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Technology Stocks

Spirit AeroSystems Reports Improved Fourth Quarter and Is Confident in Pandemic Efficiency Gains

Business Strategy and Outlook

Spirit AeroSystems is the largest independent aerostructures manufacturer. The firm produces fuselages, wing structures, as well as structures that house and connect engines to aircraft. Spirit’s revenue has traditionally been almost entirely connected to the original production of commercial aircraft, but Spirit has a growing defense segment and recently acquired Bombardier’s maintenance, repair, and overhaul business. As commercial aerospace manufacturing is highly consolidated, it is unsurprising that Spirit has customer concentration. Historically, 80% of the company’s sales have been to Boeing and 15% have been to Airbus. Management targets a 40% commercial aerospace, 40% defense, and 20% commercial aftermarket revenue exposure. The firm acquired Fiber Materials, a specialty composite manufacturer focused on defense end markets, and Bombardier’s aftermarket business in 2020 to diversify revenue.

Financial Strength

Spirit AeroSystems has raised and maintained a considerable amount of debt since the grounding of the 737 MAX began in 2019. The company has $1.9 billion of cash on the balance sheet and about $3.9 billion of debt at the end of 2020, and access to another $950 million of debt if it so needs. The firm has $300 million debt coming due in 2021 and 2023, as well as $1.7 billion of debt coming due in 2025, and $700 million of debt coming due in 2028. Revenue of $1.1 billion and adjusted loss per share of $0.84 beat FactSet consensus by 0.1% and missed the same estimates by 29.9%, respectively, though much of the earnings miss was due to a forward loss associated with 787 production. 

Revenue increased 22.1%, primarily due to increased 737 MAX production increasing OE production-related revenue. Although we slightly lowered our long-term outlook for 737 MAX production in the third quarter, we continue to expect that increasing 737 MAX production will be the primary value driver for the firm. Management continues to expect it can generate 16.5% gross margins (including depreciation) at 737 MAX production of 42 per month from efficiencies achieved during the pandemic.

Bulls Say’s 

  • Commercial aerospace manufacturing has a highly visible revenue runway, despite COVID-19, from increasing flights per capita as the emerging market middle class grows wealthier. 
  • Spirit has restructured to become more efficient when aircraft manufacturing recovers. 
  • Spirit is diversifying its customer base, which we anticipate will make it less susceptible to customer specific risk.

Company Profile 

Spirit AeroSystems designs and manufactures aerostructures, particularly fuselages, for commercial and military aircraft. The company was spun out of Boeing in 2005, and the firm is the largest independent supplier of aerostructures. Boeing and Airbus are the firms and its primary customers, Boeing composes roughly 80% of annual revenue and Airbus composes roughly 15% of revenue. The company is highly exposed to Boeing’s 737 program, which generally accounts for about half of the company’s revenue.

(Source: Morningstar)

General Advice Warning

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

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Dividend Stocks

Westpac Grinds Through Another Tough Quarter as Margins Continue to Shrink

Business Strategy and Outlook

Westpac Bank Corporation is the second-largest of Australia’s four major banks. The bank provides a range of banking and financial services to retail and business customers, including mortgages, consumer finance, credit cards, business loans, and term deposits. 

Westpac’s strategy is anchored in its commitment to conservatively manage risk across all business areas, following its near-death experience in the early 1990s. The multibrand, customer-focused strategy aims to capture an increasing share of business from its Australian and New Zealand banking and wealth management customer base.The main current influences on earnings growth are modest credit growth, with regulators likely to cool credit demand due to rising house prices and increased household leverage, and delays to business plans for capital expenditure. Intense competition is constraining interest margins with opportunities to lower funding costs largely exhausted. Operating expenses are increasing due to increased provisions for regulatory and compliance project spend.

 Bad and doubtful debt expenses peaked in first-half fiscal 2009 and remained at decade lows until provisions for the coronavirus impact were taken in first-half fiscal 2020. Morningstar analysts expect loan impairment expenses to average under 0.2% of loans over the long term.

Westpac Grinds Through Another Tough Quarter as Margins Continue to Shrink

Westpac’s first-quarter 2022 profit of AUD 1.58 billion was up modestly from the quarterly average of second-half fiscal 2021. A 2% increase in net interest income and 7% fall in operating expenses lifted earnings pre-impairments by around 10%. Unlike last year, the bottom line is no longer being boosted by loan impairment provision releases. Impairments were still modest, and credit quality remains sound, with loans in arrears as a percentage of loans falling 10 basis points to 0.58%.

Loan growth was soft in a strong market, and net interest margins, or NIM, fell to 1.91% in the quarter from 1.98% in the second half of fiscal 2021. The squeeze from chasing loan growth in a competitive environment, an ongoing drag from more fixed-rate loans, plus holding more liquid assets which earn no interest, was a little more severe than Morningstar analyst expected. Morningstar analysts lower  fiscal 2022 NIM forecast to 1.85% from 1.90% previously. The 7% reduction to fiscal 2022 profit forecast is not material enough to move to A$29 fair value estimate. 

Financial Strength 

Westpac comfortably meets APRA’s common equity Tier 1 ratio benchmark of 10.25%. The bank’s common equity Tier 1 ratio was 12.2% as at Dec. 31, 2021. This is based on APRA’s globally conservative methodology and a top-quartile internationally comparable 18%. We see the risk of higher loan losses and credit stress inflating risk-weighted assets as the greatest threat to the bank’s capital position in the near term. In the past three years, the proportion of customer deposits to total funding is about 60% to 65%, reducing exposure to volatile funding markets. Westpac has AUD 8.6 billion in excess capital as at Dec. 31, 2021. Assuming completion of the AUD 3.5 billion share buyback announced in November 2021, this surplus falls to around AUD 5 billion. The bank expects divestments to add roughly AUD 2 billion to this position in fiscal 2022.

Bulls Say

  • Improving economic conditions underpin profit growth from fiscal 2021. Productivity improvements are likely from fiscal 2023. 
  • Cost and capital advantages over regional banks and neo-banks provide a strong platform to drive credit growth. 
  • Consumer banking provides earnings diversity to complement the more volatile returns generated from business and wholesale banking activities. 
  • The withdrawal of personal financial advice by Westpac salaried financial advisors reduces compliance and regulatory risk.

Company Profile

Westpac is Australia’s oldest bank and financial services group, with a significant franchise in Australia and New Zealand in the consumer, small business, corporate, and institutional sectors, in addition to its major presence in wealth management. Westpac is among a handful of banks around the globe currently retaining very high credit ratings. The bank benefits from a large national branch network and significant market share, particularly in home loans and retail deposits.

(Source: Morningstar)

General Advice Warning

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

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Funds Funds

Neuberger Berman International Equity Fund Investor Class

Process:

This strategy’s distinctive approach remains in place under its new leader, earning it an Above Average Process rating. Former lead manager Benjamin Segal said he favoured the mid-cap universe because firms of that size–along with those in the smaller part of the large-cap range–tend to be well-enough established that they can withstand some setbacks but remain less familiar to many global investors and thus often sell at attractive prices. They can also be takeover targets. Former comanager Elias Cohen, who became lead manager upon Segal’s departure on June 30, 2021, follows the same approach. This team wants steadily growing firms, but it also focuses on the quality of company management. The team is willing to own firms without hefty margins if other traits are impressive. The strategy has a 15% limit on emerging-markets exposure, but the portfolio has been far below that for a long time. The turnover rate tends to be moderate. Ideas can come from Cohen, comanager Tom Hogan, or the analysts, and decision-making is collaborative, though the lead manager has final authority for portfolio decisions.

Portfolio:

Portfolio shows that this fund makes fuller use of the market-cap spectrum than most peers and its chosen benchmark, the MSCI EAFE Index. The fund had about 33% of its assets in midcaps and another 4% in small caps (as classified by Morningstar), versus just 10% in mid-caps and almost nothing in small caps for the index and just slightly higher figures for the foreign large-growth and foreign large-blend category averages. The portfolio’s figures are nearly identical to those from one year earlier, showing that new lead manager Elias Cohen has maintained the strategy’s broad market-cap approach even as he traded several stocks into and out of the portfolio. Cohen, like former manager Benjamin Segal, favours the mid-cap and smaller large-cap universes. The portfolio often lies on the border between the growth and blend portions of the style box, but the latest portfolio is fully in the blend region. The strategy continues to spread its assets widely, with none of the 78 stocks receiving more than 2.6% of assets. Emerging-markets exposure remains below 5% and is limited to China and India.

People:

This strategy’s long-tenured lead manager, Benjamin Segal, left Neuberger Berman on June 30, 2021, to become a high school math teacher. Replacing him as lead manager was former comanager Elias Cohen. The firm had earlier promoted Thomas Hogan from the analyst ranks to comanager on Jan. 20, 2021. Cohen had worked with Segal for almost 20 years, most recently as comanager–for two years on this strategy and four years on sibling Neuberger Berman International Select NILIX. The analyst staff remained intact including one addition in March 2021. Three of the six members of the analyst team have been in place since 2008 or earlier. They and the managers also talk with the members of Neuberger Berman’s emerging-markets team. Cohen and Hogan each have more than $1 million invested in this strategy.

Performance:

It’s a bit complicated assessing this fund’s performance, but all in all, the fund has a solid record as a core international equity choice. This fund launched in 2005 and was known until late 2012 as Neuberger Berman International Institutional. But an identical fund that was merged into it in January 2013 posted a strong 10-year record prior to the merger, using the same strategy, under recently departed lead manager Benjamin Segal. Another complication is that although this fund’s growth leanings result in its placement in the foreign large-growth category, it is not very aggressive in that direction, with its portfolio often landing around the border between growth and blend or, as currently, in the blend box. That’s typically been a disadvantage versus growthier rivals for a long time. The managers aim to outperform when markets tumble; although it did not do so in the bear market of early 2020, it did hold up well during the 2014 sell-off and the 2015-16 bear market.

(Source: Morningstar)

Price:

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s second-costliest quintile. That’s poor, but based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we still think this share class will be able to overcome its high fees and deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze.

Top Portfolio Holdings:  
Asset Allocation:  

 


(Source: Morningstar)                                                                     (Source: Morningstar)

About Funds:

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

(Source: Morningstar)

General Advice Warning

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

Categories
Funds Funds

Low-cost diversified ESG-focused Australian equity exposure

Young woman trading stock market by touching.

Investment Objective

Vanguard Ethically Conscious Australian Shares Fund seeks to track the return of the FTSE Australia 300 Choice Index before taking into account fees, expenses and tax.

Approach

This fund seeks to provide broad ESG-focused Australian share market exposure in a passively managed, taxefficient vehicle. To achieve that goal, it uses an index-replication approach to track the FTSE Australia 300 Choice Index, a derivative of the FTSE Australia 300 Index. The index is arrived at by excluding companies that deal significantly in business activities involving fossil fuels, nuclear power, alcohol, tobacco, gambling, weapons, and adult entertainment. Additionally, a screen is also applied to filter out names embroiled in severe controversies. Vanguard holds all the securities that make up the index with industry-level exposure limit set at 5 percentage points relative to the parent index. Security weights are approximately the same proportion as the index’s weights. However, the portfolio will deviate from the index when the managers believe such deviations are necessary to minimize transaction costs. The fund may also be exposed to securities that have been removed from or are expected to be included in the index.

Portfolio

The portfolio is top-heavy, with about half of the index in the top 10 companies. The concentration in banks skews the fund’s sector weights, with financial services forming around 34.5% of the portfolio (versus 26.8% for the Morningstar Category average). The basic material is the second-largest sector exposure, but it is meaningfully lower than the category index because of the ESG screening. The industry capping of 5 percentage points further adds to the portfolio diversification. VETH’s market cap does not deviate materially from the category average or index. As such, the average market of the strategy is AUD 25.3 billion versus AUD 29.2 billion for the S&P/ ASX 200 Index category benchmark. Broadly, the portfolio is diversified and offers exposure to almost the entire opportunity set of the domestic equity market. As a result, it has significant overlap with Vanguard’s other broad-based domestic equity products like VAS, both in terms of style and exposure, making it suitable as a core holding.

Performance

Launched in October 2020, the strategy has a very short track record. The trailing nine-month period has been eventful for the domestic equity market with yields moving up and value factor rotation. As such, the fund’s performance has been eventful as well in tandem with broader market movements. From its inception through July 2021, the strategy has closely mirrored the underlying index but trailed the S&P/ASX 200 category benchmark by 87 basis points. As the materials, energy, and commodity sectors rallied during this period, the fund’s relative underweighting in these sectors has hurt performance. As the value factor rebounded toward the end of last year through the first half of 2021, the modest growth tilt of the strategy relative to the category index detracted. Growth names like A2 Milk have been the major contributor to underperformance during this period. Investors should be cautious and not extrapolate this performance, however. Based on the past attributes, investors may expect similar cyclicality in performance tied to the broader domestic economic activities and value/growth factor rotation.

Top 10 Holdings of the fund

About the fund

The Fund provides low cost exposure to stocks listed on the Australian Securities Exchange (ASX) and excludes companies with significant business activities involving fossil fuels, nuclear power, alcohol, tobacco, gambling, weapons, adult entertainment and a conduct related screen based on severe controversies. Diversification requirements are applied to restrict the proportion of the index invested in any one industry to +/-5% of the industry weights of the FTSE Australia 300 Index, subject to any limitation issues resulting from the exclusionary screening.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks

J.B. Hunt’s Intermodal Rate Backdrop Holding Strong, Comfortably Offsetting Volume Constraints

Business Strategy and Outlook

At its core, J.B. Hunt is an intermodal marketing company; it contracts with the Class I railroads for the line-haul movement of its domestic containers. It was one of the first for-hire truckload carriers to venture into intermodal shipping, forming a partnership with Burlington Northern Santa Fe in the West in 1990. Years later, it struck an agreement with Norfolk Southern in the East. Hunt has established a clear leadership position in intermodal shipping, with a 20%-plus share of a $22 billion-plus industry. The next-largest competitor is Hub Group, followed by Schneider National’s intermodal division and XPO Logistics’ intermodal unit. Intermodal made up slightly less than half of Hunt’s total revenue in 2021.

Hunt isn’t immune to downturns, but over the past decade-plus it’s reduced its exposure to the more capital-intensive truckload-shipping sector, which represents about 28% of sales (including for-hire and dedicated-contract business) versus 60% in 2005. Hunt is also shifting its for-hire truckload division to more of an asset-light model via its drop-trailer offering while investing meaningfully in asset-light truck brokerage and final-mile delivery. 

Rates in the competing truckload market corrected in 2019, driving down intermodal’s value proposition relative to trucking. Thus, 2019 was a hangover year and fallout from pandemic lockdowns pressured container volume into early 2020. However, truckload capacity has since tightened drastically, contract pricing is rising nicely across all modes, and underlying intermodal demand has rebounded sharply on the spike in retail goods consumption (intermodal cargo is mostly consumer goods) and heavy retailer restocking. Hunt is grappling with near-term rail network congestion that’s constraining volume growth, but the firm is working diligently with the rails and customers to minimize the issue. It is  expected that 2.5%-3.0% U.S. retail sales growth and conversion trends to support 3.0%-3.5% industry container volume expansion longer term, with 2.0%-2.5% pricing gains on average, though Hunt’s intermodal unit should modestly outperform those trends given its favorable competitive positioning.

Financial Strength

J.B. Hunt enjoys a strong balance sheet and is not highly leveraged. It had total debt near $1.3 billion and debt/EBITDA of about 1 times at the end of 2021, roughly in line with the five-year average. EBITDA covered interest expense by a very comfortable 35 times in 2021, and we expect Hunt will have no problems making interest or principal payments during our forecast period. Hunt posted more than $350 million in cash at the end of 2021, up from $313 million at the end of 2020. Historically, Hunt has held modest levels of cash, in part because of share-repurchase activity and its preference for organic growth (including investment in new containers and chassis, for example) over acquisitions. For reference, it posted $7.6 million in cash and equivalents at the end of 2018 and $14.5 million in 2017. The company generates consistent cash flow, which has historically been more than sufficient to fund capital expenditures for equipment and dividends, as well as a portion of share-repurchase activity. It is expected that the trend will persist. Net capital expenditures will jump to $1.5 billion in 2022 as the firm completes its intermodal container expansion efforts, but after that it should also have ample room for debt reduction in the years ahead, depending on its preference for share buybacks. Overall,  Hunt will mostly deploy cash to grow organically, while taking advantage of opportunistic tuck-in acquisitions (a deal in dedicated or truck brokerage isn’t out of the question, but it is  suspected that the final mile delivery niche is most likely near term). 

Bulls Say’s

  • Intermodal shipping enjoys favorable long-term trends, including secular constraints on truckload capacity growth and shippers’ efforts to minimize transportation costs through mode conversions (truck to rail). 
  • It is believed intermodal market share in the Eastern U. S. still has room for expansion, suggesting growth potential via share gains from shorter-haul trucking. 
  • J.B. Hunt’s asset-light truck brokerage unit is benefiting from strong execution, deep capacity access, and tight market capacity. It’s also moved quickly in terms of boosting back-office and carrier sourcing automation.

Company Profile 

J.B. Hunt Transport Services ranks among the top surface transportation companies in North America by revenue. Its primary operating segments are intermodal delivery, which uses the Class I rail carriers for the underlying line-haul movement of its owned containers (45% of sales in 2021); dedicated trucking services that provide customer-specific fleet needs (21%); for-hire truckload (7%); heavy goods final-mile delivery (6%), and asset-light truck brokerage (21%).

(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

TE Connectivity Ltd. to grow its midcycle operating margins and enhance its cash flow

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

Business Strategy and Outlook

TE Connectivity is a leading designer and manufacturer of connectors and sensors, supplying custom and semicustom solutions to a bevy of end markets in the transportation, industrial, and communications verticals. TE has maintained a leading share of the global connector market for the last decade, specifically dominating the automotive connector market, from which it derives more than 40% of revenue. While the firm’s entire business benefits from trends toward efficiency and connectivity, these are especially notable in cars, where shifts toward electric and autonomous vehicles provide lucrative opportunities for TE to sell into new vehicle sockets, like an onboard charger or advanced driver-assist system. 

TE’s products offer high performance and reliability for mission-critical applications in harsh environments. As such, its customer relationships tend to be very sticky, with customers facing high financial and opportunity costs from switching to another component supplier, as well as the risk of component failure in new products. TE’s customers also rely on the firm supplying cutting-edge products to power new capabilities in end applications. As older products become commoditized, the firm can maintain high prices with new innovations. As a result of these switching costs and pricing power, TE Connectivity possesses a narrow economic moat.

In the future, TE Connectivity will focus on increasing its dollar content in end applications across its end markets. TE’s products pave the way for greater electrification and connectivity in vehicles, planes, and factories, which allows the firm to occupy a greater portion of these end products’ electrical architectures. TE will remain a serial acquirer, bolting on smaller components players to expand its geographic and technological reach. Finally, TE is expected to continue expanding its margins via footprint consolidation, as it streamlines the fixed-asset portfolio it has gained over a decade of acquisitions

Financial Strength

TE Connectivity is expected to remain leveraged, using strong free cash flow to invest organically and inorganically, and to send capital back to shareholders. As of Sept. 24, 2021, the firm carried $4.1 billion in total debt and $1.2 billion in cash on hand. While the firm is leveraged, its cash flow generation will be more than able to fulfil its obligations. TE has less than $700 million a year in payments due through fiscal 2026, and it is projected to generate more than $2 billion in free cash flow annually over the next five years. Even in a severely soft macro environment in 2020, the firm generated $1.4 billion in free cash flow. After fulfilling its obligations, TE is expected to use the remainder of its cash to maintain its dividend and conduct share repurchases. The firm will remain leveraged, using extra capital for opportunistic acquisitions while using its heady cash flow to pay off its principal and interest.

Bulls Say’s

  • TE Connectivity is a leader in the automotive connector and sensor market, enabling OEMs to build more advanced and efficient electric and autonomous vehicles. 
  • TE’s products are specialized for mission-critical applications in harsh environments, where reliable performance creates sticky customer relationships. 
  • TE’s ongoing footprint consolidation should allow it to expand its midcycle operating margins and improve its cash flow.

Company Profile 

TE Connectivity is the largest electrical connector supplier in the world, supplying interconnect and sensor solutions to the transportation, industrial, and communications markets. With operations in 150 countries and over 500,000 stock-keeping units, TE Connectivity has a broad portfolio that forms the electrical architecture of its end customers’ cutting-edge innovations.

(Source: Morningstar)

General Advice Warning

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

Categories
Shares Technology Stocks

Revised Tax Expectations Nudge Cooper’s FVE Upward

Young woman trading stock market by touching.

Business Strategy and Outlook

As a cash-pay business with sticky customers and few competitors, the contact lens industry is an attractive market, in our opinion. Four players (Johnson & Johnson, Alcon, Cooper, and Bausch Health) dominate the global market, and industry regulation creates strong barriers to entry, keeping new entrants away. Cooper’s surgical segment has contributed approximately one fourth of total revenue since 2018, following the acquisition of Paragard, a nonhormonal copper intrauterine device.

Though Paragard sales dropped during the COVID-19 pandemic, its believe that the product is well positioned to benefit from secular trends toward increased adoption of IUDs in the U.S. IUD usage rate to mirror the rate in other developed countries, leading to market saturation and a slowdown in segment revenue growth. 

Financial Strength

Cooper is in solid financial strength. While the company took on $1.4 billion in debt in fiscal 2018 to acquire Teva’s Paragard IUD, its vision and surgical segments should generate enough cash to allow the company to pay down debt and continue investing in its businesses. Historically, Cooper had no trouble paying down debt, with debt/EBITDA down from 3.1 in fiscal 2014 to 1.9 times by the end of fiscal 2017. Even with the large acquisition and significant upticks in COVID-19-related costs, the firm ended 2020 with debt about 3 times EBITDA. 

The contact lens market is already very consolidated, especially after the Sauflon acquisition, so future large acquisitions seem unlikely for CooperVision, but the firm may seek additional capital to pursue bolt-on deals in its surgical division. CooperSurgical has acquired about 40 companies since 1990, and we project this trend to continue. Cooper has spent $1.1 billion and $1.9 billion on acquisitions over the past five and 10 years, respectively.

Bulls Say’s 

  • CooperVision will benefit as customers trade up from weekly or monthly contact lenses to more expensive daily lenses. 
  • Paragard is the only nonhormonal IUD approved in the U.S. and does not have any serious competition. 
  • MiSight has first-mover advantage in a fast-growing market with a multibillion-dollar market potential.

Company Profile 

Cooper Companies operates two units: CooperVision and CooperSurgical. Accounting for approximately 75% of total sales, CooperVision is the the second-largest player in the oligopolistic contact lens market. Over 50% of CooperVision’s sales are in international territories. The second unit, CooperSurgical, develops and manufactures diagnostic and surgical products for gynecologists and obstetricians, including the Paragard IUD, which Cooper acquired from Teva in 2017. 

(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
ETFs ETFs Research Sectors

BetaShares Australian Sustainability Leaders ETF: Australian equities exposure with a tangible approach to ESG

Approach

FAIR tracks the Nasdaq Future Australian Sustainable Leaders Index, a benchmark Nasdaq co-developed with BetaShares in 2017. As per the guidelines laid out by the Responsible Investment Committee, Sustainability Leaders are defined as companies generating more than 20% revenue from select sustainable business or having a certain grade (B or better) from sanctioned ethical consumer reports or being a certified B corporation. There is a maximum 10 stocks per sector and a limit of 4% exposure at an individual stock level.  

Portfolio

As at 30 November 2021, FAIR has a large-cap-dominated portfolio comprising 86 stocks. Stocks must have a market cap of more than USD 100 million and three-month trading volume of over USD 750,000. The index differs largely from the category index S&P/ASX 200, as there is a significant overweight in healthcare, real estate, technology, and communication services. On the other hand, the portfolio is underweight in financial services and materials with nil exposure to energy stocks.

People

The three-person responsible investment committee may remove index inclusions at any time based solely on qualitative considerations of whether a company still meets ESG considerations. The committee comprises Betashares co-founder David Nathanson and Adam Verwey, a managing director of large investor Future Super.

Performance

In early 2020, the fund dropped significantly owing to the frantic sell-off triggered by the global coronavirus pandemic. Despite this, the fund managed to close on a positive return of 2.23% for the year 2020. The uptrend continued into 2021, and it ended the calendar year with 17.99% returns, closely matching the category.

(Source: Morningstar)

General Advice Warning

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

Categories
Dividend Stocks

TC Energy Continues to Pursue Promising Low-Carbon Efforts

Business Strategy and Outlook

TC Energy faces many of the same challenges as Canadian pipeline peer Enbridge but also offers important contrasts. The most critical differences between Enbridge and TC Energy arise from their approaches to energy transition.

Canadian carbon emissions taxes are expected to increase to CAD 170 a ton by 2030 from CAD 40 today, meaning it is critical that TC Energy, with its natural gas exposure, follow Enbridge’s approach to rapidly reduce its carbon emission profile and continue to pursue projects like the Alberta Carbon Grid, which will be able to transport more than 20 million tons of carbon dioxide. These taxes potentially increase costs for Canadian pipes compared with U.S. pipes but also make hydrogen a viable alternative to gas-powered electricity generation by 2030 in Canada, presenting an emerging threat. TC Energy recently introduced targets to reduce its Scope 1 and 2 intensity by 30% by 2030 and reach net zero by 2050, which is a start.

In addition, Enbridge’s backlog is more diversified across its businesses already, and it already has a more material renewable business, including hydrogen, renewable natural gas, and wind efforts. Morningstar analysts think the renewable business lacks an economic moat today, and considers it is an important area of investment for TC Energy that it needs to pursue. The renewable investments can compete for capital across the rest of the portfolio, generating reasonable returns on capital, allowing the overall enterprise to adapt to the markets as they evolve. This shift is especially the case as a CAD 170 per ton carbon tax in Canada opens the door for potentially sizable investments to reduce carbon emissions.

Financial Strength 

TC Energy carries significantly higher leverage than the typical U.S. midstream firm, with current debt/EBITDA well over 5 times.The high degree of leverage is supported by the highly protected nature of its earnings stream. As capital spending declines over the next few years TC Energy to currently will reach the 4s in the latter half of the decade.TC Energy is also unusual in that it will continue to rely on the capital markets to meet about 20% of its expected capital expenditures over the next few years.TC Energy has outlined plans to spend about CAD 5 billion annually on a continued basis. About CAD 1.5 billion-2 billion is maintenance spending on its pipelines, and 85% of this is recoverable due to being invested in the rate base. Bruce Power and the U.S. and Canadian natural gas pipelines will consume about CAD 1 billion each annually. ESG-related opportunities such as using renewable power to power its own operations or seeking carbon capture efforts would be on top of this spending. TC’s dividend growth remains prized by its investors, and 3%-5% growth going forward is easily supportable under the firm’s 60/40 framework.

Bulls Say

  • TC Energy has strong growth opportunities in Mexican natural gas as well as liquefied natural gas. 
  • The company offers virtually identical growth prospects and a protected earnings profile to Enbridge but allows investors to bet more heavily on natural gas. 
  • The Canadian regulatory structure allows for greater recovery of costs due to project cancelations or producers failing compared with the U.S.

Company Profile

TC Energy operates natural gas, oil, and power generation assets in Canada and the United States. The firm operates more than 60,000 miles of oil and gas pipelines, more than 650 billion cubic feet of natural gas storage, and about 4,200 megawatts of electric power.

(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

Adobe Remains Dominant in Creative While Building Its Second Empire in Digital Experience

Business Strategy and Outlook

Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud, which is now offered via a subscription model. The company has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation The benefits from software as a service are well known in that it offers significantly improved revenue visibility and the elimination of piracy for the company, and a much lower cost hurdle to overcome ($1,000 or more up-front, versus plans as low as $10 per month) and a solution that is regularly updated with new features for users.

Adobe benefits from the natural cross-selling opportunity from Creative Cloud to the business and operational aspects of marketing and advertising. On the heels of the Magento and Marketo acquisitions in the second half of fiscal 2018 and Workfront in 2021, Morningstar analysts believe Adobe to continue to focus its M&A efforts on the digital experience segment and other emerging areas.

Adobe believes it is attacking an addressable market greater than $205 billion. The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher price point solutions, and cross sell digital media offerings.

Financial Strength 

Morningstar analysts believe Adobe enjoys a position of excellent financial strength arising from its strong balance sheet, growing revenues, and high and expanding margins. As of November 2021, Adobe has $5.8 billion in cash and equivalents, offset by $4.1 billion in debt, resulting in a net cash position of $1.6 billion. Adobe has historically generated strong operating margins. Free cash flow generation was $6.9 billion in fiscal 2021, representing a free cash flow margin of 43.7%. Morningstar analysts believe that margins should continue to grind higher over time as the digital experience segment scales. In terms of capital deployment, Adobe reinvests for growth, repurchases shares, and makes acquisitions. The company does not pay a dividend. Over the last three years Adobe has spent $2.8 billion on acquisitions, $9.6 billion on buy-backs, while share count has decreased by 15 million shares. It is believed that the company will continue to repurchase shares as its primary means of returning cash to shareholders over the medium term. Morningstar analysts also believe the company will continue to make opportunistic and strategic tuck-in acquisitions.

Bulls Say

  • Adobe is the de facto standard in content creation software and PDF file editing, categories the company created and still dominates. 
  • Shift to subscriptions eliminates piracy and makes revenue recurring, while removing the high up-front price for customers. Growth has accelerated and margins are expanding from the initial conversion inflection. 
  • Adobe is extending its empire in the creative world from content creation to marketing services more broadly through the expansion of its digital experience segment. This segment should drive growth in the coming years.

Company Profile

Adobe provides content creation, document management, and digital marketing and advertising software and services to creative professionals and marketers for creating, managing, delivering, measuring, optimizing and engaging with compelling content across multiple operating systems, devices and media. The company operates with three segments: digital media content creation, digital experience for marketing solutions, and publishing for legacy products (less than 5% of revenue).

 (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.