has reduced its dependence on wholesale customers, which is viewed favorably as increased direct-to-consumer sales allow for better pricing and control over marketing. 
  • The acquisitions of Jimmy Choo and Versace afford diversification opportunities by bringing two luxury brands that maintain products with high price points into the fold.

Company Profile 

Michael Kors, Versace, and Jimmy Choo are the brands of Capri Holdings, a marketer, distributor, and retailer of upscale accessories and apparel. Kors, Capri’s largest brand, offers handbags, footwear, and apparel through more than 800 company-owned stores, wholesale, and e-commerce. Versace (acquired in 2018) is known for its ready-to-wear luxury fashion, while Jimmy Choo (acquired in 2017) is best known for women’s luxury footwear. John Idol has served as CEO since 2003 but will be replaced in the position by Joshua Schulman in late 2022. (Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Aptiv Sees Q4 Results Take Chip Crunch Hit, Sets New Revenue Growth Target

Business Strategy and Outlook:

Aptiv’s average yearly revenue growth is expected to exceed average annual growth in global light-vehicle demand by high-single-digit percentage points. The company provides automakers with components and systems that are in high demand from consumers and that government regulation requires to be installed. Aptiv’s high-growth technologies include advanced driver-assist systems, autonomous driving, connectivity, data services, and high-voltage electrical distribution systems for hybrids and battery electric vehicles.

Aptiv’s ability to regularly innovate and commercialize new technologies bolsters sales growth, margin, and return on investment. A global manufacturing presence enables Aptiv to serve customers around the globe, capitalizing on the economies of scale inherent in automakers’ plans to use more global vehicle platforms. Lean manufacturing discipline and a low-cost country footprint enable more favorable operating leverage as volume increases. Aptiv enjoys relatively sticky market share, supported by integral customer relationships and long-term contracts. The design phase of a vehicle program can last between 18 months and three years depending on the complexity and extent of the model redesign. The production phase averages between five and 10 years. Engineering and design for the types of products that Aptiv provides necessitate highly integrated, long-term customer relationships that are not easily broken by competitors’ attempts at market penetration.

Financial Strength:

Aptiv’s financial health is in good shape. Total debt/total capital has averaged 16.9% while total debt/EBITDA has averaged 2.9 times. Most of Aptiv’s capital needs are met by cash flow from operations. However, the COVID-19 pandemic necessitated the drawdown of the company’s $2.0 billion revolver on March 23, 2020. The revolver was repaid after the company raised capital through share issuance and a mandatory convertible preferred in June 2020. Aptiv’s liquidity remains healthy at $5.2 billion, with around $2.8 billion in cash and equivalents at the end of December 2020. The company was also granted covenant relief, with a debt/EBITDA ratio of 4.5 times through the second quarter of 2021, up from 3.5 times. With the exception of the credit line that includes the revolver and a term loan, which expires in August 2021, the company has no other major maturities until 2024. The company has approximately $4.1 billion in senior unsecured note principal outstanding with maturities that range from 2024 to 2049, at a weighted average stated interest rate of 3.2%. Aptiv issued $300 million in 4.35% senior notes due in 2029 and $300 million 4.4% notes due in 2046 in March 2019 to redeem senior notes due in 2020 with an interest rate of 3.15%. The bonds and bank debt are all senior unsecured, pari passu, and have similar subsidiary guarantees.

Bulls Say:

  • Owing to product segments with better-than-industry average growth prospects like safety, electrical architecture, electronics, and autonomous driving, we expect Aptiv’s revenue to grow mid- to high-single digit percentage points in excess of the percentage change in global demand for new vehicles. 
  • The ability to continuously innovate and commercialize new technologies should enable Aptiv to generate excess returns over its cost of capital. 
  • A global manufacturing footprint enables participation in global vehicle platforms and provides penetration in developing markets.

Company Profile:

Aptiv’s signal and power solutions segment supplies components and systems that make up a vehicle’s electrical system backbone, including wiring assemblies and harnesses, connectors, electrical centers, and hybrid electrical systems. The advanced safety and user experience segment provides body controls, infotainment and connectivity systems, passive and active safety electronics, advanced driver-assist technologies, and displays, as well as the development of software for these systems. Aptiv’s largest customer is General Motors at roughly 13% of revenue, including sales to GM’s Shanghai joint venture. North America and Europe represented approximately 38% and 33% of total 2019 revenue, respectively.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Snap-on Remains Resilient Despite Supply Headwinds

Display of Stock market quotes

Business Strategy and Outlook

Snap-on provides premium tools to vehicle repair shops and industrial customers. Snap-on will continue to be the top player in the tools industry. The company benefits from a strong brand reputation among repair professionals. Customers value Snap-on’s high-quality and strong performing products, in addition to its high-touch mobile van network. Snap-on’s tools and diagnostic products help customers complete repairs faster, improving productivity. Customers will continue to pay up for Snap-on’s tool durability, convenience, and flexible financing options. 

The company’s strategy focuses on providing technicians, shop owners, and dealerships a full line of products, ranging from tools to diagnostic and software solutions. Snap-on’s tools are considered the go-to products, exhibiting better durability and reliability than cheaper alternatives that break a lot quicker. Diagnostic products arm technicians with more information to identify issues faster. Snap-on has exposure to end markets that have attractive tailwinds. In automotive, Demand for vehicle repair work will be strong in the near term, largely due to vehicle owners taking in their cars for overdue servicing (delayed due to the COVID-19 pandemic).

Financial Strength

Snap-on’s remaining segments were resilient, despite the supply headwinds. The repair systems and information segment increased about 9% year on year. A key contributor to sales growth was increased demand for undercar equipment and diagnostic products, which help technicians quickly access repair data, boosting operational efficiency. Snap-on’s exposure to diagnostic products positively, given the proliferation of electronics in automobiles. Snap-on maintains a sound balance sheet. The industrial business does not hold any long-term debt, but the debt balance of the finance arm stood at $1.7 billion in 2021, along with $2.1 billion in finance and contract receivables.

As a lender, the finance arm helps drive sales in the industrial business by providing both customers and franchisees financing. With respect to financing for customers, Snap-on extends credit for large ticket purchases and leaves financing for smaller items to franchisees. Sales representatives bear the credit risk if customers fail to pay. Snap-on’s solid balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth but also returns cash to shareholders via dividends and share repurchases.

Bulls Say’s 

  • The growth in vehicle miles driven increases the wear and tear on vehicles, calling for more maintenance and repair work to keep them on the road, benefiting Snap-on. 
  • Auto manufacturers continue to tap Snap-on to create new tools and products to service new EV models. This alleviates concerns that EV adoption will threaten Snap-on’s viability. 
  • Sales representatives can add new customers on their designated service routes, increasing revenue per franchisee.

Company Profile 

Snap-on is a manufacturer of premium tools and software for repair professionals. Hand tools are sold through franchisee-operated mobile vans that serve auto technicians who purchase tools at their own expense. A unique element of its business model is that franchisees bear significant risk, as they must invest in the mobile van, inventory, and software. At the same time, franchisees extend personal credit directly to technicians on an individual tool basis. Snap-on currently operates three segments—repair systems and information, commercial and industrial, and tools. The company’s finance arm provides financing to franchisees to run their operations, which includes offering loans and leases for mobile vans.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.