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Financial Markets Sectors Technology Technology Stocks

Apple Inc is focused on sustaining growth and margins

fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.

Investment Thesis 

  • High barriers to entry.Strong strategic position in the rapidly growing global smartphone market especially with high end consumers. Loyal consumer base resulting in lower competitive pressure, and higher pricing power. 
  • Large cash balance and strong free cash flow supporting share buyback and dividend payout.
  •  Leading positions in iPhone; iPads; and Macs. 
  •  Services segment remains on track to double FY16 revenue by FY20. 
  • In terms of Other products (such as wearables and home products), AAPL seized the leading position off the back of a surge in smartwatch sales in a market expected to grow single digit till 2022 and double digit thereafter. 
  • Strong senior executive team reducing (not totally eliminating) key man risk.

Key Risks

  • Geo-political tensions. The current trade war between the US and China pose a threat to the company’s future profits. AAPL currently obtains components from single or limited sources (mostly China), the Company is subject to significant supply and pricing risks. Also, Greater China is a major market contributing to approximately 21% (Q218) of total revenue and any retaliatory efforts from Beijing could impact those sales. 
  • Whilst there are only a handful of competitors, the competition is Intense from Android manufacturers. The most notable competitors in the smartphone market (which contributes 62% of Apple’s revenues) are the Korean giant Samsung and two rapidly growing Chinese smartphone players in Huawei and Xiaomi. On raw performance specs (i.e., camera, maps, screen size, charge time, etc.), one may assert that AAPL devices are technically inferior to a handful of Android devices. 
  • Movements in U.S. dollar (USD). The greenback’s strong gain recently (due to rise in U.S. interest rates and moderating growth in other parts of the globe) has seen it rise to the highest level in nearly seven months, meaning foreign currency earnings of AAPL can be worth less when translated back to USD. The weakness in foreign currencies relative to USD will have an adverse impact on net sales during 2018.

Key highlights to 4Q18 results

  • 4Q18 revenue of $62.9bn, up +20% from the year-ago quarter, and quarterly diluted EPS of $2.91, up +41%, driven by record sales and strong momentum for iPhone, Wearables and Services. On the conference call, management highlighted “[revenue] was ahead of our expectations. That’s an increase of 20% over last year and our highest growth rate in three years”. 
  •  Gross margin was 38.3%, flat sequentially, in line with management’s expectations, as leverage from higher revenue offset seasonal transition costs. 
  •  International sales (61% of the quarter’s revenue) was strong, especially in Japan, up +34%, Rest of Asia Pacific, up +22%. The Americas (44% of revenue) saw revenue of $27.5bn, up +19%, whilst Europe at $15.4bn, was up +18% and China was up +16% at $11.4bn. 
  • Services revenue reached an all-time high of $10.0bn. Excluding a one-time favorable adjustment of $640m (in 4Q17), Services revenue grew from $7.9bn to $10bn, up +27% over the pcp. 
  • By product, iPhone, Services and Other products saw 29%, 17% and 31% sales growth, respectively, whilst disappointingly, iPad and Mac saw -15% and 3% sales growth respectively. 
  • iPhone ASP was $793 compared to $618 a year ago, driven by strong performance of iPhone X, 8 and 8 Plus, as well as the successful launch of iPhone XS and XS Max in the September quarter this year, while we launched iPhone X in the December quarter last year.

Company Profile

Apple Inc. (AAPL) designs and manufactures media devices and personal computers (Macs), and sells a variety of related software, services, accessories, networking solutions and third party digital content and applications. The company leads the world in innovation with iPhone, iPad, Mac, apple watch and Apple tv.

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 Research Sectors

Altius Sustainable Bond Fund- A fund that aims to provide a total return approach

The Altius Sustainable Bond Fund offers investors fixed interest investments, which are managed with the consideration of environment, social and corporate governance (ESG) principles. The Manager recently expanded its exclusion of companies engaged in thermal coal to all fossil fuels (or at least have revenue no greater than 10% sourced from these activities). The Fund is a credible offering. It is run by an investment team with strong credentials and lengthy investment experience in managed assets in the investment class (the team of six comprises three PMs all with at least 25 years’ experience and the remaining team members all with over 10 years’ experience).

Downside Risk: 

  • Interest rate risk (however the Fund’s total return focus should limit this). 
  • The Manager gets the thematic and top-down view wrong. 
  • Key man risk – Bill Bovingdon, Chris Dickman and Gavin Goodhand.

Investment Team:

The fund is managed by Australian Unity’s Cash and Fixed Interest team (Altius) consisting of experienced fixed interest investment professionals. The investment team is supported by a very experienced Investment Advisory Committee, which meet every quarter (formally). Below are the 

  • Bill Bovingdon – Executive Director, Chief Investment Officer 
  • Chris Dickman – Executive Director, Senior Portfolio Manager
  • Gavin Goodhand – Senior Portfolio Manager
  • Yen Wong – Head of Credit Research
  • Kirsten Lee – Credit Analyst.
  • Vincent Tang – Senior Portfolio Analyst

Performance:

(%)Fund  Benchmark**Out-performance
1-month-0.110.35-0.46
3-months0.390.77-0.38
1-year (p.a.)-0.550.32-0.23
3-years (p.a.1.422.49-1.07
5-year (p.a.)1.532.13-0.6
Since inception (p.a.)*2.262.65-0.39

Fees Structure:

The Fund has lowered its management fees 0.56% p.a. to 0.37%p.a. The Fund charges no performance fee.

Fund Positioning:

Sector Allocation:

Top 10 Holdings:

About the fund:

The Altius Sustainable Bond Fund is an Australian fixed interest fund that invests in companies which conduct their business and apply capital responsibly, considering a range of environmental, social and governance (ESG) issues. The Fund aims to provide a total return approach, offering duration exposure at appropriate points in the cycle, as well as positioning the portfolio defensively in a rising rate environment and invests only in domestic assets, thus avoiding importation of global risks (e.g. currency) and offering a different risk profile.

(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.

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Dividend Stocks Sectors

Transurban toll revenue declined -17.6% to $616m driving a -20.7% decline in EBITDA

Investment Thesis

  • Hard to replicate critical infrastructure assets. 
  • Consistent growth in earnings driven by four key factors: 1) Traffic (with mature toll roads delivering on average 2-4% annual traffic growth); 2) Prices (with escalation set with agreements with governments); 3) operational efficiency improvements; and 4) development contribution from new assets. 
  • Attractive yield – steady and growing distribution stream. 
  • Integration of technology and systems to enhance operations. 
  • Growth by asset acquisition and/or development of greenfield and brownfield projects. 
  • Exposure to infrastructure assets in the U.S. 
  • Strong management team with experience in deploying the developer-operator business model. 
  • West Gate Tunnel dispute is a drag on share price.

Key Risks and project deliverables

  • Bond yields experience a significant increase in the short term and track upwards over the long term. 
  • Valuation appears full at current levels. 
  • Project development cost blowouts. 
  • Reduced traffic volumes. 
  • Regulatory changes within the sector. 
  • Unfavorable financing arrangements. 
  • Poor acquisitions (derived from inaccurate modelling of traffic).

FY21 Results Highlights

  • Average daily traffic (ADT) decreased by 0.4% vs FY20 or 7.0% excluding the contribution from new assets, M8/M5 East and NorthConnex, which opened during the year and performed ahead of expectations. 
  • Free Cash decreased by 13.5% vs FY20, primarily reflecting the impacts of reduced traffic in Melbourne and North America due to Covid-19 related mobility restrictions as well as increases in cost related to strategic growth projects. 
  • FY21 distribution of 36.5cps including a final distribution of 21.5 cps for 2H21. 
  • Statutory profit of $3,272m, which includes $3,726m gain on sale of TCL’s Chesapeake assets. 
  • The Board declared a distribution of 21.5 cps for 2H21 which takes the total FY21 distribution to 36.5cps, of which 1.0 cent is fully franked. TCL highlighted that its distribution reinvestment plan is open for this distribution payment.

Company Profile 

Transurban Group (TCL) develops, operates, and maintains urban toll road networks in Australia and the United States. The company holds interest in 15 roads in Melbourne, Sydney, Brisbane, and Virginia. Transurban Group is headquartered in Docklands, Australia.

(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
Funds Funds

Allspring Diversified Income Builder Fund – Class C: A fund providing high income

Fund Objective

The investment seeks long-term total return, consisting of current income and capital appreciation.

Approach

The strategy targets a yield of 4%-5% and allocates 60%-90% of assets in fixed income, with the remainder in stocks. The team may also employ tactical shifts, vetted by the firm’s tactical trading council, by trading currencies or equity sector indexes, but these can be difficult to execute well consistently. Since introducing a multisleeved approach in early 2018, this strategy has undergone three prospectus benchmark shifts that signal it continues to experiment with its profile. The most recent adjustment (February 2020) decreased the equity exposure by 10 percentage points to 25% in order to make room for a more diversified bond sleeve. Other adjustments include the removal of a REITs sleeve in September 2018, the addition of a securitized bond sleeve in March 2019, and the introduction of an options sleeve in January 2020.

Portfolio 

As fixed-income markets have proved richly priced, the portfolio managers cited more attractive capital appreciation and dividends in the equity space, prompting an uptick in the equity holdings to roughly 38% here by September 2021. Within that equity sleeve, technology stocks (Microsoft MSFT is a holding) and healthcare stocks (such as Bausch Health Companies BHC, DaVita DVA, and AbbeVie ABBV) occupied roughly 27% and 17% of assets, respectively. 

High-yield bonds dominate the fixed-income portion of the strategy (59% of the portfolio as of September 2021), and it is worth noting that these are more sensitive to equity markets than the investment-grade fare employed by many peers for downside protection in stressed markets. Other bond sleeves here are modest but diversifying relative to the portfolio’s historical profile and include municipal bonds (3%) and securitized bonds (2%).

People

Kandarp Acharya as co manager alongside Margie Patel, who was the sole manager since 2007 but is departing this strategy (though she remains on Allspring Diversified Capital Builder EKBYX) as of Dec. 13, 2021. This move is accompanied by the arrival of quantitative researcher Petros Bocray, a 15-year firm veteran and Acharya’s collaborator on Allspring Asset Allocation EAAIX.

Performance

Over the strategy’s short tenure with its new contours (January 2018 through November 2021), the 5.5% annualized return of its R6 share class modestly outpaced the 5.3% return of the Morningstar Conservative. Target Risk Index and trailed the 6.7% return of its custom benchmark (60% ICE BoA U.S. Cash Pay HY Index, 25% MSCI ACWI, and 15% Barclays Aggregate Index). From an absolute return perspective, the strategy also generated a higher return than the 5.0% median of its typical allocation–15% to 30% equity Morningstar Category peer.This strategy has a riskier profile than many strategies in the category, particularly during stress periods, resulting in risk-adjusted returns (as measured by the Sharpe ratio) that trail all comparative points (typical category peer and benchmark as well as custom benchmark) over the aforementioned period. In three recent stress periods (when energy prices plummeted from June 2015 to February 2016, the 2018 fourth-quarter high-yield sell-off, and the coronavirus-driven market panic of Feb. 20-March 23, 2020), the fund lagged its category index by more than double and trailed its typical peer.

Top 10 Holdings

C:\Users\Akhila\Downloads\Screenshot 2021-12-10 121827.png

About the fund

The Fund seeks high current income from investments in income-producing securities. The Fund will normally invest at least 80% of its assets in income producing securities, including debt securities of any quality, dividend paying common and preferred stocks, convertible bonds, and  

derivatives. The strategy targets a yield of 4%-5% and allocates 60%-90% of assets in fixed income, with the remainder in stocks. The team may also employ tactical shifts, vetted by the firm’s tactical trading council, by trading currencies or equity sector indexes, but these can be difficult to execute well consistently.

(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

Touchstone Flexible Income Fund Class Y: A flexible Income fund providing income as well as capital appreciation

Approach

The strategy’s primary hunting grounds include U.S. investment-grade and high-yield corporates, preferred stock, municipal bonds, and U.S. Treasuries. The strategy gains exposure to high-yielding corporate and municipal bonds via closedend funds–an uncommon tactic–which compose 5% to 15% of assets. Within these positions, the team focuses on the fund’s discount and quality of cash flow rather than its underlying holdings. Unlike most peers, the team doesn’t invest in emerging-markets debt, nor do they take on any currency risk. The strategy is benchmark-agnostic and flexible in its construction across asset classes and credit quality. It can invest up to 40% in junk-rated debt, which had peaked near 30% (including non-rated debt) up until September 2020. As of October 2021, the strategy’s non-investment grade exposure stands at 45%, owing to the increase in nonrated debt over the last year. The strategy tends to be concentrated; it is common to see individual positions between 2% and 4% each.

Portfolio

 The strategy continued to maintain a high allocation to preferred securities (34% of assets as of October 2021), followed by structured credit (32%, mostly in commercial mortgage-backed securities). The team modestly added shorter term Treasuries and maintained a nominal allocation to cash and cash equivalents towards the end of 2020 due to near zero interest rates. However, in the first quarter of 2021, the portfolio cut its 9% allocation to Treasuries to zero as the long-end of the curve sold off and no desirable returns were seen in the short-end. Post the first quarter of 2021, the portfolio’s exposure to treasuries, mostly short-dated, has increased drastically to 16% as of October 2021, owing to the flat credit curve and the credit spreads for riskier securities having tightened to pre-pandemic levels. The team has also reduced the exposure to corporate credits, both investment-grade (3.7%) and high yield (6.4%), given tight credit spreads. The portfolio’s exposure to nonrated debt has increased and stood at 30% as of October 2021, an increase of roughly 18 percentage points from last year. Most of this exposure comprises multifamily MBS originated by Freddie Mac, but still carry some risk.

Performance

 Institutional share class has shown middling performance within its nontraditional Morningstar Category peer group, returning 3.8% annualized. From November 2018 through November 2021, the strategy’s I share class has gained 6.5% annualized, outpacing more than 65% of its category peers, and beating its typical rival by 60 basis points. The team has made good use of its flexible mandate by tilting towards Treasuries and high-quality securitized credit heading into 2020 which helped ease some pain as the markets tumbled during the coronavirus-led self-off from Feb. 20 to March 23, 2020. However, the strategy’s 14.2% loss over that stretch was still in line with its peers. As markets recovered, the strategy gained a swift 25.3% from March 24, 2020, through to the end of the year, owing to the addition of battered corporate credits that rebounded later that year

(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

Xero Ltd. delivered strong results with improving key metrics

Modern financier with papers sitting in front of computer monitor with chart and graph of sales rate

Investment Thesis:

  • Competent leadership team with a proven track record of delivering strong growth (Strong top-line momentum driven by strong support of accountants and bookkeepers with annualised monthly recurring revenue increasing at CAGR 32% and strong subscriber growth with positive LTV (Lifetime Value) trends (over FY15-19, ANZ LTV grew at CAGR 48% and International LTV grew at CAGR 65%)). 
  • Solid product offering that is secure, scalable and efficient technology which is competing against competitors with technology that has legacy issues. We note that XRO’s small business platform is an ecosystem of more than 700 connected apps backed by a community of more than 50,000 users of XRO’s API developer tools. Going forward the Company could potentially increase its revenue by monetising its platform in other ways like charging third party app developers. 
  • Potential for meaningful acquisitions to fill gaps in product capability. In our view, the Company is well positioned to make acquisitions going forward (given its balance sheet and funding status). 
  • The Company continues to focus on cloud accounting, and we see significant upside potential in the sector given the fact that the current levels of small business cloud accounting adoption globally is estimated to be less than 20% of the total market or opportunity across English-speaking countries in which the Company operates.

Key Risks:

  • Decrease of migration to cloud software. 
  • Currency headwinds due to weakening of NZ$ relative to AUD, USD and Pound. 
  • Deteriorating sentiment if the economy and IT spending weakens. 
  • Excessive competition from other established players like Intuit leading to loss of market share. 
  • Inability to extract higher operational efficiencies as the Company scales up. 
  • Issues in gaining market share especially in markets with established incumbents.

Key highlights:

  • Improving trends in key metrics – (1) subscriber growth; (2) higher ARPUs (average revenue per user); and (3) lower churn.
  • A key catalyst for XRO’s share price going forward will be execution and growth in North America. 
  • Despite relatively mature markets in New Zealand and Australia, XRO’s subscriber growth in 1H22 in both markets (NZ +16% and Aus +22%) was a standout from our perspective.
  • The Company finished 1H22 with net cash position of NZ$125m and has total available liquidity of NZ$1.2bn.
  • Operating revenue was up +23% (or up +26% in constant currency) to NZ$505.7m, with total subscribers up +23% to 3.0m and ARPU (average revenue per user) up +5% to NZ$31.32
  • The financial position for different markets of Xero are as follows:
  • Australia: Segment revenue was up +22% to NZ$225m, with net additions up +24% and subscribers up +22% to 1.24m. 
  • New Zealand: Segment revenue was up +13% to NZ$72m, with net additions up +55% and subscribers up +16% to 480,000. 
  • United Kingdom: Segment revenue was up +33% to NZ$133m, with net additions up +160% and subscribers up +23% to 785,000. 
  • North America: Segment revenue was up +5% to NZ$30m, with net additions up +130% and subscribers up +23% to 308,000. 
  • Rest of World: Segment revenue was up +72% to NZ$46m. with net additions up +136% and subscribers up +48% to 201,000.

Company Description: 

Xero Ltd (XRO) is a software as a service (SaaS) company, engaged in the provision of a platform for online accounting and business services to small businesses and their advisors. The Company operates through two operating segments: Australia and New Zealand (ANZ), and International (UK + North America + Rest of the World).

(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
Sectors Technology Stocks

Aristocrat Leisure to gain strong boost through Playtech acquisition

Investment Thesis:

  • Fasting growing Digital business, with strong execution by management
  • Expectations of new product releases will gain significant traction with customers 
  • Increasing skew towards recurring revenue
  • Global gaming exposure
  • Growing market share in underpenetrated markets
  • Leveraged to a falling AUD
  • Strong balance sheet with ample liquidity provides management with significant flexibility to take advantage of value accretive acquisitions or pursue organic growth opportunities 

Key Risks:

  • Any further downside to the Japanese market
  • Low replacement/uptake in the US market
  • Competition risk
  • Loss in market share
  • Lack of product development
  • Adverse currency movements
  • Adverse outcome from any potential court case

Key highlights:

  • The proposed acquisition of Playtech is strategically and financially compelling. It will accelerate Aristocrat strategy and provide material scale in the already large and growing $70bn online RMG segment.
  • ALL’s share price has performed strongly and is up 34.9% over a one-year period
  • Enhanced market leading positions in gaming operations, measured by the number of machines and fee per day
  • Sustainable growth before share across key gaming outright sales markets globally
  • Further growth in Pixel United bookings with UA spend and expected to be within the recent range of 26% and 29% of overall Pixel United revenues, pending priming and success of new game launches during the year
  • Continued D%D investment to drive sustained long-term growth with investment likely to be modestly above the historical range of 11% to 12% of revenue
  • operating revenue of $4,736.1m was up +14.4% on a reported basis, or +24.8% in CC, whilst EBITDA of $1,542.9m was up +43% on a reported basis and +58% higher on a CC basis
  • ALL’s normalised profit after tax and before amortisation of acquired intangibles (NPATA) of $864.7m, was up +81% in reported terms, and +102% in constant currency (CC) relative to the prior corresponding period (pcp), driven by strong product and portfolio performance, and profitable growth across both Aristocrat Gaming and the Pixel United businesses

Company Description: 

Aristocrat Leisure Ltd (ASX: ALL) manufactures and sells gaming machines in Australia and globally, to casinos, clubs and hotels. In addition, ALL provides complementary products and services such as gaming systems and software, table gaming equipment and other related products.

(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

Core business of Magellan Financial Group managed to grow despite a lesser outperformance

Investment Thesis:

  • Principal Investments could grow to become a meaningful contributor to group performance over the medium-to-long term
  • MFG no longer trades at a significant premium to its peer-group post the recent derating 
  • Acquisitions could pave growth runways, helping to ease the Company’s fund capacity constraints 
  • Average base management fee (bps) per annum (excluding performance fee) continues to be stable but there are risks to the downside from pressures on fees (which is an industry trend not specific to MFG alone)
  • Continued strong investment performances, especially in the global and infrastructure funds 
  • Growing levels of funds under management 
  • New strategies could significantly increase addressable market and help sustain earnings growth

Key Risks:

  • Decline in fund performance
  • Risk of potential funds outflow – both retail and institutional (loss of a large mandate)
  • Execution risk with the acquisitions
  • Significant key man risk around Hamish Douglass and key management or investment management personnel
  • New strategies fail to add meaningful earnings to the group

Key highlights:

  • MFG’s FY21 adjusted net profit of A$412.7m, declined -5.8% over pcp, which came in below consensus estimate of A$434m, as a year of trailing the market for MFG’s most important global equities strategy, the Magellan Global Fund, reduced the performance fee take for FY21 by -63% to $30.1m
  • The core business of funds management still managed to grow despite a lesser outperformance overall, and the Company reported management and service fees increasing +7% over pcp to $635.4m and average FUM increase of +9% to $103.7bn
  • The Board declared a final dividend of $1.141 a share taking FY21 dividend to $1.22 a share and announced a dividend reinvestment plan discounted at 1.5%
  • Management saw total Funds Management expenses declined -8.5% over pcp to $106.9m
  • Management has restructured three Global Equities retail funds into a single trust (Magellan Global Fund) with total FUN of $18bn

Company Description: 

Magellan Financial Group Ltd (MFG) is a specialist funds management business. MFG’s core subsidiary, Magellan Asset Management Ltd, manages ~$53.6bn of funds under management across its global equities and global listed infrastructure strategies for retail, high net worth and institutional investors.

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

Orora Ltd. reported solid operating earnings of $369.3m, up by 11.5%

Investment Thesis:

  • Trading on fair value relative to our valuation
  • Exposure to both developed and emerging markets’ growth 
  • Near-term headwinds should be in the price
  • Revised strategy following recent strategic review
  • Bolt-on acquisitions (and associated synergies) provide opportunity to supplement organic growth 
  • Leveraged to a falling AUD/USD 
  • Potential corporate activity
  • Capital management (current on-market share buyback plus potential for additional initiatives)

Key Risks:

  • Competitive pressures leading to margin erosion 
  • Input cost pressures which the company is unable to pass on to customers 
  • Deterioration in economic conditions in US, EM and Australia
  • Emerging markets risk 
  • Adverse movements in AUD/USD
  • Declining OCC prices

Key highlights:

  • ORA delivered a solid FY21 result, which came in ahead of consensus expectations – revenue of $3,538m was up +7.8% YoY
  • Operating earnings (EBITDA) of $369.3m was up +11.5% YoY
  • NPAT of $156.7m was up +34.1% YoY
  • EPS up +29% to 16.9cps (also driven by the on-market share buyback) and full year dividend of 14cps up +16.7% on pcp (representing a payout ratio of ~80% vs target range 60-80%)
  • Strong performance in the North America business, which delivered revenue growth of +8.2% and EBIT growth of +43.0% year-on-year (YoY) in constant currency
  • Leverage increased from 0.9x to 1.5x, driven by the impact of the on-market share buyback
  • With a strong balance sheet, the Company is looking to invest to drive growth
  • Australasia segment revenue was up +6.1% to $834
  • North America segment revenue was up +8.2% to US$2,019.8m and EBIT was up +43.0% to US$73.8m

Company Description: 

Orora Limited (ORA) provides packaging products and services. The Company offers fiber, glass and beverage can packaging materials in Australia and Asia and packaging distribution services in North America and Australia.

(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

Hanesbrands’ Investments in Key Brands as Part of Its Full Potential Plan Support Its Narrow Moat

Business Strategy and Outlook

Hanesbrands is the market leader in basic innerwear (69% of its 2020 sales) in multiple countries. In May 2021, the firm unveiled its Full Potential plan to expand Global Champion, bring growth back to innerwear, improve connections to consumers (through greater marketing and enhanced ecommerce, for example), and streamline its portfolio.

As part of Full Potential, Hanes intends to build on Champion’s increasing popularity in North America, Asia, and Europe. Although COVID-19 and the discontinuation of the C9 label at Target hurt sales in 2020,it is believed that Champion will continue its growth path in 2021 as it and other activewear apparel have become more than just athletic apparel and are increasingly worn as lifestyle/fashion brands. Moreover, Hanes recently found a new home for C9 as an exclusive brand for wide-moat Amazon. Hanes’ management forecasts Champion will reach $3 billion in global sales in 2024, up from about $2 billion this year, which we see as an achievable goal.

Another key strategy for Hanes is to improve the efficiency of its supply chain. It has already made progress in this area, having achieved a 15% increase in manufacturing output over the past three years. Hanes, unlike many rivals, primarily operates its own manufacturing facilities. More than 70% of the more than 2 billion apparel units sold by the company each year are manufactured in its own plants or those of dedicated contractors. It is believed that the combination of strong pricing and production efficiencies allow Hanes to maintain operating margins above 20% for its American innerwear business despite somewhat inconsistent sales.

Morningstar analyst maintains per share fair value estimate of $26 after the release of Hanes’ 2021 third-quarter report.The fair value estimate implies 2022 adjusted price/earnings of 13 and enterprise value/adjusted EBITDA of 10.

Financial Strength 

Hanes is saddled with heavy debt from its acquisition spree in 2013-18 and closed September 2021 with $3.7 billion in debt. However, the firm also had nearly $900 million in cash and no borrowings under its revolving credit facilities of just over $1 billion. Moreover, it intends to refinance its $700 million in 5.375% 2025 senior notes at a lower interest rate to save about $35 million per year in interest costs. Hanes has a stated goal of bringing debt/EBITDA below 3 times by 2024.The company bought back significant amounts of stock in 2016 and 2017 and repurchased $200 million in shares in early 2020 before the virus spread. .Hanes, unlike many peers, did not suspend its dividend due to the virus. Its annual dividend has been set at $0.60 per share since 2017.Hanes may expand the business through acquisitions, although it has not made a major acquisition since 2018. We do not include acquisitions in our model due to uncertainty about timing, size, and profitability.

Bulls Say 

  • Hanes’ Champion is a contender in the hot but crowded athleisure space. The brand is already well known in North America and parts of Europe, and there is significant potential in China and other underpenetrated markets. 
  • Hanesbrands has successfully introduced brand extensions that have allowed it to expand shelf space and increase price points in the typically staid category of basic apparel. 
  • After a review, Hanesbrands announced a new strategic plan called Full Potential to boost growth and reduce expenses, which should benefit its brand strength.

Company Profile

Hanesbrands manufactures basic and athletic apparel under brands including Hanes, Champion, Playtex, Bali, and Bonds. The company sells wholesale to discount, midmarket, and department store retailers as well as direct to consumers. Hanesbrands is vertically integrated as it produces more than 70% of its products in company-controlled factories in more than three dozen nations. Hanesbrands distributes products in the Americas, Europe, and Asia-Pacific. The company was founded in 1901 and is based in Winston-Salem, North Carolina.

(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.