Tag: Street Talks

Categories
Dividend Stocks Shares Technical Picks

“Can Lives Here” Is No Marketing Gimmick for Commonwealth Bank

Amber markets itself as a provider of cheap electricity, which Commonwealth Bank will promote to its mobile banking customers. Little Birdie will help the bank provide rewards and exclusive offers for Commonwealth Bank customers, probably a way of winning back share from the likes of Afterpay. The initiatives will not appeal to everyone, with these product enhancements likely appealing more to younger demographics who in the future become more profitable home loan customers. Generating annual profit north of AUD 8 billion, the bank has the luxury to: 1) invest in new and even unproven products; and 2) respond to consumer preferences.

It’s hard to say if recent investments will lead to material revenue windfalls, but we think the bank’s relatively small investments make sense as it attempts to build more engaged and satisfied customers. Our buy now, pay later analyst expects the market to grow materially over the next 10 years, but the incumbents will lose share, partly due to the major banks rolling out their own offerings. Commonwealth Bank shares are up over 50% in the last 12 months, and while we agree confidence in the earnings and dividend outlook is warranted, shares trade at a 30% premium to our fair value estimate. The fully franked dividend of AUD 4 per share, or 4% yield is likely attracting retail investors, but we caution against chasing shares for income. It is not hard to imagine the share price falling more than AUD 4 in a tough year, or even a month for that matter. Hopefully the earnings share price volatility of 2020 has not already been forgotten.

Commonwealth Bank’s consumer lending business, less than 2.5% of loans but we estimate around 8.5% of operating income, includes credit cards which are being impacted by growth in the buy now, pay later, or BNPL, sector. It’s not a surprise the bank is fighting back. It owns 5% of Klarna (50% of Klarna Australia), has the CBA BNPL offering, and a no-interest card called Neo.

Company Profile

Commonwealth Bank is Australia’s largest bank with operations spanning Australia, New Zealand, and Asia. Its core business is the provision of retail, business, and institutional banking services. An exit from wealth management is ongoing, with the bank still holding a 45% stake in Colonial First State. The bank has placed a greater emphasis on banking in recent years.

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

Invesco Intermediate Term Muni Inc

This is one of the larger muni credit teams in the industry, with 16 portfolio managers and 24 muni research analysts. It has grown primarily by way of Invesco’s acquisitions, though, and the current research configuration doesn’t have a significant history navigating market turbulence together. Veteran muni manager Mark Paris, Invesco’s muni-bond head, manages this strategy alongside nine other portfolio managers. The muni research team is large, and given this team’s preference for nonrated deals, the effort is adequate for this mandate.

The strategy absorbed a legacy Oppenheimer counterpart in mid-May 2020, though the portfolio’s profile largely remained intact over the past year. This team has a long-standing specialization in high-yield munis, and this portfolio can hold up to 35% of assets combined in below-investment-grade and nonrated bonds per its mandate. Over the past five years, the portfolio has maintained anywhere from 8% to 14% exposure to below-investment-grade munis and a similar range in nonrated issues. The team’s preference for smaller nonrated bonds can carry more liquidity risk than the typical muni national intermediate portfolio does. The team aims to minimize risk through sector diversification and limits issuer specific risk by keeping position sizes relatively small.

The strategy’s Y shares gained 3.6% annualized from October 2015 through April 30, 2021, modestly outpacing the typical muni national intermediate Morningstar Category peer’s 3.4% annualized gain, though it was also more volatile, with a top-quartile standard deviation over the same period.

Adequate for a higher-yielding offering

The process employed here combines top-down macro analysis and bottom-up credit research with a focus on below-investment grade fare, though it lacks a distinctive competitive edge. The 10-person management team running this strategy is responsible for portfolio construction and risk monitoring, which is essential as the managers regularly invest in nonrated bonds. Analysts provide long- and short-term outlooks and assign proprietary ratings to each bond. The credit research team leads also meet as needed to review any changes to these ratings as well as any special circumstances around distressed securities in the portfolio

This team has a long-standing specialization in high-yield muni bonds, and this portfolio can hold up to 35% of assets in below-investment-grade and nonrated bonds. Over the past five years, the portfolio has maintained anywhere from 8% to 14% exposure to below-investment grade munis and a similar range in nonrated issues. The team’s preference for smaller nonrated bonds can carry more liquidity risk than the typical muni national intermediate portfolio does. The team aims to minimize risks through sector diversification and limits issuer-specific risk by keeping position sizes relatively small.

Portfolio – Credit-oriented

As of March 2021, the portfolio’s largest sector exposures were industrial development and pollution-control (12%), hospital (12%), and dedicated tax (12%) revenue bonds. Life-care and higher education bonds were the next largest sectors at 8% and 7%, respectively. This portfolio has historically had a larger stake in nonrated fare than its typical muni national intermediate peer. As of March 2021, the portfolio’s 14% nonrated stake was more than 3 times its typical peer’s 3% stake. This exposure primarily comprises revenue bonds in continuing care retirement communities, hospitals, charter schools, and toll roads. The portfolio also has substantial exposure to tobacco settlement bonds; its 5% exposure is higher than the typical peer’s 1% exposure as well as the 0.4% in its S&P Municipal Bond Index benchmark.

Performance – Behaves as expected

The strategy’s long-term record under lead manager Mark Paris is decent, though it has seen more volatility than its typical national intermediate muni peer. Its Y shares gained 3.6% annualized from October 2015 through April 30, 2021, modestly outpacing the typical muni national intermediate peer’s 3.4% annualized gain, though it also had a top-quartile standard deviation over the same period, suggesting a more volatile ride than most.

The team’s preference to court more credit risk in this strategy than its typical peer means it may lag when muni credit markets get rough and benefit when risk is rewarded.

(Source: Morning star)

Disclaimer

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
Technical Picks

Sonic Healthcare– Earnings To Retrace

Key Investment Considerations

  • Sonic has a strong market position in a consolidating industry. As a result, and in line with its strategy, we expect ongoing acquisitions to boost organic growth
  • Pathology labs benefit from scale, however, we expect operational efficiencies to be offset by a combination of pricing pressure and constrained volumes and thus limited improvement in underlying operating margins OFree cash conversion of net income is healthy and we forecast 95% of earnings result in free cash. After paying dividends, this gives Sonic the capacity to acquire 1% of revenue growth annually from free cash resources which we factor into our valuation
  • Sonic’s “medical leadership” model recognises the importance of the relationship with the referring doctor as the company seeks to differentiate itself on service levels rather than purely price. Evidence of the success of the model is the organic growth rate ahead of the market, suggesting market share gains. In an industry where absolute volumes are an important component in achieving cost advantage, Sonic’s source of moat, the organic growth supplemented by acquisitions continues to add value for shareholders.
  • Sonic has a leading market position in most of itsgeographies and as a result is well placed to take advantage of a consolidating industry.
  • Demographics and the focus on value-based based healthcare support the ongoing global volume growth in preventative diagnostics such pathology and imaging.
  • There is potential upside to margins in both Laboratories, from synergies and operational efficiencies, and Imaging from re-indexation of prices.
  • Organic growth is potentially slowing and acquisitive growth is more expensive to achieve. OPricing pressure is not over. Anatomical pathology, which is a strategic growth area of Sonic in the U.S., is a targeted area for cost savings by large private health insurers.
  • Returns on invested capital including goodwill of approximately 8% are only marginally above the 7% weighted average cost of capital suggesting the company is paying full prices for its acquisitions.

 (Source: Morningstar)

Disclaimer

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

Regis Resources

Gold grades for resources yet to be converted to reserves at Duketon are on about 30% below reserves and if converted will likely be far less profitable. If developed, the McPhillamys mine should add another mine with just under 10 years of reserves in the medium term. Excess returns for the five-year forecast period are a function of sound acquisitions and developments. However, it will be difficult to replicate this investment success. The potential development of McPhillamys is likely to come at a higher unit capital cost and generate lower returns than the existing operations.

Regis’ gold mines do not represent in-perpetuity businesses, and this is a key reason we see the shares as overvalued. To illustrate the importance of finite life, if we were to assume production continued indefinitely, our fair value estimate would almost double to around AUD 7 per share. Reserves at the operating Duketon mines are sufficient for just over five years production at forecast fiscal 2020 rate. Short reserve life means additional resources, in the shape of exploration and development expenditure, will need to be spent to extend operations. But ultimately there’s no guarantee exploration will be successful.

Profile

Regis Resources is one of Australia’s largest gold companies, producing around 350,000 ounces of gold per year. Cash costs are below the industry average. Operating mines are located in Western Australia, which brings relatively low sovereign risk. Management has a sound operating track record and an appropriate bias towards strong balance sheets and dividends; however, the gold price and new investments will be the primary arbiters of long-term returns. Development of the McPhillamys deposit in New South Wales, if approved, should add approximately 200,000 ounces of gold production a year in the medium term.

 (Source: Morningstar)

Disclaimer

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

News Corp – Investment outlook

Against this negative backdrop, the fate of a legacy publisher depends on how it maintains audience in the ultracompetitive digital age, and whether it has the financial, as well as the editorial, resources to prevail in the longer term. With still-healthy free cash generation, a solid balance sheet, and ample journalistic resources, we believe News Corporation is well placed to tackle this monumental challenge. Furthermore, the strong balance sheet furnishes management with the ammunition to diversify away from the legacy publishing industry and explore investment opportunities in more structurally stable fields such as digital media assets. Recent efforts to simplify the group is also positive.

Key Investment Consideration

  • News Corporation is in the middle of transforming its legacy print publishing and pay TV business model to one that must compete in the ultracompetitive digital information environment.
  • News Corporation’s editorial resources and solid balance sheet place the company in good stead to maintain readership and stabilise advertising dollars against proliferating news alternatives for consumers.
  • In the meantime, News Corporation is diversifying into new businesses, such as digital real estate advertising in the U.S., while its online real estate classifieds operation enjoys dominance in Australia.
  • News Corporation’s strong financial position and stillsolid free cash generation separate the company from its struggling peers in the traditional print and publishing space.
  • The solid balance sheet provides management with critical flexibility, as it attempts to navigate the treacherous structural landscape and transition the company into the brave new world of digital media.
  • News Corporation also boasts a number of resilient online property classified assets in Australia and the U.S., ones that add to its cash flow profile and provide a template for the kind of businesses that management wishes to acquire as part of a diversification strategy.
  • The structural headwinds that have decimated the industry during the past decade may accelerate in the future, as technology and innovation provide consumers with even more choice in news and information.
  • Management’s efforts to change the legacy publishing model, charge for content in the digital arena, and convince advertisers of the value of its online audience may be overwhelmed by technological and behavioural forces beyond the company’s control.
  • The balance sheet may not be utilised in accretive fashion, with attractive assets that diversify News Corporation’s earnings likely to demand high valuation multiples.

 (Source: Morningstar)

Disclaimer

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

Avantis® U.S. Equity Institutional

The fund offers broad exposure to stocks of all sizes listed in the U.S. and tilts toward those with lower price/book multiples and higher profitability. To accomplish this, the managers assign weights based on a stock’s market cap and a market-cap multiplier. They apply larger multipliers to stocks with lower valuations and higher profitability, while those with opposite characteristics receive smaller multipliers. This technique has two advantages. It effectively leans toward factors that have historically been associated with superior long-term returns, which should give the fund an edge when those styles are in favour. It also cuts back on turnover and trading costs because a stock’s market cap is incorporated into the weighting scheme. Overall, this is one of the best diversified and lowest turnover funds in the large-blend Morningstar Category.

The portfolio’s emphasis on stocks with lower valuations has been persistent. But its preference for profitable firms was less obvious because cheaper stocks tend to be less profitable than their larger and faster-growing counterparts. However, the fund’s profitability tilt is still at work, even if its holdings, on average, generate lower returns on invested capital than the market. Incorporating profitability paints a more complete picture about each stock’s expected return and should steer the portfolio away from lower-quality names. Leaning toward stocks trading at lower valuations has paid off over this fund’s short live track record. It modestly outperformed the Russell 1000 Index, beating the bogy by 1.1 percentage points per year from its launch in December 2019 through April 2021. The fund’s 0.15% expense ratio lands within the cheapest decile of the category and should provide a long-term edge over many of its peers.

The Fund’s Approach

The fund’s managers start with a broad universe that includes U.S. stocks of all sizes. They use market-cap multipliers to emphasize those trading at low price/book ratios (adjusted to remove goodwill) and high profitability (using a cash-based measure of operating income that removes accruals). Names with lower price/book ratios and higher profitability receive larger multipliers than those with opposite characteristics. This effectively tilts the portfolio toward profitable names trading at lower valuations without incurring a lot of turnovers because each stock’s weight remains linked to its market cap, so weights will change proportionally with price changes.

The strategy takes measures to reducing trading costs. Some turnover is required when a stock’s book value or profitability changes, but the mangers will allow stocks to float within predetermined tolerances to avoid unnecessary trading. Traders can help further cut back on transaction costs.

The Fund’s Portfolio

The strategy’s broad reach and emphasis on stocks trading at lower multiples pushes it away from the largest and most expensive names in the market and improves diversification relative to the Russell 1000 Index. Its average market capitalization has been less than half that of the index. As of April 30, 2021, the fund’s 10 largest names represented 16% of assets, while the same ten firms represented about one fourth of the Russell 1000 Index.

Including small caps expands the fund’s reach and makes it one of the broadest in the large-blend category. It holds more than twice the number of stocks in the Russell 1000 Index. The benchmark does not include small-cap companies, which represent about 15% of this fund. The fund’s emphasis on stocks with low price/book ratios has been evident. Its average price/book ratio has consistently landed below that of the Russell 1000 Index, though it still lands in the large-blend segment of the Morningstar Style Box. Its value orientation also steers it toward cyclical sectors. The fund has larger stakes in the consumer cyclical and financial-services sectors, with comparably smaller positions in names from the technology and communications sectors. The portfolio’s average return on invested capital has also been lower than the index because companies trading at lower multiplies tend to be smaller and less profitable, on average.

The Fund’s Performance

This fund has a short live track record, but it managed to outperform the Russell 1000 Index by 1.1 percentage points from its launch in December 2019 through April 2021. On balance, its value orientation contributed to that mild advantage. Overweighting stocks trading at lower multiples hurt performance during the coronavirus sell-off in the first quarter of 2020, when it lagged the Russell 1000 Index by 3.7 percentage points. But value stocks aided performance during the ensuing rebound. The fund outperformed the index by 7.2 percentage points between October 2020 and April 2021. So far, this strategy has been more volatile than the Russell 1000 Index. Its standard deviation since its December 2019 inception has been about 6% higher than the benchmark, so it slightly underperformed the index on a risk-adjusted basis.

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
Fixed Income Fixed Income

First Eagle US Value A

First Eagle’s multifaceted global value team runs the strategy. Its co-heads, Matt McLennan and Kimball Brooker, each have more than 25 years of investing experience and have cooperated as managers here since March 2010. They also spearhead siblings First Eagle Global SGIIX and First Eagle Overseas SGOIX. Comanager Matt Lamphier directs the research team whose coverage ranges from equities to sovereign bonds and investment-grade credits–all fair game for this portfolio. The manager team added depth in May 2021 with Mark Wright’s promotion to full-fledged comanager after two years of honing his skills as an associate manager.

The team takes a risk-averse approach. With capital preservation in mind, it invests mostly in large-cap equities having what it sees as margins of safety–or prices well below the value of those firms’ average earnings or profitability over a business cycle, their hard assets (such as forest lands), or the strength of their balance sheets. The managers also hold cash (often 10%- 20% of assets) and gold (5%-15%), with gold serving as a hedge against economic calamity.

The Fund’s Approach

This risk-averse approach works well on sibling strategies with broader geographic reach but is less effective for this U.S.-focused offering. It warrants an Average Process rating. Whether investing internationally or in the U.S., First Eagle’s global value team takes an uncommon line. Its managers prioritize capital preservation. While sticking mostly with large-cap equities, they will also hold bonds, gold bullion, and cash. The managers target investments with a margin of safety–that is, a price well below intrinsic value–and assets (real or intangible) that should hold value even during economic distress. The team takes a long-term view, looking at average earnings and profit margins over a business cycle, earnings stability, and balance-sheet health to determine valuations. They often keep annual portfolio turnover under 20%.

Cash and gold stakes are key to this defensive approach. The managers typically keep around 10% of assets in cash–more if opportunities are scarce–and 5%-15% in gold and the equities of gold miners as hedges against economic calamity. The team’s prowess outside the U.S. has served First Eagle’s global and international strategies well, but this U.S.-focused version has struggled to compete. Keeping so much cash and gold on the side-lines has held it back in equity bull markets, and mediocre stock selection over time hasn’t helped.

The Fund’s Portfolio

This portfolio stands out in many ways. With so much cash and gold and so few bonds, equities typically account for 60%-80% of total assets, unlike the equity-only S&P 500 prospectus benchmark and many allocation–70% to 85% equity peers who wade more into bonds. The managers usually own 70-90 stocks. Cash had never been less than 12% of assets at the end of any month in manager Matt McLellan’s 12- year tenure until April 2020; it went on to hit a low of 2% in October 2020 before rising to nearly 10% in March 2021. The portfolio’s gold stake had hovered around 10% going into 2020; it appreciated to more than 15% in July 2020 before dropping back to 10% in early 2021.

The portfolio’s equity exposure is also distinctive. It has tended to be light on consumer cyclicals relative to peers (1.5% of total assets in March compared with the 8.9% category norm) but heavy on energy (7% versus 2%) and basic materials (6% to 3%). The basic-materials stake can be larger if the team is buying the stocks of gold miners such as Newmont NEM and Barrick Gold ABX, but it pared most of those as the price of gold rallied in 2020. Firms with hard assets– such as Weyerhaeuser WY, which owns forest lands, and integrated oil firm Exxon Mobil XOM– also suit this portfolio’s conservative bent.

The Fund’s Performance

This fund’s track record is middling, though a recent category change offers better points of comparison. The portfolio’s gold and cash stakes made it a poor match for its equity-only S&P 500 prospectus benchmark in the decade-long bull market for stocks following the 2007-09 global financial crisis. The strategy’s value tilt didn’t help either, as growth stocks drove much of the rally. A December 2020 Morningstar Category change to allocation–70% to 85% equity from large blend improves the picture somewhat. From manager Matt McLennan’s January 2009 start through April 2021, the fund’s I share class gained 10.6% annualized; that beat the allocation category’s 10.2% average but trailed the S&P 500’s 15.3% and the large-blend category norm of 13.5%. The fund also lagged a custom index approximating the fund’s historical asset exposures (to stocks, cash, gold, and bonds), albeit by a narrower 1.3-percentage-point margin.

Source: Morningstar

General Advice Warning

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

Categories
Technology Stocks

Nvidia Continues to Enjoy Record Revenue, Though Crypto Demand Is Concerning; Raising FVE to $515

Online stock exchange team

Nvidia was negatively impacted by lower cryptocurrency prices in late 2018 that resulted in gaming GPU sales falling 12% in 2019 (fiscal 2020). We estimate crypto mining related demand contributed around $400 million to $500 million in GPU sales during the quarter.

Narrow-moat Nvidia continues to execute well in growing its data center business thanks to its A100 GPU for Artificial Intelligence and networking products from its 2020 Mellanox acquisition. We are raising our probability weighted fair value to $515 per share from $400. We are raising our standalone fair value estimate for Nvidia to $465 per share from $352, as we incorporate the stronger results and outlook for the second quarter. Nvidia is in the process of acquiring ARM, and if the deal closes, our fair value would increase to $565 per share. Our probability-weighted fair value estimate assigns a 50% probability of closing due to potential regulatory scrutiny and ARM customer pushback. Nvidia is paying a high multiple for ARM’s earnings but given the GPU leader’s share price is trading at a significant premium to our updated standalone $465 fair value estimate, we like that Nvidia is using its rich shares to fund a large portion of the deal.

First-quarter sales grew 84% year over year to $5.7 billion, with gaming and data center revenue up 106% and 79%, respectively. Data center sales benefitted from the inclusion of Mellanox and continued adoption of Nvidia’s A100 GPUs. We estimate data center sales were up about 30% year on year. We expect the firm’s automotive segment to resume growth in the coming years as its autonomous solutions are adopted and its legacy infotainment business is ramped down. Specifically, Nvidia’s automotive design win pipeline exceeds $8 billion through fiscal 2027. Gross margins during the first quarter grew 100 basis points sequentially thanks to a more favorable product mix.

Management expects second-quarter sales to be at a midpoint of $6.3 billion, which implies 63% year-over-year growth and was also ahead of our estimates. The chief growth drivers are expected to be gaming, data center, and crypto mining processors, or CMPs. CMPs are optimized for crypto mining power efficiency and will provide Nvidia’s management some visibility into the contribution of crypto mining to total revenue. For the second quarter, CMP sales are expected to be $400 million. We still think Nvidia’s gaming GPUs are receiving an artificial boost from crypto mining that could be difficult to sustain.

Nvidia’s channel inventories remain lean, and management expects the firm to be supply constrained into the second half of the year. While we anticipate strong growth for Nvidia in the coming quarters, we remain vigilant of signs of weaker crypto-mining demand for its GPUs should crypto prices fall.

Nvidia Corp’s Company Profile

Nvidia is the leading designer of graphics processing units that enhance the experience on computing platforms. The firm’s chips are used in a variety of end markets, including high-end PCs for gaming, data centers, and automotive infotainment systems. In recent years, the firm has broadened its focus from traditional PC graphics applications such as gaming to more complex and favorable opportunities, including artificial intelligence and autonomous driving, which leverage the high-performance capabilities of the firm’s graphics processing units.

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.