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Dividend Stocks

Vodafone Continues to Make Gradual Progress as Potential Consolidation Comes Into Focus

Business Strategy and Outlook

Vodafone has steadily transformed its business over the past several years, adding fixed-line assets in core markets, selling out of peripheral areas like New Zealand, and forming partnerships in others. Through a series of acquisitions and partnerships, Vodafone has added fixed-line infrastructure to its traditional wireless business in several countries.Vodafone is now the largest cable company in the country, with networks that reach around 60% of the population, enabling it to capture about one third of the broadband market. 

Vodafone has also sought to improve efficiency and free up assets. Intense competition, especially in Spain and Italy, has led to disappointing financial results recently. However, Morningstar analysts think the reshaping of Vodafone’s capabilities across Europe to integrate fixed-line and wireless assets positions the firm to compete more effectively over the long term. Integrating fixed-line and wireless networks should improve the quality of each over time, while bundling services should enable the firm to serve customers more efficiently.

Vodafone Continues to Make Gradual Progress as Potential Consolidation Comes Into Focus

Vodafone’s fiscal third-quarter results were broadly as expected, with management stating that the firm remains on track to hit the upper end of its financial expectations for the year. The firm only reports revenue and customer metrics for odd-numbered quarters. More importantly, management clearly sounded optimistic that it will move forward with transactions that change the structure of its operations in several countries. Rumors have swirled around potential merger partners for Vodafone’s operations in the U.K., Italy, and Spain, each of which continues to face challenging competitive environments. We continue to believe the market has overly discounted the long-term value of Vodafone’s assets, and we suspect moves to improve the economics in certain countries will help uncover that value. Morningstar analysts  don’t plan to change its GBX 185 fair value estimate.

Financial Strength 

As of mid-fiscal 2022, net leverage stood at 3.0 times (before lease obligations), with spectrum costs, restructuring expenses, and dividend payments consuming a large portion of free cash flow while the pandemic and competitive pressure have weighed on EBITDA. Management targets leverage in the range of 2.5-3.0 times EBITDA, though, so debt reduction is not a high priority currently.Even with management claiming comfort with the balance sheet, Vodafone still decided to cut its dividend 40% in May 2019, saving the firm about EUR 1.6 billion annually. The payout in fiscal 2019 consumed more than 90% of free cash flow, after funding spectrum purchases. At the new dividend payout, that ratio dropped to less than 50% of free cash flow during fiscal 2020, though cash payments for spectrum were modest. Sizable spectrum purchases pushed the payout ratio to nearly 80% of free cash flow in fiscal 2021. The firm expects a 60% cash flow payout assuming EUR 1.2 billion of spectrum purchases in the average year.Overall, Morningstar analysts don’t believe Vodafone’s debt load is a concern. The firm holds stakes in multiple assets that could be sold if needed to reduce leverage, including its Australian venture, its partnership with Liberty Global in the Netherlands, and its stake in Vantage Towers. Vodafone has also pledged not to put additional money into its troubled Indian venture.

Bulls Say

  • Vodafone possesses massive scale, serving around 280 million wireless customers globally, and it owns extensive wireless and fixed-line networks in most of the markets it serves. Few telecom firms can match its size and strength. 
  • While Europe forms the core of the business, Vodafone still provides access to several emerging markets with strong growth potential. 
  • Even after the 2019 dividend cut, Vodafone shares still offer a very attractive yield. The current payout should prove sustainable, with room for growth as restructuring efforts wind down.

Company Profile

With about 270 million wireless customers, Vodafone is one of the largest wireless carriers in the world. More recently, the firm has acquired cable operations and gained access to additional fixed-line networks, either building its own or gaining wholesale access. Vodafone is increasingly pushing converged services of wireless and fixed-line telephone services. Europe accounts for about three fourths of reported service revenue, with major operations in Germany (about 30% of total service revenue), the U.K. (13%), Italy (12%), and Spain (10%). Outside of Europe, 65%-owned Vodacom, which serves sub-Saharan Africa, is Vodafone’s largest controlled subsidiary (12% of total service revenue). The firm also owns stakes in operations in India, Australia, and the Netherlands.

(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.

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Dividend Stocks

COVID-19 Crisis and Other Issues Have Slowed VF, but Its Brands Provide a Competitive Advantage

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy and Outlook:

Through dispositions and additions, VF has built a portfolio of strong brands in multiple apparel categories. The three brands that are viewed account for about 80% its sales (Vans, Timberland, and The North Face) as supporting VF’s narrow moat based on a brand intangible asset. Despite short-term disruption from the COVID-19 crisis and economic weakness in China, VF is believed to grow faster than most competitors in the long run and maintain its competitive edge.

The North Face will benefit from its new Future Light waterproof fabric, brand extensions, and expansions of its direct-to-consumer business. VF plans 8%-9% annual growth for The North Face, which may be possible after the coronavirus crisis has passed. It is less certain of VF’s long-term growth targets for Timberland and Dickies of 3%-4% and 5%-6%, respectively, given inconsistent results. At its 2019 investor event, VF targeted a gross margin above 55.5%, an operating margin above 15%, and an ROIC above 20% in fiscal 2024.

Financial Strength:

Although VF is struggling with some product shortages, higher costs, and inconsistent demand for Vans in China, its sales and profit margins have mostly recovered from the worst of the pandemic. Fiscal 2022 sales growth forecast has been lowered to 29% from 30% but adjusted EPS estimate have been held at $3.20. For fiscal 2023, adjusted EPS is adjusted of $3.68 on 7% sales growth. Fair value estimate implies fiscal 2023 price/adjusted earnings and EV/adjusted EBITDA of 18 and 15, respectively. The Kontoor spin-off and the sale of some of VF’s work brands has improved the firm’s margins as its remaining brands have more pricing power than those that have been eliminated. Further, the remaining VF has higher exposure to attractive active and outdoor categories. Gross margins of 56% or higher are forecasted after this fiscal year, well above historical gross margins of below 50%.

Bulls Say:

  • Vans, expected to generate over $4 billion in sales in fiscal 2022, is developing into a fashion brand. It still has growth potential, given its small share in the global sports-inspired apparel and footwear market, estimated at $152 billion in 2021 (Euromonitor). 
  • VF has disposed of its weaker jeans and work brands, helping to pull its gross margins up to the mid-50s from the high-40s. 
  • As an upscale brand with high price points, Supreme brings higher margins than any of VF’s individual brands except Vans. There is potential for VF to expand Supreme in international markets.

Company Profile:

VF designs, produces, and distributes branded apparel and accessories. Its largest apparel categories include action sports, outdoor, and workwear. Its portfolio of about 15 brands includes Vans, The North Face, Timberland, Supreme, and Dickies. VF markets its products in the Americas, Europe, and Asia-Pacific through wholesale sales to retailers, e-commerce, and branded stores owned by the company and partners. The company has grown through multiple acquisitions and traces its roots to 1899.

(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.

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Funds Funds

Vanguard Energy Fund Investor Shares: An energy hybrid sensible

Approach

In late 2020, Vanguard changed this strategy’s prospectus benchmark from the MSCI ACWI Energy Index to the MSCI ACWI Energy + Utilities Index (a custom benchmark that splices the MSCI ACWI Energy and MSCI ACWI Utilities indexes). The firm made the change so this strategy could capitalize on the evolution away from fossil fuels and toward renewable energy sources by investing significantly more in electric and other utilities.

Portfolio

The MSCI ACWI Energy + Utilities Index is a dynamic benchmark, and its sector weights vary based on the performance of energy stocks versus utilities stocks. Meanwhile, the MSCI ACWI Energy Index gained 36% in 2021, whereas the MSCI ACWI Utilities Index returned 10% last year. The MSCI ACWI Energy + Utilities Index’s energy stake increased to 56% as of Dec 31, 2021, as result, while its utilities position decreased to 44% (per Vanguard data).

People

Tom Levering has good credentials for picking utilities stocks as well as energy equities. For starters, he spent several years as a utilities consultant before joining Wellington in 2000, and he served as an energy and utilities analyst for roughly two decades–and led Wellington’s combined energy/utilities team for a few years–before he took charge of this fund in early 2020.

Performance

The Investor share class of this strategy recorded a 27.7% gain in 2021. That’s significantly less than the 36.0% and 44.8% returns posted by the MSCI ACWI Energy Index and the average fund in the energy equity Morningstar Category, respectively. But this strategy is an energy/utilities hybrid that began 2021 with roughly 48% of its assets in utilities stocks and ended the year with roughly 44% of assets in such names, and the MSCI ACWI Utilities Index produced a gain of just 10.1% last year. The Investor share class’ 27.7% gain is significantly better than the 23.6% return of a 50/50 MSCI ACWI Energy/Utilities custom index and better than the 23.0% return of the strategy’s custom prospectus benchmark.

(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.

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Small Cap

New Breakfast Lineup Driving Impressive Growth for Narrow Moat Hostess

Business diagram on financial report with coins

Business Strategy and Outlook

Although the previous owners of the Hostess brand filed for bankruptcy in 2004 and 2012, we contend it was due not to a lack of brand equity but rather highly inefficient manufacturing and distribution systems, a powerful unionized workforce, and a high debt load. In the four years preceding the pandemic, Hostess averaged 6.4% organic growth, materially outpacing the sweet baked goods category. Market share gains were driven by regained shelf space that was lost during its 2012-13 hiatus, expansion into new channels (enabled by its differentiated direct-to-warehouse delivery system), and expanded breakfast and value brand offerings.

Hostess has created significant shareholder value via its disciplined acquisition strategy. Although the 2018 Cloverhill acquisition initially depressed margins, the business is now generating healthy profits, and the deal provided a breakfast platform and access to the club channel, where the firm is expanding the Hostess brand. 

Financial Strength

Although previous owners of the brand filed bankruptcy in 2004 and 2012, that Hostess Brands is a much different company now, having shed the highly inefficient manufacturing and distribution systems, powerful unionized workforce, and high debt load responsible for the insolvencies. The current company is an entirely new entity. After the 2012 bankruptcy, investors purchased only the brand rights and recipes from the bankruptcy court, freeing them of employee benefits and other labor obligations that had weighed down the company. The new company has a highly efficient cost structure and operates with a cost-effective direct-to-warehouse model, whereas the predecessor firm operated with a more expensive direct-store-delivery model.

That said, the firm targets a 3-4 times net debt/adjusted EBITDA, a bit higher than most packaged-food companies, given its plan to expand into adjacent categories via acquisitions. As of September 2021, the ratio stood at 3.3 times. But the firm generates an impressive amount of free cash flow. Hostess’ free cash flow as a percentage of sales should average 12% over the next five years, comparable to most packaged food companies. 

Bulls Say’s 

  • The firm’s DTW distribution model allows it to penetrate channels previously not accessible (channels difficult for the firm’s DSD competitors to access), providing attractive, untapped growth opportunities. 
  • Hostess’ acquisitions in the breakfast and cookie segments provide it with a great foundation to expand into adjacent categories. 
  • The Hostess brand has exhibited impressive staying power throughout its 100-year history, outlasting many nutritional and diet fads, and we think the firm’s commitment to invest behind further innovation should ensure this persists.

Company Profile 

Hostess Brands is the second-largest U.S. provider of sweet baked goods under the Hostess, Voortman, and Dolly Madison group of brands, including Twinkies, Cupcakes, Ding Dongs, Ho Hos, Donettes, and Zingers. In 2018, Hostess expanded its breakfast offerings with the purchase of Aryzta’s breakfast assets (the Cloverhill business), including a branded business and private-label deals, and in 2020 entered the cookie category via the Voortman tie-up. Although its roots stem from the 1919 launch of the Hostess Cupcake, the company filed for bankruptcy in 2012. Investors purchased the brands and restarted production in 2013, followed by a 2016 initial public offering. Most products are sold in the U.S., although third parties distribute some product to Mexico, the United Kingdom, and Canada. 

(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
Funds Funds Research Sectors

JPMorgan U.S. Large Cap Core Plus Fund performing well with solid philosophy and consistently applied bottom-up process

Process:

The strategy rests on a solid philosophy and a clearly designed and consistently applied bottom-up process. The ability to leverage the analysts’ insights through both long and short positions makes it distinctive, though small active bets make us somewhat cautious regarding its alpha potential. The strategy aims to capture temporarily mispriced opportunities through consistent use of the analysts’ long-term valuation forecasts. Those derive from an in-house dividend-discount model that is fed by the team’s earnings, cash flow, and growth-rate estimates. The analysts rank stocks in each industry based on their estimated fair value. The managers incorporate these rankings into their stock-picking, expressing modest sector preferences based on their macroeconomic view.

Portfolio:

This benchmark-aware and highly diversified fund held 289 stock positions per end of November 2021, of which 124 are shorts. The long leg of the fund is conservatively managed, with modest bets versus the Russell 1000 Index and an active share of 55%-60%. NXP Semiconductors, Alphabet, and Amazon.com were the largest active positions in the portfolio, with an overweight of around 200 basis points. Rivian was bought in 2021 for risk-management considerations to offset the underweight of Tesla, which the managers never held. Most stocks that are sold short in the 30/30 extension carry a weight of less than 25 basis points.

People:

Growing confidence in the two experienced portfolio managers and the large and seasoned analyst team supporting them leads to an upgrade of the People Pillar rating to Above Average from Average. Susan Bao is an experienced and long-tenured manager on this strategy and is well-versed in the firm’s hallmark investment process. Bao and Luddy have also managed this 130/30 strategy together since the start of the U.S.-domiciled vehicle in 2005 and since 2007 on its offshore counterpart. Steven Lee succeeded Luddy in 2018. Lee brings close to three decades of experience, but most of it was gained as an analyst. Since 2014, he has managed JPMorgan US Research Enhanced Equity, the firm’s analyst-driven long-short strategy, which serves as the blueprint for this strategy’s 30/30 extension. Although portfolio management is collegial, Bao concentrates on consumer, financials, and healthcare, while Lee is the lead for industrial/commodities, technology, and utilities/telecom. While their collaboration is still relatively short, it has already proved fruitful, and the managers have demonstrated their ability to generate alpha from both long and short ideas provided by the analyst team.

Performance:

It has outperformed the Russell 1000 Index on a total return and alpha basis since inception and over shorter time horizons. Since Susan Bao and Steven Lee have comanaged the strategy, a more relevant period to consider, the strategy also outperformed its average peer and the index. However, results were a bit mixed during that period, with a disappointing performance in 2018 offset by successful stock-picking predominantly in 2020 and 2021. The strategy had a good year in 2021, as stock selection in the long-leg and in the market-neutral component contributed positively. Positions in semiconductors, banks, and energy helped.

Table Description automatically generated

(Source: Morningstar)

Price:

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s costliest quintile. Such high fees stack the odds heavily against investors. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral.


(Source: Morningstar)                                                                     (Source: Morningstar)

About Funds:

A growing conviction in the duo that manages JPMorgan U.S. Large Cap Core Plus and its Luxembourg resided sibling JPM U.S. Select Equity Plus, and the considerable resources they have effectively utilised, lead to an upgrade of the strategy’s People Pillar rating to Above Average from Average. The strategy looks sensible and is designed to fully exploit the analyst recommendations by taking long positions in top-ranked companies while shorting stocks disliked by the analysts. Classic fundamental bottom-up research should give the fund an informational advantage. The portfolio is quite diversified, holding 250-350 stocks in total with modest deviations from the category index in the long leg. The 30/30 extension is broadly sector-, style-, and beta-neutral. Here the managers are cognizant of the risks of shorting stocks, where they select stocks on company-specific grounds or as part of a secular theme. For example, the team prefers semiconductors, digital advertising, and e-commerce offset by shorts in legacy hardware, media, and network providers. Short exposure generally stands at 20%-30%, with the portfolio’s net exposure to the market kept at 100%. The strategy’s performance since inception, which still has some relevance given Bao’s involvement, has been outstanding. 

(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

Boeing to Ramp 737 MAX Production Above Previous Peak Levels to Serve Global Aircraft Demand

Business Strategy and Outlook

Boeing is a major aerospace and defense firm that generates revenue primarily from manufacturing commercial aircraft. Boeing’s commercial aircraft segment can be split into two parts: narrow-bodied planes that are ideal for high-frequency short-haul routes, and wide-bodies that are used for transcontinental flights. Sales volumes for narrow-bodies have increased over the past 20 years the worldwide rise of low-cost carriers and an emerging-market middle class. 

Boeing’s narrow-body business is bruised after the extended grounding of the 737 MAX, but it is anticipated that the structural tailwinds driving narrow-body demand, particularly the development of emerging-market economies, will continue as the world emerges from the COVID-19 pandemic. As nations grow richer, their citizens tend to demand travel, and almost all aviation demand is served by two firms. It is projected that Boeing will ramp 737 MAX production above previous peak levels to serve global aircraft demand. Critical to our thesis is a normalization of U.S.-China trade relations, as management anticipates China will provide about a quarter of the growth in the aviation market over the next decade. 

It is expected that wide-body demand will recover more slowly from the COVID-19 downturn than narrow-body demand because wide-bodies are used for longer haul trips, which are unlikely to recover until a COVID-19 vaccine is distributed globally, which likely will begin happening in 2022. It is held that Boeing’s 787 Dreamliner is a fantastic aircraft for long-haul travel, but it is expected production issues will stop deliveries until 2022. It is alleged Boeing’s commercial deliveries will sustainably return to 2018 levels in 2026. 

Boeing has segments dedicated to the production of defense-specific products and aftermarket servicing. These businesses together generate about 38% of our midcycle operating income. It is broadly assumed GDP-like growth in the defense business and expect the services business will regain profitability faster than Boeing as a whole because aftermarket revenue increases directly with flights, but that global retirements will slow the recovery of this segment over the medium term.

Financial Strength

Boeing’s capitalization is looking more uncertain since the COVID-19 outbreak has substantially reduced air travel. EBITDA turned negative in 2020, which renders many traditional leverage metrics meaningless. The company ended 2021 with about $58.1 billion in debt and $16.2 billion in cash. Analysts’ expect EBITDA expansion and debt reduction over our forecast period to lead to gross debt/EBITDA levels at about 8.0 in 2022 and lower levels in subsequent years. Our estimated 2022 EBITDA covers interest expense 2.4 times, and the company has access to additional liquidity if necessary. In subsequent years, free cash flow is positive and EBITDA covers interest expense by about 5 or more times. The firm’s first capital allocation priority is to reduce debt, but will face considerable challenges as it needs to also reinvest in new technology to remain competitive. It is likely the correct balance between debt reduction and reinvestment is the critical question management needs to address.

 Bulls Say’s

  • Boeing has a large backlog that covers several years of production for the most popular aircraft, which gives us confidence in aggregate demand for aerospace products. 
  • Boeing is well-positioned to benefit from emerging market growth in revenue passenger kilometers and a robust developed market replacement cycle over the next two decades. 
  • It is probable that commercial airframe manufacturing will remain a duopoly for most of the world for the foreseeable future. It is anticipated customers will not have many options other than continuing to rely on incumbent aircraft suppliers.

Company Profile 

Boeing is a major aerospace and defense firm. With headquarters in Chicago, the firm operates in four segments, commercial airplanes, defense, space & security, global services, and Boeing capital. Boeing’s commercial airplanes segment generally produces about 60% of sales and two-thirds of operating profit, and it competes with Airbus in the production of aircraft ranging from 130 seats upwards. Boeing’s defense, space & security segment competes with Lockheed, Northrop, and several other firms to create military aircraft and weaponry. The defense segment produces about 25% of sales and 13% of operating profit, respectively. Boeing’s global services segment provides aftermarket servicing to commercial and military aircraft and produces about 15% of sales and 21% of operating profit. 

(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

Heavier Than Expected Content Investment Dents AT&T’s 2022 Outlook; FVE Down to $35

Business Strategy and Outlook

AT&T is the third largest wireless carrier in the U.S. Morningstar analyst believe that AT&T management is now putting the firm on the right path, shedding assets and refocusing on the telecom business, investing aggressively to extend its fiber and 5G networks to more locations, which will build on the firm’s core strengths. The complexity of the Warner transaction and the intensity of this investment will likely create a bumpy ride over the next couple years, but it is  believed that patience will be rewarded.

AT&T also benefits from its ownership of deep network infrastructure across much of the U.S. and its ability to provide a range of telecom services, particularly among enterprise customers. The plan to extend fiber to at least 3 million homes and businesses annually through at least 2025 builds on this position and should allow it to serve those locations directly and enhance wireless coverage in the surrounding areas.

Also, Morningstar analysts believe that the T-Mobile merger greatly improved the industry’s structure, leaving three players with little incentive to price irrationally in search of short-term market share gains. We don’t believe Dish Network presents a credible threat to the traditional wireless business. AT&T is also positioned to benefit as Dish builds out a wireless network as the firm recently signed a 10-year wholesale agreement that generates revenue for AT&T and gives it access to Dish spectrum.

Heavier Than Expected Content Investment Dents AT&T’s 2022 Outlook; FVE Down to $35

AT&T posted mixed fourth-quarter results and 2022 expectations. The wireless business continues to perform well, attracting customers at a solid clip. Management still expects to deliver at least 3% wireless service revenue growth in 2022, in line with Verizon’s forecast. Overall, the firm expects to generate $23 billion of free cash flow this year, down from $27 billion in 2021, reflecting heavy investments in networks and content, which as per Morningstar analysts believe are necessary to protect and build on its narrow economic moat. Thus, lowering fair value estimate to $35 from $36 but still believe the shares are substantially undervalued.

Financial Strength 

AT&T ended 2020 with net debt of $148 billion, down from $177 billion immediately after the Time Warner acquisition closed in mid-2018. The firm’s purchase of C-band spectrum for $23 billion, partially offset by the proceeds from assets sales, pushed the net debt load back up to $156 billion as of the end of 2021, taking net leverage to 3.2 times EBITDA from 2.7 times. This load is far higher than the firm has operated under in the past.In addition, the firm has issued more than $5 billion of general preferred shares. The WarnerMedia spin-off will take $43 billion of debt with it. Coupled with an additional $9 billion spectrum purchase in early 2022, AT&T will carry about $120 billion in net debt after the deal closes, which management expects will shake out in the range of 2.6 times EBITDA. That debt load compares favorably versus Verizon and reasonably well against T-Mobile. The firm plans to continue repaying debt, pulling net leverage below 2.5 times by the end of 2023, a year sooner than it had previously expected. The firm will use the Warner spin-off to adjust its dividend policy, targeting a payout of around 40% of free cash flow, down from more than 70% in 2021 (by our calculation), leaving substantial excess cash to reduce leverage or take advantage of opportunities, including share repurchases. In total, management will target a payout of around $8 billion-$9 billion annually, down from $15 billion in 2021. Morningstar analysts consider this policy makes sense, as it contemplates a sizable increase in network investment, notably in fiber infrastructure, which we believe is important to AT&T’s long-term health.

Bulls Say

  • AT&T has pulled together assets no telecom company can match. The firm has direct contact with more than 170 million customers across various products, providing an opportunity to build deeper relationships. 
  • Within the wireless business, AT&T holds the scale needed to remain a strong competitor over the long term. With Sprint and T-Mobile merging, industry pricing should be more rational going forward.
  • WarnerMedia holds a broad array of content rights and has a strong reputation with content creators. Shareholders will own 71% of this firm after it merges with Discovery

Company Profile

Wireless is AT&T’s largest business, contributing about 40% of revenue. The firm is the third-largest U.S. wireless carrier, connecting 66 million postpaid and 17 million prepaid phone customers. WarnerMedia contributes a bit less than 20% of revenue with media assets that include HBO, the Turner cable networks, and the Warner Brothers studios. AT&T plans to spin Warner off and merge it with Discovery to create a new stand-alone media firm. The firm recently sold a 30% stake in its traditional television business, which serves 15 million customers and generates about 17% of sales. This business will be removed from AT&T’s financials going forward. Fixed-line telecom services provided to businesses and consumers account for about 20% of revenue, serving about 15 million broadband 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
Shares Small Cap

Oshkosh to Focus on Driving Product Innovation and Aftermarket Offering

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

Business Strategy and Outlook

It is alleged, Oshkosh will continue to be a leading player across its end markets. The company’s enviable competitive positioning is underpinned by its ability to produce strong performing products that exhibit high durability. Remarkably, Oshkosh has been able to replicate its brand strength in unrelated end markets, such as aerial lifts and commercial vehicles (military, fire, and emergency). Despite having very few synergies between its businesses, Oshkosh has been adept at implementing its technology across vehicle platforms. 

Going forward, it is foreseen the company’s strategy will largely be focused on driving product innovation and improving its aftermarket offering. In defense, Oshkosh has proven that it can develop innovative products for military customers. The joint light tactical vehicle, or JLTV, program is a prime example of its strength in the segment, which is essentially the replacement to the Humvee. Research and development investments allowed the company to win a lucrative contract from the U.S. Department of Defense in 2015. The contract is expected to be up for a recompete in late 2022, upon which the U.S. DOD will then reconsider alternatives. It is held, Oshkosh will win an extension given its strong product capabilities and performance. In addition, it is likely, the company is focused on growing its aftermarket business, which will help improve the profitability of its largely cyclical businesses. 

Finally, the company has exposure to end markets with near-term, attractive tailwinds. In access equipment, the recently passed infrastructure legislation will create demand for its aerial equipment over the medium term. Many of its customers are construction companies, which are direct beneficiaries of increased infrastructure spending. It is also understood, Oshkosh’s aerial equipment benefits from a replacement cycle. Rental customers typically refresh their fleet every 7-8 years, setting up strong revenue growth in the near term. It is regarded, the company’s emergency and commercial vehicle businesses will benefit from the replacement cycle. In defense, it is projected the JLTV program to drive steady sales growth, as military customers ramp up their vehicle fleet.

Financial Strength

Oshkosh maintains a sound balance sheet. Total debt at the end of 2021 stood at $819 million, which is roughly where the company’s debt balance has been over the past decade. It is unforeseen for Oshkosh to increase its debt levels, as management looks to be set on keeping its net leverage ratio under 2 times for the foreseeable future. It is often seen net leverage ratios spike when companies make large acquisitions, but in Oshkosh’s case, management will likely pursue small tuck-in deals. This will allow the company to expand its product capabilities, without stressing its balance sheet. Oshkosh’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and returns cash to shareholders. It is believed Oshkosh can generate solid free cash flow throughout the economic cycle. By midcycle year, it is projected the company to generate over $500 million in free cash flow, supporting its ability to return free cash flow to shareholders. Oshkosh’s capital allocation strategy includes both dividends and buybacks. The company began paying out a dividend in 2014 and has steadily grown it over time. With respect to repurchases, Oshkosh has returned $1.7 billion to shareholders since 2010. Looking ahead, it is anticipated more of the same from management, in addition to a greater focus on tuck-in deals to acquire new product capabilities. In terms of liquidity, it is held, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of year-end 2021 stood at just under $1 billion on its balance sheet. It is also found comfort in Oshkosh’s ability to tap into available lines of credit to meet any short-term needs. The company has access to $833 million in credit facilities. It is regarded, Oshkosh maintains a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

 Bulls Say’s

  • Increased infrastructure spending in the U.S. and emerging markets could result in more aerial equipment purchases, driving higher revenue growth for Oshkosh. 
  • The U.S. DOD elects to stay with Oshkosh’s JLTV program following the recompete process in late 2022, providing strong revenue visibility through 2030. 
  • The average fleet age of Oshkosh’s emergency and commercial vehicles could lead customers to refresh their fleet with newer models, boosting Oshkosh’s sales.

Company Profile 

Oshkosh is the top producer of access equipment, specialty vehicles, and military trucks. It serves diverse end markets, where it is typically the market share leader in North America, or, in the case of JLG aerial work platforms, a global leader. After winning the contract to make the Humvee replacement, the JLTV in 2015, Oshkosh became the largest supplier of light defense trucks to the U.S. military. The company reports four segments—access equipment (42% of revenue), defense (32%), fire & emergency (15%), commercial (12%)—and it generated $7.9 billion in revenue in 2021. 

(Source: MorningStar)

General Advice Warning

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

Categories
Dividend Stocks

Corning’s Q4 Reaffirms Expectations for Long-Term Growth Despite Short-Term Margin Pressure

Business Strategy and Outlook

Corning is a materials science behemoth with differentiated glass products for televisions, notebooks, mobile devices, wearables, optical fiber, cars, and pharmaceutical packaging. In its 170 years of operation, the company has constantly innovated (including inventing glass optical fiber and ceramic substrates for catalytic converters) and oriented itself toward evolving demand trends that it can serve through its core competency of materials science. 

Corning is able to use its scale to invest heavily in research and development–$1 billion or more per year–and spread these expenses across its five segments. Centralizing R&D allows the firm to manufacture products for a materially lower cost than its competitors, all while using this hefty investment to maintain an innovation lead that results in leading share positions in its end markets. Corning’s cost advantage and intangible assets result in a narrow economic moat.

Financial Strength

Narrow-moat Corning capped off the year with strong fourth-quarter results, coming in at the top end of its guidance ranges for the top and bottom lines. Corning’s fourth quarter–and 2021 in general–show the firm reaping the benefits of its diverse end-market exposure and enjoying broad-based demand. The firm uses a combination of debt and strong operating cash generation to fund its capital and debt obligations, and this trend to continue. As of Dec. 31, 2021, Corning had $7 billion in total long-term debt and $2.1 billion in cash on hand. While the firm is highly leveraged, it has the longest debt maturity of any S&P 500 company, with debt maturities upward of 20, 30 and 40 years.

Through 2026, the company has barely $1 billion coming due. Corning is a reliable generator of free cash flow, despite capital-intensive businesses. Since 2016, Corning has averaged more than $700 million in free cash flow each year, even with the impact of COVID-19 in 2020. After $1.8 billion in free cash flow in 2021, it is expected that at least $1 billion in annual free cash flow over our explicit forecast.

Bulls Say’s 

  • Corning boasts a leading share in four distinct end markets: display glass, optical fiber, cover glass, and emissions substrates/filters. 
  • Corning’s portfolio is aligned toward global secular trends of increasing connectivity and efficiency. 
  • Corning’s debt has the longest average time to maturity of the entire S&P 500, giving it ample time and liquidity to fulfill its obligations.

Company Profile 

Corning is a leader in materials science, specializing in the production of glass, ceramics, and optical fiber. The firm supplies its products for a wide range of applications, from flat-panel displays in televisions to gasoline particulate filters in automobiles to optical fiber for broadband access, with a leading share in many of its end markets.

(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.

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Funds Funds

A strong option for investors seeking a low-volatility approach to investing

Fund Objective

The fund aims to achieve capital growth equal to, or greater than the Benchmark with lower volatility over the long term by investing globally in listed securities of companies having their registered office or exercising a preponderant part of their economic activities in emerging countries through the underlying fund.

Approach

The strategy’s robust foundation and consistent execution remain attractive features. The rules based, quantitative process is built on academic research demonstrating low-risk stocks leads to better risk adjusted returns. After an initial liquidity filter, Robeco’s quant model ranks the 2,000-stock universe on a multidimensional risk factor (volatility, beta, and distress metrics), combined with value, quality, sentiment, and momentum factors. In recent years, enhancements to refine the model have been added, including short-term momentum-driven signals that can adjust a stock’s ranking up or down by a maximum 10 percentage points. This should prioritise buy decisions for stocks that rank high in the model and score well on short term signals, and vice versa. From 2020 the team also allows liquid mega-caps to have more weight in the portfolio. Top-quintile stocks are typically included in an optimisation algorithm that considers liquidity, market cap, and 10-percentage-point country and sector limits relative to the MSCI Emerging Markets Index. A 200- to 300-stock portfolio is constructed with better ESG and carbon footprints than the index; rebalancing takes place monthly, generating annual turnover of about 25%. Stocks are sold when ranking in the bottom 40% of the model.

Portfolio

The defensive nature of the strategy translates into a higher allocation to low-beta and high-yielding stocks in the utilities, consumer staples and communication services sectors, while consumer discretionary stocks are a large underweight. The valuation factors embedded in the model have steered the fund clear from index heavyweight Meituan, while positions in Alibaba and Tencent were sold in August and September 2021, respectively. The quant approach gives management wide latitude to invest across the market-cap spectrum, and the diversified 200- to 300-stock portfolio has long exhibited a small/mid-cap bias compared with the index. However, the team’s decision to increase the maximum absolute weight in mega-caps to 4% from 3% for liquidity purposes has increased top-10 concentration to around 20%, double the level at inception. Still, 29% of assets remain invested outside of large- and mega- caps, about three times the MSCI Emerging Markets index’ allocation.

Performance

This defensive strategy has generally offered good volatility reduction during turbulent markets, capturing 67.77% of the losses of the MSCI Emerging Markets Index since inception, and 76.89% of the upside return. It did not live up to expectations in the coronavirus-dominated markets of 2020, falling more than the index, explained by market dynamics that did not work in its favour. Exposure to dividend stocks and traditional low-risk stocks did poorly compared to high-growth and momentum stocks; the tilt to mid and small caps also detracted. The portfolio lagged during the subsequent recovery that benefited underweight technology and e-commerce stocks. While the value rally in the final quarter did help, cyclical value stocks that are not favoured rallied the most. Consequently, the fund underperformed the Emerging Markets Minimum Volatility Index by 11 percentage points. Things changed in 2021, benefiting from low risk exposure and value tilt during the correction of Chinese e-commerce stocks following a regulatory crackdown. Taiwanese financials and Indian IT stocks aided returns, helping to recoup lost grounds. The fund’s alpha since inception versus the MSCI EM index remains positive, yet slightly behind the minimum volatility index. Although three- and five-year absolute returns have been below index, Sharpe ratios are broadly similar to index with a lower drawdown since inception.

About the fund

The fund aims to achieve capital growth equal to, or greater than the Benchmark with lower volatility over the long term by investing globally in listed securities of companies having their registered office or exercising a preponderant part of their economic activities in emerging countries through the underlying fund.

The investment strategy of the underlying fund seeks to capture the low risk anomaly. Analysis by Robeco has shown that low-risk stocks (in terms of volatility and beta) are able to generate returns equal to, or greater than, the market with lower associated risks. The beta of a stock or portfolio is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that the asset is being compared to.

(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.