Tag: Recommendations

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Dividend Stocks

Swiss Re Is an Undervalued and Fairly Run Reinsurer

Business Strategy & Outlook

Swiss Re has a history of overly aggressive expansion and typically too much leverage. The first example of this can be seen in the acquisition of General Electric Insurance Solutions in the earlier part of the new millennium. This was financed through a combination of debt and share issuance, a historic and largest Swiss Re acquisition in that period. Furthermore, Swiss Re continued down a path of building out its reinsurance securitization offering, structuring pools of credit, mortality and natural catastrophe risk. This did not work out well because the Swiss Re increased correlation and dependence and when financial markets fell so did the value of these securities. Swiss Re’s leverage position and problems with its securitization program led the business to complete a capital raise and take on Berkshire as a preferential terms’ investor. This investment built on a previously established relationship where Berkshire reinsured substantially all of Swiss Re’s yearly renewable-term United States mortality book, another area where Swiss Re had run into difficulties. 

The latest round has been aggressive expansion for commercial insurance and this came back to bite the business. What is a business that is still overleveraged and one where the levels of debt do need to be addressed? However, from an operational perspective one can see a company that is focusing on building a cleaner and more traditional reinsurance business, one that focuses on underwriting and shifts away from reliance on investment returns to fund unprofitable long-tailed lines of underwriting. One can see a turnaround in corporate solutions starting to come to fruition and the nascent stronger move into more specialist lines of business and find the management team to be a lot more disciplined. However, one would like to see the business reign in its buybacks and concentrate more on building out the long-term profitability of this business.

Financial Strengths

Swiss Re does not have a particularly strong balance sheet. It would help the business immensely if management chose to pay down more debt. Swiss Re has around $11.2 billion of debt. The majority of this is long term, and the most substantial portions don’t mature for a few years. The shape of the debt isn’t well balanced, with the vast majority issued as subordinated. This means there are some pockets of very high interest rates and this is reflected in the broader group’s interest. Swiss Re pays an annual dividend that it intends to grow annually in line with long-term earnings growth and maintain the prior year’s dividend as a minimum level. The business also actions buybacks, though given the macro uncertainty it would be prudent if the business held off over the next few years from doing this.

Bulls Say

  • Swiss Re looks to be on the cusp of producing consistent results in the long term under the performing commercial insurance division. 
  • The quality of Swiss Re’s investment portfolio is high. 
  • Swiss Re pays a good dividend.

Company Description

Swiss Re was established in 1863 in Zurich. Since then, the business appears to have cycled through quite a few strategies. Namely in the early part of the millennium Swiss Re took on an investment banker who eventually led the business. Over the next 10 years CEO Jacques Aigrain built Swiss Re’s financial solutions into a powerhouse and helped the company complete its first securitization, finalized in 2005 for credit reinsurance. This division became a leader for Swiss Re but then disaster struck during the global financial crisis. Swiss Re mothballed this unit and approved a CHF 5 billion capital raise. Now the business concentrates more fundamentally on property and casualty, life and health reinsurance. Swiss Re also has a good commercial insurance offering named corporate solutions.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Cochlear is investing significantly to increase awareness as well as funding research to support payer reimbursement

Business Strategy & Outlook

Cochlear is the market leader in cochlear implants with a consistent share of roughly 60% across developed markets. Cochlear implants became the standard of care many years ago for children in developed markets with profound hearing loss or deafness. With this market segment largely penetrated, the company is looking elsewhere for growth with developed-markets adults the next primary focus and emerging-markets children after that. Roughly 70% of units are sold to developed markets and the remaining 30% to emerging markets, where over 90% are for children. Large price differentials in the lower range of products result in 80% of revenue being earned in developed markets and 20% in tender-oriented emerging markets. The average unit prices achieved in developed markets are double those in emerging markets. In the developed-markets children segment, the growth tailwinds from increasing market penetration and the shift from single to bilateral implants over the last 15 years have played out, and forecast growth in this segment to reduce to the birth rate over time.

The adult developed market is more difficult to penetrate, and required investment to expand this segment will restrain significant operating margin expansion. Currently, penetration is still estimated to be under 5%, and Cochlear is at a pivot point as it invests to be adopted more widely by seniors with profound hearing loss. Prevalence of profound hearing loss increases over 65 years and has a steep increase over 80 years of age. As such, an ageing population and low penetration suggest a large opportunity. However, hearing aids, not cochlear implants, are the standard of care. Cochlear is investing significantly to increase awareness as well as funding research to support payer reimbursement. But two main challenges can be seen to accessing this market fully: first, the relatively low willingness of older candidates to undertake such invasive surgery, and second, the improvements

in hearing aids. The hearing aid market is increasing its penetration in the severe hearing loss category, leaving only the smaller profound hearing loss as the cochlear implant niche.

Financial Strengths

The company has typically enjoyed low capital intensity and high cash conversion, affording it to pay out 70% of earnings as a dividend. However, with the confluence of operational weakness due to deferred elective surgeries as a result of the coronavirus, a peak in the capital cycle, and a patent infringement penalty becoming payable, the company faced a liquidity crunch. Consequently, it completed an AUD 850 million equity raise in fiscal 2020, adding an additional 10% to shares on issue and forecast the company to carry no net debt for the foreseeable future. The company is not acquisitive and organic growth is driven by R&D spending of roughly 12% of revenue per year.

Bulls Say

  • There are signs Cochlear is looking to expand beyond the hearing market with the investment in Nyxoah, a company focused on development of a hypoglossal nerve stimulation therapy for the treatment of obstructive sleep apnea.
  • The annuity like revenue stream from sound processor upgrades and accessories is an increasingly important component of the revenue stream.
  • Cochlear earns ROICs well ahead of the cost of capital even in bear-case scenario, which is testament to the high quality of the company.

Company Description

Cochlear is the leading cochlear implant device manufacturer with around 60% global market share. Developed markets contribute 80% of group revenue where cochlear implants are the standard of care for children with severe to profound hearing loss. The company also actively targets the growing cohort of seniors in developed markets. Tender-oriented emerging markets contribute the remaining 20% of group revenue. Main products include cochlear implants, bone-anchored hearing aids, and associated sound processors. In fiscal 2020, 49% of revenue came from the Americas, 35% from Europe, the Middle East, and Africa, and 16% from the Asia-Pacific segment.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Treasury’s volume share gains and positive mix shift support strong enough brand assets

Business Strategy & Outlook

Treasury Wine Estates has increasingly focused on building high-end brands in its portfolio, particularly in luxury (bottles priced above AUD 20) and “masstige” (bottles priced from AUD 10 to AUD 20) wine. With this focus, the company’s revenue from higher-end wines has risen to over 90% in fiscal 2022 from 43% in early 2014, both from growth in its high-end products and purposeful reduction of low-end, or commercial, wine sales. Continued end-market premiumization to benefit Treasury, leading to market share gains in Australasia and North America, which together made nearly half of operating earnings in fiscal 2020. In recent years, global wine consumption has proven sluggish, but high-priced wines have bucked this trend, with luxury and masstige volumes growing at mid- to high-single-digit rates in developed regions such as Australia and the U.S., per company estimates. However, Treasury faced an installation of a sizable tariff against its imported product in China in fiscal 2021, effectively shutting the door in what was arguably Treasury’s most important market, comprising 30% of earnings in fiscal 2020. The company plans to reallocate some of this wine to other markets, but the associated sales and marketing efforts will take time, reducing growth from previous expectations.

Treasury also faces risks from unfavorable weather effects, sensitivity to the consumer cycle, and inelastic industry supply that frequently results in wine gluts or shortages. That said, the diversity of Treasury’s grape and bulk wine supply should significantly mitigate these concerns. And bringing in a significant proportion of its grape and bulk wine from outside suppliers increases the proportion of variable costs and ensures a lower-cost supply in times of surplus. But it cannot be believed Treasury’s volume share gains and positive mix shift support strong enough brand assets to offset industry fragmentation, a proliferation of branded offerings, limited customer switching costs, and potential for changing consumer tastes. As such, despite a strong position in Australia, the company will likely continue to combat competitive pricing and promotional activity globally.

Financial Strengths

Treasury is in good financial health. The firm’s net debt/adjusted EBITDA ratio, including operating leases stood at 1.8 times at June 2022, and EBITDA to cover interest expense (including operating leases) an average of 8 times over the next five years. The company’s next major debt maturity is in fiscal 2024, but there are no issues either relaying or refinancing this payment. At June 2021 the company’s liquidity, comprising cash and undrawn committed debt facilities, was solid at approximately AUD 1.3 billion. Over the long run, there’s probably some room for additional debt, given management’s target of net debt/adjusted EBITDA of 2.0 times through the cycle, potentially stretching to 2.5 times, compared with the low levels today. That said, the company will remain focused on maintaining an investment-grade credit profile. The company aims to pay out 55%-70% of its earnings as dividends; an average of about 65% over the next five years. Treasury can continue to pay out dividends near the top of this range, but anticipate dividends to be only partially franked from fiscal 2025. While Treasury is an Australian taxpayer, the majority of earnings are derived outside Australia, and the available franking credits to be exhausted more quickly than they are replenished over the coming years.

Bulls Say

  • Wine consumption growth in Asia should continue growing at high rates over the long run, and is a high margin business for Treasury given a focus on luxury and mid-range wine. 
  • Treasury’s focus on higher-priced wine than in the past puts the company on-trend in global wine, and should drive substantial earnings growth as profitability expands. 
  • Additions of new high-end wine brands, either organically or through acquisition, drive better grape utilization, improving margins, and higher ROICs.

Company Description

Treasury Wine Estates is an Australia-based global wine company that demerged from Foster’s Group in 2011. The company is among the world’s top five wine producers, and owns a portfolio that includes Australian labels such as Penfolds and Wolf Blass, U.S. wines like Chateau St Jean and Sterling, and newly launched names such as 19 Crimes and Maison de Grand Esprit. An acquisition of Diageo’s wine business in 2016 added additional U.S. brands including BV and Stags’ Leap. Treasury owns over 130 wineries, with more than 13,000 planted hectares.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Carlyle Group is one of the world’s largest alternative asset managers

Business Strategy and Outlook 

Carlyle Group has built a solid position in the alternative-asset management industry, using its reputation, broad product portfolio, investment performance track record and cadre of dedicated professionals to not only raise capital but to maintain its reputation as one of the go-to firms for institutional and high-net-worth investors looking for exposure to alternative assets. Unlike the more traditional asset managers, which have had to rely on investor inaction (driven by either good fund performance or investor inertia/uncertainty) to keep annual redemption rates low, the products offered by alternative asset managers can have lockup periods attached to them, which prevent investors from redeeming part or all of their investment for a prolonged period of time. Carlyle Group is one of the world’s largest alternative asset managers, with $376.4 billion in total assets under management, including $259.6 billion in fee-earning AUM, at the end of June 2022. The company’s portfolio is broadly diversified across business segments–private equity, which includes private equity, real estate, infrastructure and natural resources funds (accounting for 41% of fee-earning AUM and 65% of base management fees during 2021), global credit (45% and 24%) and investment solutions (14% and 11%)–and primarily serves clients in the institutional channel. With customer demand for alternatives increasing and investors in alternative assets attempting to limit the number of providers they use, larger-scale players like Carlyle Group are well positioned. 

That said, investors in the firm are betting that the company’s solid investment track record and fundraising capabilities will continue. While Carlyle Group’s ability to earn excess returns over the next 10 years, it will become increasingly difficult for the company to do so longer term, as increased competition (including from more traditional asset managers like BlackRock), continued pressure on fees, and a general maturation of the segment (from a solid period of above average growth due to shifting investor demand for alternatives) weigh on results.

Financial Strength

Carlyle Group’s business model depends heavily on having fully functioning credit and equity markets that will allow its investment funds to not only arrange financing for leveraged buyouts and/or additional debt issuances for the companies it operates but cash out of them once they’ve run their course. While the company saved itself a lot of headaches during the collapse of the credit and equity markets during the 2008-09 financial crisis by having relatively little debt on its own books, debt levels have crept up over the past 10 years. Given that asset managers like Carlyle Group have a high degree of revenue cyclicality and operating leverage and are generally asset-light, they should not maintain more than low to moderate levels of financial leverage. The company entered 2022 with $2.1 billion in longer-term debt (on a principal basis), with close to 70% of that amount coming due during 2030-50. The company also has a $1 billion revolving credit facility that expires in April 2027, with no balance outstanding at the end of June 2022. Assuming the company closes out the year in line with the projections, Carlyle Group should enter 2023 with a debt/total capital ratio of 24%, debt/EBITDA at 1.9 times, and interest coverage of more than 10 times. On the distribution front, share repurchases have been rare over the past decade, with the company repurchasing far less stock than it issued. Dividend payments, meanwhile, exceeded $4.8 billion during 2012-21 but are expected to account for only around 30% of distributable earnings annually going forward.

Bulls Say’s

  • Carlyle Group, with $259.6 billion in fee-earning AUM at the end of June 2022, is one of the go-to firms for institutional and high-net-worth investors looking for exposure to alternative assets. 
  • The company’s ever-increasing scale, diversified product offerings, long track record of investment performance, and strong client relationships position it to perform well in a variety of market conditions. 
  • Customer demand for alternatives has increased, with institutional investors in the category limiting the number of providers they use–both positives for the firm’s business model.

Company Profile 

Carlyle Group is one of the world’s largest alternative asset managers, with $376.4 billion in total assets under management, including $259.6 billion in fee-earning AUM, at the end of June 2022. The company has three core business segments: private equity, which includes private equity, real estate, infrastructure and natural resources funds (accounting for 41% of fee-earning AUM and 65% of base management fees during 2021), global credit (45% and 24%) and investment solutions (14% and 11%). The firm primarily serves institutional investors and high-net-worth individuals. Carlyle operates through 29 offices across five continents, serving close to 2,700 active carry fund investors from 95 countries.

 (Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Novartis reported mixed 2Q22 results, missing consensus estimates on top line with revenue of $12.78bn

Investment Thesis:

  • Relatively high barriers to entry, with a significant amount of funds deployed in R&D every year.
  • Recent and upcoming divestments will streamline the business and provide increased focus to deliver shareholder returns. 
  • Recent product launches indicate solid sales momentum, with near-term product pipeline potentially providing further upside.  
  • Selective bolt-on acquisitions to supplement organic growth. 
  • Operating efficiency focuses to further support earnings growth.
  • As the new management team improves Company culture, investors are less likely to ascribe a discount to the stock based on legacy issues.  

Key Risks:

  • Recently launched products fail to deliver sales growth as expected by the market.
  • New product pipeline fails to yield “blockbuster” products or delays in bringing key products to market.
  • R&D programs do not yield new long-term ideas.
  • Increased competition (pricing pressure & innovative products) from new entrants or existing players.  
  • Value destructive M&A.
  • Regulatory / litigation risks. 

Key Highlights:

  • FY22 outlook – Sandoz guidance upgraded. Assuming a continuing return to normal global healthcare systems, including prescription dynamics, and that no Sandostatin LAR generics enter in the U.S., management expects; Group sales to grow mid-single digits with Innovative Medicines (IM) sales growing mid-single-digits and Sandoz sales growing low-single-digit (vs prior forecast of being broadly in line with pcp), benefitting from return towards normal business dynamics with management anticipating solid base for growth starting FY23 driven by biosimilars (>15 biosimilar assets in pipeline), targeting $80bn originator sales in FY2030. 
  • Core operating income to grow mid-single digits with IM growing mid-to-high-single digits driven by good top-line momentum and continuation of productivity programs, and Sandoz being broadly in line with pcp (vs prior forecast of declining low-to-mid-single digit). 
  • Expenses to be broadly in line with pcp. 
  • Core tax rate of 17-17.5%.
  • Organizational model simplified – SG&A savings estimate increased to ~$1.5bn fully embedded by FY24. Management continued to simplify the organization model by integrating operations unit synergies, simplifying M&S structure (non-customer-facing) and streamlining G&A functions, increasing estimates of SG&A savings to $1.5bn (onetime restructuring costs to be 1-1.2x of the annual structure savings), fully embedded by FY24 (FY22 savings impact to be minimal as savings will be offsetting higher energy cost and inflationary pressures), with savings contributing to achieving mid-to-long-term low 40% IM core margin guidance and helping pipeline progression.
  • Capital management. The Company remained disciplined and shareholder focused in capital allocation, balancing investing in business through organic investments ($4.5bn in R&D + $0.5bn in capex) and value-creating bolt-ons ($0.9bn mainly for the Gyroscope acquisition), while returning capital to shareholders via growing annual dividend (paid $7.5bn in 1H22) and share buybacks of $5.6bn during the half, with $9.4bn still to be executed.

Company Description:

Novartis AG (NOVN) is an innovative healthcare company headquartered in Basel, Switzerland, with approximately 125,000 employees. In 2017, the Group reported net sales of US$49.1bn, while R&D throughout the Group amounted to approximately US$9.0bn. The Company sells its products in approximately 155 countries. The group has two segments which it reports on: (1) Innovative Medicines (Oncology / Pharmaceutical), and (2) Sandoz generics division.    

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

Bread Financial Faces Challenges as It Looks to Resume Growth After Spinning Off Assets

Business Strategy & Outlook

After the sale of Epsilon in 2019 and spinoff of LoyaltyOne in 2021, Bread Financial is now solely a consumer credit company, with its private label credit cards and buy now-pay later businesses being its only two product lines. However, Bread’s retail credit card business is under pressure. The company has historically targeted midsize retailers for its partnerships. This strategy has led to a partnership base that is weighted toward mall-based retailers, which are in decline due to increased online shopping. Many of Bread’s retail partners have already filed for bankruptcy, including the Ascena Retail Group in July 2020 and Forever 21 in 2019. Bread has also suffered defections, losing Wayfair and Meijer to Citi in 2020 and BJ’s Wholesale Club to Capital One at the start of 2022. The retail partner loss is an ongoing threat to Bread as the firm does not have a competitive advantage that would give it an edge in retaining partnerships during contract renewal negotiations.

Bread must also now contend with rising competitive threats from buy now-pay later firms, which are targeting the U.S. retail market and seek to sign agreements with Bread’s partners. These firms are still a relatively small part of U.S. retail, but Bread takes the threat seriously. The company’s acquisition of the original Bread, a buy now pay later company, as well its decision to adopt its name as its own was done with the intent of accelerating the deployment of its own competing offering. As part of the spinoff of LoyaltyOne, Bread used the proceeds from the transaction to reduce its considerable debt load. This strategy favorably as Bread is heavily leveraged, especially when considering the low credit quality of its receivable portfolio, which has historically seen net charge-offs well above industry averages. More needs to be done to put Bread in a good financial position, but the spinoff and the related debt reduction are a material improvement to Bread’s balance sheet. However, this does place Bread in an awkward position should credit conditions deteriorate industry wide, as the bank is among the most credit sensitive firms that cover.

Financial Strengths

When viewed as a single consolidated company, Bread Financial is a heavily leveraged firm. Bread finished 2021 with a tangible asset to tangible equity ratio of 15.1. The company accomplished this leverage by holding its banks as subsidiaries and keeping around $2 billion of its debt at the parent level. With the spinoff of LoyaltyOne now complete there are no longer any revenue-generating assets held at the parent level, and Bread will need to reconsolidate itself as a single entity or have its subsidiary banks make regular distributions up to the parent company to support its debt. The banks themselves are well capitalized with $3.3 billion in equity and a combined common equity Tier 1 ratio of 20.1% as of the end of June 2022. However, the banks are guarantors of the parent company’s debt, and the company will likely have to rely on further distributions from the banks. The degree of leverage also restricts Bread’s flexibility to invest in its businesses and respond to competitive threats. One of the key reasons that Bread sold its Epsilon business was that the firm did not believe it had the ability to make the kind of investments necessary to support the enterprise. There is precious little room for the company to maneuver, and its debt costs have already risen. In late 2020, the company issued 7% unrated debt to do a partial paydown of its credit line, which at the time was costing the company roughly 1.9%. The debt paydown that was a part of the LoyaltyOne spinoff, and in the future, one would like to see the company continue to manage its debt levels, particularly as economic fears intensify.

Bulls Say

  • Bread Financial’s restructuring efforts have been highly successful at reducing the company’s costs. This has allowed it to adjust effectively for its smaller size and retain profitability. 
  • Many of Bread Financial’s partners rely on it for data collection and loyalty programs. Switching costs protect these partnerships from competitive threats. 
  • The company’s credit card business is well capitalized, which will help protect the firm if credit results deteriorate.

Company Description

Formed by a combination of J.C. Penney’s credit card processing unit and The Limited’s credit card bank business, Bread Financial is a provider of private label and co-branded credit cards, loyalty programs, and marketing services. The company’s most financially significant unit is its credit card business that partners with retailers to jointly market Bread’s credit cards to their customers. The company also retains minority interest in its recently spun off LoyaltyOne division, which operates the largest airline miles loyalty program in Canada and offers marketing services to grocery chains in Europe and Asia.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Alphabet Inc: Revenue Increased +13% to $69.7bn, Driven by Search and Cloud

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$125bn 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 GOOGL’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 GOOGL does business (e.g., forced changes to products). 
  • Expenses such as TAC (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:

  • Revenue increased +13% (+16% in CC) to $69.7bn, driven by Search and Cloud.
  • Cost of revenues was up +15% to $30.1bn, primarily driven by costs associated with data centres and other operations.
  • Operating expenses were up +24% to $20.1bn, reflecting increase in R&D expenses driven primarily by headcount growth, growth in Sales & Marketing expenses driven primarily by increased spending on ads & promo followed by headcount growth, and growth in G&A reflecting increases in both professional service fees and in headcount, partially offset by a decline in charges related to legal matters.
  • Operating income was up +0.5% to $19.5bn, however, margin declined -340bps to 27.9%.
  • FCF was $12.6bn and $65bn for the trailing 12 months, with the Company ending the quarter with $125bn in cash and marketable securities.
  • Google Services revenue increased +10%, with Google Search and other advertising up +14% driven by both Travel and Retail, YouTube up +5%, Network advertising up +9% driven by AdSense and Other Revenues down -1%, reflecting decline in Play, primarily driven by the fee changes and slowdown in buyer spend, which combined with +12% increase in TAC delivered operating income growth of +2% and margin decline of -300bps was 36.2%.
  • Google Cloud revenues increased +36%, driven by GCP reflecting significant growth in both infrastructure and platform services and Google Workspace driven by solid growth in both seats and average revenue per seat, which combined with increase in employee compensation expenses saw operating loss widen +45%.  
  • Capital management. The Board repurchased 231.1m aggregate shares (21.2m Class A + 209.9m Class C) for $28.5bn during 1H22 and is left with authorized $58.9bn remaining for Class A and Class C share repurchases.

Company Description:

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)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

CBA remains in a strong capital position after returning ~$13bn to shareholders via dividends and buy-backs, absorbing a significant increase in Weighted Assets

Investment Thesis:

  • Trades at a 2.3x Price to Book, and dividend yield of 4.2%, however the stock trades at a premium to its peer group. 
  • Improving macroeconomic environment which may see favourable higher interest rate hikes.
  • Post Covid-19 expected low levels of impairment charges (especially as a low interest rate environment helps customers and arrears).
  • Potential pressure on net interest margins as competition intensifies with other major banks.
  • Sector leading return on tangible equity.
  • A well-diversified corporate book.
  • Improving CET1 ratio, which may in due course provide opportunity to undertake capital management initiatives.

Key Risks:

  • Intense competition for loans, as overall market growth rate moderates. 
  • Trades at a premium to peer group, with high competition potentially eroding its ROE.
  • Major banks, including CBA, are growing below system growth (i.e. losing market share). 
  • Increase in bad and doubtful debts or increase in provisioning.
  • Funding pressure for deposits and wholesale funding (increased funding costs).
  • Regulatory and compliance risk
  • Australian housing property crash. 

Key Highlights:

  • Statutory NPAT of $9,673m, was up +9%, whilst Cash NPAT of $9,595m, was up +11%, driven by volume growth in core businesses (Home lending was up +7.4%, Household deposits was up +13.2%, Business lending was up +13.6%, and Business deposits was up +15.1%), sound credit quality and lower provisions related to uncertainties relating to Covid-19.
  • Pre-provision profit of $13,190m (excluding one-off items), was up +3%.
  • Net interest margin of 1.9%, is down 18bps, due to large increase in low yielding liquid assets and lower home loan margins.
  • Operating expenses of $11,190m was down -1.5% on lower remediation costs and productivity benefits, partly offset by increased staff costs.
  • Loan impairment expense declined $911m to a $357m benefit, due to lower Covid-19 overlays partly offset by higher forward-looking adjustments for emerging risks.
  • CBA remains in a strong capital position after returning ~$13bn to shareholders via dividends and buy-backs, absorbing a significant increase in Weighted Assets associated with Interest Rate Risk in the Banking book. Common Equity Tier 1 capital ratio of 11.5% (Level 2, APRA) was down 160bps (or 18.6% on an internationally comparable basis).
  • The Board declared a dividend of $2.10 for 2H22, which brings the total FY22 dividend $3.85, fully franked, up +10% or $0.35cps on the prior year. The final dividend pay-out was ~68% of cash earnings or ~75% after normalising for long run loan loss rates. Management reiterated that the Bank continues to target a full year pay-out ratio of 70-80% of cash NPAT and an interim pay-out ratio of ~70% of cash NPAT.

Company Description:

Commonwealth Bank of Australia (CBA) is one of the major Australian Banks. Its key segments are retail, business and institutional banking, wealth management, New Zealand and Bankwest. Across these core segments, the bank provides services in retail, corporate and general banking, international financing, institutional banking, stock broking and funds management.

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Smith & Nephew’s smaller user base means the firm could find itself locked out of more hospitals and healthcare systems in the future

85215903 - attractive businessman using mobile phone while having lunch

Business Strategy and Outlook 

Impressive innovation has allowed Smith & Nephew to carve out a slice of the orthopaedic, sports medicine, and wound-care markets. Though the company is smaller than the dominant orthopaedic competitors, it has punched above its weight in terms of introducing meaningful innovation with its pioneering hip resurfacing implant and knee replacements with Verilast technology, which it contends can last for 30 years. These are significant improvements that exceed the evolutionary innovation typically seen in orthopaedics. Nevertheless, as the competitive set consolidates, Smith & Nephew’s position as a midsize competitor leaves it vulnerable as the hospital customer base seeks to reduce vendors to save costs. The firm’s market share–about 10% of hips and knees–translates into a tenuous position. Share shifts in this market are glacial at best, thanks to significant switching costs, and new technology does not necessarily overcome those switching costs. Smith & Nephew’s strong show of meaningful innovation translated into a mere 200-basis-point gain in share over the past decade. This showdown between technical innovation and the stickiness of surgeon preference underscores how difficult it is to induce practitioners to switch. This dynamic and Smith & Nephew’s smaller user base mean the firm could find itself locked out of more hospitals and healthcare systems in the future.

The firm has been aggressively pivoting to reduce its reliance on large-joint replacement with the acquisition of ArthroCare for its arthroscopy and sports medicine presence, concerted efforts to penetrate emerging markets, and the new additions of Osiris Therapeutics for its regenerative products and Leaf Healthcare’s pressure sore-monitoring system. The jury is still out on whether this is enough to allow Smith & Nephew to compete effectively against competitors that continue to grow larger and remain independent. As the market moves gradually toward more vendor consolidation, Smith & Nephew can eventually pair up with a larger rival, such as Stryker or Johnson & Johnson, in order to better compete.

Financial Strength

Thus far, there is a little to get nervous about Smith & Nephew’s financial flexibility. While the firm has periodically made acquisitions, it has also generated enough cash to deleverage in relatively quick fashion. For example, following the acquisitions of Osiris in 2019, debt/EBITDA rose to just over 4 times, but has moderated since then. Smith & Nephew can easily meet its interest obligations many times over. Prior to the pandemic, the firm consistently held net debt/EBITDA around 1 time. As compared with other med tech firms, Smith & Nephew issued debt in 2020 to enhance its cash cushion in the face of uncertainty. With procedure volume resuming, it is expected the firm to end the year with net debt/EBITDA around 2.3 times and for further deleveraging in the ensuing years. This still leaves plenty of flexibility for management to leverage up, if management decides to further round out Smith & Nephew’s portfolio in adjacent areas to its core markets. At this point, the firm can fund ongoing operations and support its intention to make regular share repurchases with its cash flow, but it may use debt financing for more large acquisition.

Bulls Say’s

  • Smith & Nephew participates in the fast-growing sports medicine arena thanks to its extensive arthroscopy portfolio. 
  • A strong arthroscopy presence in ambulatory surgical centres leaves Smith & Nephew well positioned to expand its large joint footprint in that setting. 
  • Smith & Nephew has been building out its presence in emerging markets. Considering the obstacles in developed markets that keep it from transforming into a top-tier player, S&N may enjoy greater upside in developing markets.

Company Profile 

Smith & Nephew designs, manufactures, and markets orthopaedic devices, sports medicine and arthroscopic technologies, and wound-care solutions. Roughly 42% of the U.K.-based firm’s revenue comes from orthopaedic products, and another 30% is sports medicine and ENT. The remaining 28% of revenue is from the advanced wound therapy segment. Roughly half of Smith & Nephew’s total revenue comes from the United States, just over 30% is from other developed markets, and emerging markets account for the remainder.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

UNH delivered earnings beat at both top and bottom line with 2Q22 revenue of $80.332bn

Investment Thesis

  • Well positioned to benefit from positive healthcare trends and demographics. 
  • Optum offers a sustainable cost edge with predictive data and analytics. Management is expecting to achieve a further 20-40bps cost efficiencies through automation and machine learning.
  • Consistent top line growth with revenues growing at CAGR ~14% and operating earnings growing at CAGR ~17%. The Company has a very diversified portfolio which seemingly benefits in every market (with the insurer serving employers, individuals, Medicare, and state and local governments).
  • Excessive expansion of international business giving UNH some protection from increasing regulations in the U.S. The global business is now earning revenue of ~US$10bn.
  • Competent management team.
  • Generating very significant cash flow (growing at a CAGR ~15%) and returning a fair amount of that cash flow back to shareholders via a growing dividend (DPS grew at a CAGR 22% over FY15-18) and share repurchase program.

Key Risks

  • Slowdown in customer acquisition if health insurance tax comes back in 2021. 
  • Headwinds from potential regulatory reforms like Medicare for all. 
  • Value destructive M&A.
  • Key-man risk due to management changes.
  • Increased competition (pricing pressure & innovative products) from new entrants or existing players like Anthem and Humana.
  • Cyber-attacks or other privacy or data security incidents resulting in security breaches.
  • Legal proceedings leading to substantial penalties or damage to reputation.

Key Highlights

  • Group revenues of $317-320bn. 
  • Operating profit margin of 8.5% at the midpoint. 
  • EPS of $20.45-20.95 per share vs prior forecast of $20.2-20.7 per share and adjusted EPS of $21.4-21.9 per share (vs prior guidance of $21.1-21.6 per share), translating to growth of +13.8% y/y at the midpoint, +80bps higher than the lower end of management’s long-term target of 13-16%.
  • Cash flows from operations of ~24bn. 
  • Medicare Advantage customer growth of 800,000 with ~3/4 in individual and group Medicare Advantage and the remainder in Dual Special Needs Plans.

Company Description

UnitedHealth Group (NYSE: UNH) is a diversified health care company offering a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services and includes UnitedHealthcare Employer & Individual, UnitedHealthcare Medicare & Retirement, UnitedHealthcare Community & State, and UnitedHealthcare Global businesses; and Optum, which provides information and technology-enabled health services through its OptumHealth, OptumInsight and OptumRx businesses.

(Source: Banyantree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

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