Tag: Top Stocks

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Technology Stocks

Iress Ltd (IRE) reported FY21 Results in line with management’s earnings guidance

Investment Thesis

  • Solid FY22 earnings guidance. 
  • Current share price is trading below the blended valuation and offers a >10% upside. 
  • 50% of the $100m buyback will be purchased in 2022, which should support IRE’s share price. 
  • Growing quantum of superannuation/pension bodes well for IRE’s clients, which bodes well for demand for IRE’s products.
  • IRE’s products are firmly entrenched within Australia, UK and South African financial market players (i.e. IRESS terminals and XPLAN). For instance, in ANZ Wealth Management segment, increasing dynamic of self-licensing by practices, high client retention and increasing demand for integrated solutions, are all key revenue themes. Over 90% of revenue is recurring. 
  • Strong continuing momentum in the core growth markets of ANZ Wealth Management, and South Africa and the UK. 
  • New product roll-out providing growth opportunities. 
  • Solid balance sheet and capable management team.

Key Risks

  • Less subscription due to declining sell-side and buy-side demand as well as financial planners. 
  • Competitive platforms/offering (new disruptive technology); improved features and innovation from competition. 
  • Associated risks in relation to system, technology and software. 
  • Regulatory and structural changes in the finance sector impacting clients and their needs.
  • Deterioration in equity and debt markets which may have a negative impact on terminal demand. 
  • Further deterioration with its Canadian segment.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Segment profit: excluding Mortgages, $160-165m, versus $151m in FY21, or including Mortgages $177- 183m, versus $166m in FY21. 
  • Underlying NPAT: excluding Mortgages, $61-67m, versus $47m in FY21, or including Mortgages $74-81m, versus $59m in FY21. 
  • NPAT: excluding Mortgages, $50-58m, versus $62m in FY21, or including Mortgages $63-72m, versus $74m in FY21. 
  • Pro forma revenue $600.2m, was up +3%. 
  • Pro forma segment profit $166.4m, was up +6%.
  • Pro forma EPS of 30.9cps was up +12%. 
  • The final dividend is 30cps, franked to 15% bringing the full year 2021 dividend to 46.0 cents per share, franked at 38% (average weighted). Franking of interim dividend was high in context of EQT bid. 
  • IRE maintains conservative gearing levels and leverage remains below the neutral setting of 2.0x

segment profit (currently at 1.4x).

Company Description

IRESS Ltd (IRE) is an ASX-listed company that specialise in software for the finance industry, with a focus on financial markets, wealth management and superannuation. IRE operates in the Asia-Pacific, UK, South Africa and Canada.

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

NAB also retained strong balance sheet metrics and capital position, with group Common Equity Tier 1 (CET1) ratio of 11.51%

Investment Thesis

  • NAB is trading on an undemanding valuation, with 1.6x Price to Book (P/B) and dividend yield of 5.4%. 
  • All else being equal, NAB is offering an attractive dividend yield on a 2-yr (5.6%) and 3-Yr (5.8%) view. 
  • Strong oligopoly position in Australia (along with three other major banks in CBA, ANZ, WBC).
  • Strong management team and Board. 
  • Macro environment to be both a tailwind and headwind –a rising interest rates environment to be both positive and negative in that while it will enable banks to charge more for loans, it also could result in deterioration in asset quality, slower loan growth, as well as higher inflation and wage growth to be detrimental to costs expense. 
  • Well capitalized after the capital raising. 
  • Though management has been cautioned to expect cost to increase, highlight NAB’s strong franchise model with management capable of improving below a 40% cost to income ratio (however do not factor in management’s long-term target of 35%).
  •  Potential pressure on net interest margins as competition intensifies with other major banks. Though these pressures are to slightly alleviate as it moves into a higher interest rate environment.
  •  Improving return on equity with management proving their abilities in recent times to manage profitability in a low interest rate environment. 
  • Strong provisioning coverage. 
  • A well-diversified loan book.

Key Risks

  • Impacts from Covid-19 are more severe than already provisioned for.
  • Low growth environment impacting earnings. 
  • Potential cuts or reduction to dividends due to low earnings growth. 
  • Intense competition for loan and deposit growth. 
  • Normalizing / increase in bad and doubtful debts or increase in provisioning. 
  • Funding pressure for deposits and wholesale funding (increased funding costs). 
  • Any legal fees, settlements, loss or penalties associated with ASIC or US-based law suits.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Cash earnings up +8.3% to $7,104m. Statutory net profit up +8.3% to $6,891m. Net interest margin (NIM) declined 6bps to 1.65%. 
  • Group Common Equity Tier 1 (CET1) ratio of 11.51%, down 149 bps from September 2021 mainly due to the impact of the on-market share buy-back in FY22 totalling $3.9bn (94 bps), and Citi consumer business acquisition (30 bps). Leverage ratio (APRA basis) was 5.1%. Liquidity coverage ratio (LCR) quarterly average of 137%. Net Stable Funding Ratio (NSFR) of 119%. 
  • The Board declared a fully franked final dividend of 78cps, up 5cps from the pcp, and brings full year dividend to 151cps, up +18.9%.
  • Business and Private Banking. Cash earnings of $3,013m, was up an impressive +21.5%, driven by higher revenue (on stronger volume growth and higher margins), and lower credit impairment charges, partly offset by higher operating expenses for additional bankers and resources to support growth, LanternPay acquisition and investment in technology. 
  •  Personal Banking. Cash earnings of $1,591m, declined -3.6%, mainly due to the impact on margins from intense home lending competition, a lower level of credit impairment writebacks, partly offset by lower operating costs. 
  • Corporate and Institutional Banking. Cash earnings of $1,628m improved an impressive +34.9% on higher revenue from strong volume growth and higher margins, and lower credit impairment charges. 
  • New Zealand Banking. Cash earnings of $1,403m was up +14.1% on higher revenue due to growth in volumes and higher margins, partly offset by higher credit impairment charges and operating expenses.

Company Description

National Australia Bank Limited (NAB) is one of Australia’s largest banks, with majority of their financial service businesses operating in Australia and New Zealand. The bank also has a presence in Asia, UK and the US. NAB offers banking services, credit and access card facilities, leasing, housing and general finance, international and investing banking, wealth and funds management, life insurance and custodian, trusts and nominee services.

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

SGM’s FY22 results were solid and driven by higher volumes and prices

Investment Thesis

  • Improvement in scrap prices across key regions. 
  • Cloud recycling could add significant earnings over the long run. 
  • Investment in improving scrap quality should improve SGM’s competitive position. 
  • Undemanding valuation relative to its own historical average and ASX200 Industrials Index. 
  • Self-help initiatives to support earnings. 
  • Improving Return on Capital (ROC). 
  • Current on-market share buyback. 

Key Risks

  • Significant downturn in global economy. 
  • Trade war between China and the U.S. escalates. 
  • Weaker scrap prices in key regions. 
  • Lower volumes. 
  • Regulatory changes – particularly around China’s anti-pollution policies. 
  • Cost pressures impacting group margins 

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Underlying revenue of $9,264.4m was up +56.6%, driven by higher volumes and selling prices (ferrous and non-ferrous). Sales volumes of 8,106m tonnes, was up +12.2%. 
  • Underlying operating earnings (EBIT) of $756.1m was up +95.6% on pcp, driven predominantly by: strong contribution from SA Recycling, contributing the bulk of the $144.8m improvement in JV contribution; non-acquired growth in volumes contributed over $100m; and $307.8m in margin growth. Earnings growth was partially offset by $170.9m increase in organic metal costs. Underlying NPAT of $578.9m was up +103.8%. 
  • The Board declared a final dividend of 50cps (50% franked), bringing the full year dividend to 91.0cps, up +116.7% YoY. 
  • Return on productive assets (capital efficiency) improved by 16% to 39.0%. (5) Capital expenditure forecast for FY23 was increased – at the March Investor Day management estimated FY23 sustaining and environmental capex would be approximately $175m, however this has been increased to $220m due to higher spending on environmental and increased costs from inflation. 
  • North America Metal (NAM) sales revenue of $2,669.9m was up 66.8% driven by higher sales prices and sales volumes (up +17.7%). Intake also improved over the period and was higher than pre-Covid levels. Trading margin of $881.4m was up +55% as a significant proportion of the trading margin spread in percentage terms was retained due to higher commodity prices. Segment underlying EBIT of $293.4m was up +114.2%. 
  • Australia & New Zealand Metal (ANZ) revenue of $1,694.4m was up +54.2% driven by +55.2% increase in average selling prices. Sales volumes were largely unchanged on pcp (-0.3% YoY). Trading margin of $423.1m was up +34.9%. Costs were up +16.5% and lower than NAM due to flat volumes. Segment EBIT of $186.9m was up +80.2%. 
  • UK Metal sales volumes were up +9.0% YoY and average selling prices up +47.3%, driving sales revenue growth of +60.6% YoY to $1,594.9m. Management noted that the Trading Margin of $234.6m was up only +23.9% “due to market structure and competitive dynamics, UK was not able to hold onto as much of the sales price increase as NAM or ANZ.” Segment underlying EBIT of $69.8m was up +52.7% on pcp. 
  • Sims Lifecycle Services reported revenue of $327m (up +2.5%) and underlying EBIT of $16.3m was down -25.2% driven by the 30% reduction in prices for units resold, driven by reduced manufacturing activity in China due to Covid lockdowns. 
  • SA Recycling reported sales volumes growth of +33.3%, sales revenue up +74.8% to $4,993.1m, trading margin of $1,520.1m up +69% and underlying EBIT (50% share) of $298.5m 

Company Description

Sims Ltd (SGM) collects, sorts and processes scrap metal materials which are recycled for resale. SGM’s segments include ferrous recycling, non-ferrous recycling, secondary processing of non-ferrous metals and plastics, international trading of metal commodities and the merchandising of steel semi-fabricated products.

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

Danaher continues to prune its portfolio of businesses

Business Strategy & Outlook

Through the Danaher Business System, Danaher aims for continuous improvement of its scientific technology portfolio by seeking out attractive markets and then making acquisitions to enter or expand within those fields and divest assets that are no longer seen as core. After acquisitions, Danaher aims to accelerate core growth at acquired companies by making R&D and marketing-related investments. It also implements Lean manufacturing principles and administrative cost controls to boost operating margins. Overall, Danaher’s strategic moves are appreciable, which have pushed it into attractive end markets with strong growth prospects and sticky, recurring revenue streams. For example, recurring revenue could reach about 80% of sales after the pending environmental and applied solutions (EAS) group divestiture in late 2023.

Danaher’s acquisition-focused strategy has contributed to it becoming a top-5 player in the highly fragmented and relatively sticky life science and diagnostic tool markets less than 20 years after its first acquisition in the space (Radiometer in 2004). Recent life science and diagnostic acquisitions have included Beckman Coulter, Pall, and Cepheid. In early 2020, Danaher completed the acquisition of GE Biopharma, now called Cytiva, which fills in some gaps for Danaher within the biopharmaceutical development and manufacturing tool market. Within the life sciences field, the end market is particularly attractive given its strong growth trajectory, high margins, and high switching costs associated with regulatory and reproducibility concerns of end users. Management has started making more acquisitions in that space, such as Aldevron, and expects more tuck-in acquisitions in this and other end markets. Danaher also continues to prune its portfolio of businesses. The planned EAS group divestiture is just the latest for the company that distributed shares in the now publicly traded Fortive Corp (industrials) in 2016 and Envista (dental) in 2019 directly to shareholders. More divestitures are possible in the future, as well.

Financial Strengths

Danaher’s acquisition-focused strategy makes financial flexibility and capital market access important. In recent years, the company has issued debt to make significant acquisitions, such as Beckman Coulter (2011), Pall (2015), Cepheid (2016), and Cytiva (2020) before deleveraging to more manageable levels again. At the end of 2021, gross leverage stood at just 2 times, including COVID-19-elevated profits. Danaher has expressed a desire to maintain its investment-grade status, and it should be achievable. However, the company is highly acquisitive, and future acquisitions could significantly boost leverage from current levels before the company aims to return to more manageable levels.

Bulls Say

  • The Danaher Business System focuses on continuous improvement, including the acceleration of core growth and margin expansion through marketing initiatives and innovation, which appears positive for Danaher’s long-term prospects. 
  • Danaher’s shift to healthcare markets has created a less cyclical business in attractive markets with high barriers to entry and impressive recurring consumables revenue streams. 
  • Danaher has plenty of opportunities to consolidate and improve performance in its targeted life science and diagnostic end markets.

Company Description

In 1984, Danaher’s founders transformed a real estate organization into an industrial focused manufacturing company. Through a series of mergers, acquisitions, and divestitures, including the Fortive separation in 2016, Danaher now focuses primarily on manufacturing scientific instruments and consumables in three segments: life sciences, diagnostics, and environmental and applied solutions. In late 2019, Danaher separated from its dental business through an initial public offering process, and in early 2020, it acquired GE’s Biopharma business, now called Cytiva, which added to its life sciences 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

W.R. Berkley and peers are experiencing a positive trend in underlying underwriting profitability

Business Strategy & Outlook

W.R. Berkley’s niche focus and strict underwriting discipline result in a business model that has historically earned outstanding returns during hard market pricing periods, but only slightly better than adequate returns during soft periods. In 2020, the pandemic negatively affected both the industry’s and W.R. Berkley’s results. However, losses in 2020 were very manageable and well within the range of historical events that the industry has successfully absorbed in the past. W.R. Berkley recognized losses roughly in line with peers. However, the picture for the future has brightened significantly. The pricing environment had not been particularly favorable for commercial lines in previous years, and W.R. Berkley had stayed cautious as a result. However, in 2019, pricing momentum picked up in primary lines, and this positive trend only accelerated in 2020. While higher pricing is necessary to some extent to offset some negative claims trends, pricing increases appear to be more than offsetting these factors. 

As a result, W.R. Berkley and peers are experiencing a positive trend in underlying underwriting profitability, and the company has been getting more aggressive. There is a potential for a truly hard pricing market, similar to what the industry saw in 2003. In this scenario, narrow-moat and highly disciplined operators such as W.R. Berkley would be positioned to earn very attractive returns. Starting in 2003, the company generated returns above 20% for five years. However, given that the industry remains well-capitalized, the magnitude and duration of excess returns will be lower than during that period. Still, as a result of these factors, W.R. Berkley will generate strong returns in the near term. More importantly, management’s approach will favor shareholders in the long run. 

Financial Strengths

W.R. Berkley’s equity/assets ratio of 21% at the end of 2021 is a bit below industry averages, but it is acceptable, given the nature of the company’s lines and the relative lack of catastrophe exposure. The current level is in line with the company’s historical average. W.R. Berkley’s investment portfolio is fairly typical for the industry, with most of the money invested in municipal bonds, corporate bonds and asset-backed securities. But W.R. Berkley shortened the duration of its portfolio in anticipation of a rise in interest rates and shifted its allocation toward investments that generate returns primarily through capital appreciation. The potential long-term upside to this tactic, this has increased near-term pressure on investment income and raises investment risk. Still, its investment portfolio is reasonably safe and this move is unlikely to have a material effect on valuation or the company’s financial health.

Bulls Say

  • The company’s reinsurance operations are a drag on overall results. 
  • The investment in international opportunities creates a point of uncertainty, and results to date have been merely adequate. 
  • During soft pricing periods, Berkley will struggle to earn meaningful excess returns, as it is unwilling to reduce staff.

Company Description

W.R. Berkley is an insurance holding company with a host of subsidiaries that primarily write commercial casualty insurance. The firm specializes in niche products that include various excess and surplus lines, workers’ compensation insurance, self-insurance consulting, reinsurance, and regional commercial lines for small and midsize businesses.

(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

Home Depot should continue to capture sales growth, bolstered by an aging housing stock

Business Strategy & Outlook

Home Depot is the world’s largest home improvement retailer, on track to deliver $157 billion in revenue in 2022. It continues to benefit from healthy long-term housing dynamics and improvements in its merchandising and distribution network. The firm earns a wide economic moat rating due to its economies of scale and brand equity. While Home Depot has produced strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets underlying the modest margin expansion forecast. Its flexible distribution network will help elevate the firm’s brand intangible asset, with faster time to delivery improving the do-it-yourself experience and market delivery centers catering to the pro business. The success of ongoing initiatives should allow for modest operating margin expansion above pre pandemic levels longer term, despite inflationary pressures. Home Depot should continue to capture sales growth, bolstered by an aging housing stock, a shortage in home inventory, and rising home prices, even when lapping robust COVID-19 demand. Other internal catalysts for topline growth could come from the firm’s efficient supply chain, improved merchandising technology, and penetration of adjacent customer product segments (through the acquisition of HD Supply). 

Expansion of newer categories (like textiles from the Company Store acquisition) as well as existing ones (such as appliances) could also drive demand. Perpetual improvements in the omnichannel experience should support the firm’s competitive position, even as existing-home sales and turnover become more volatile. The commitment to better merchandising and an efficient supply chain has led the firm to achieve operating margins and adjusted returns on invested capital, including goodwill, of 15.2% and 34.9%, respectively, in 2021 (both quantitative peaks). Additionally, Home Depot’s focus on cross-selling products in both its DIY and its maintenance, repair, and operations channel should support stable pricing and volatility in the sales base, helping achieve further operating margin lift, with the metric remaining above 15% on average over the next decade.

Financial Strengths

Since the beginning of the pandemic, Home Depot has had no concerns tapping the credit markets. The company raised $5 billion in long-term debt in March 2020 to ensure it could weather COVID-19 without disruption, and raised another roughly $3 billion in the fourth quarter of 2020 to help facilitate the acquisition of HD Supply. In 2021, Home Depot issued another $3 billion in debt. This led the firm to end fiscal 2021 with a total debt load of around $40 billion and a debt/capital ratio of 1.04. There aren’t any concerns about near-term cash constraints as forward debt maturities are staggered, with just $1.2 billion of short and long-term debt maturing in the next 12 months (from Oct. 30, 2022). Moreover, EBIT is forecast to cover interest expense 15 times at the end of 2022. Strong free cash flow to equity that has averaged about 10% of sales over the past five years supports higher leverage, and the company will stay within its targeted adjusted debt/EBITDAR metric of 2 times over the long term. The balance sheet’s $25 billion in net property, plant, and equipment provides an asset base to secure more debt if necessary. Given Home Depot’s ability to generate tremendous free cash flow to equity, the management has no problem facilitating dividend payments and remaining near its long-term dividend payout ratio target of 55%. Given the outsize performance despite COVID-19, share repurchases will continue, with the new $15 billion share repurchase program authorized in August 2022.

Bulls Say

  • Home Depot’s focus on distribution and merchandising should increase productivity and grow domestic share in a stable housing market, helping stimulate sales and protect margins. 
  • The company has returned $67 billion to its shareholders through dividends and share buybacks over the past five years, above 20% of its market cap. Home Depot would be returning another $90 billion to shareholders over the next five years. 
  • The addressable MRO market is around $100 billion, and Interline and HD Supply make up a low-double-digit share, leaving meaningful upside up for grabs.

Company Description

Home Depot is the world’s largest home improvement specialty retailer, operating more than 2,300 warehouse-format stores offering more than 30,000 products in store and 1 million products online in the United States, Canada, and Mexico. Its stores offer numerous building materials, home improvement products, lawn and garden products, and decor products and provide various services, including home improvement installation services and tool and equipment rentals. The acquisition of distributor Interline Brands in 2015 allowed Home Depot to enter the maintenance, repair, and operations business, which has been expanded through the tie-up with HD Supply (2020). The addition of the Company Store brought textile exposure to Home Depot’s lineup.

(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
Commodities Trading Ideas & Charts

The Sinclair acquisition furthers HFs push into renewable diesel, adding a production facility and pre-treatment project

Business Strategy & Outlook

After the acquisition of Sinclair Oil, HollyFrontier, now HF Sinclair, is a fully integrated independent company composed of refining, marketing, renewables, specialty lubricants, and midstream businesses. Its refining footprint has grown to seven refineries totaling 678 mbd in total capacity, including the recently acquired Puget Sound refinery. The latter deal extends the company’s footprint to the West Coast, beyond its historical midcontinent and Rockies roots and into a more difficult refining market with less competitive advantages. However, the foothold in the West Coast should help with the growing renewable diesel business given the region’s growing biofuel mandates. The Sinclair acquisition furthers HF’s push into renewable diesel, adding a production facility and pre-treatment project. Combined with HF’s existing projects (two RD units and a pre-treatment unit), it expects to produce 380 million gallons annually once complete in 2022. 

Adding Sinclair’s marketing group of over 300 distributors, 1,300 wholesale brand sites, and 2 billion gallons a year of branded sales adds a stable earnings stream HF previously lacked as a merchant refiner. In addition, it offers the ability to generate RINs whose high costs have put HF at a disadvantage in the recent past. HF had already begun to diversify its earnings when it acquired the Petro-Canada lubricants business, Red Giant Oil, and Sonneborn to diversify its earnings stream. It expects the segment to generate $250 million EBITDA annually while also serving as a platform for future growth. At the same time, HF’s MLP Holly Energy Partners acquired Sinclair’s midstream assets including 1,200 miles of pipelines, eight product terminals with 4.5 mmbbl of storage, and interests in three pipeline joint ventures. The incremental EBITDA of $70 million-$80 million will increase HEP’s annual EBITDA to about $450 million while opening up future organic and external transaction growth opportunities.

Financial Strengths

HF Sinclair’s debt increased amid the difficult market conditions and acquisitions in the last few years. However, with completion of the Sinclair acquisition, net debt was only 16% at the end of the third quarter, including Holly Energy Partners’ debt, among the lowest of its peer group. To fund the Puget Sound acquisition with cash, management suspended the dividend but reinstated it in the first quarter 2022, earlier than expected. The Sinclair acquisition was done with equity. By first-quarter 2023, management planned to have returned $1 billion to shareholders through dividends and repurchases, but did so by third-quarter 2022 given the strong market conditions. It has already authorized another $1 billion in repurchases as part of its guidance of an ongoing 50% payout ratio of adjusted net income through dividends and repurchases. Capital spending doubled in 2021 to $1.2 billion primarily driven by planned investments in renewable diesel, with the remainder earmarked for refining and lubricants. Spending should fall in 2022 as renewable diesel projects are completed but increase slightly in 2023. Management has set the minimum cash balance target at $500 million.

Bulls Say

  • HF Sinclair stands to benefit from continued discount of light and heavy mid continent crude. Also, its Navajo refinery is well positioned to capitalize on growing Permian production. 
  • The Sinclair acquisition adds refining assets complementary to HF’s legacy footprint while adding a marketing business that its portfolio lacked, improving competitiveness. 
  • Investments in renewable diesel should deliver free cash flow and high returns while offering diversification from petroleum, reducing carbon intensity, and generating valuable RINs.

Company Description

HF Sinclair is an integrated petroleum refiner that owns and operates seven refineries serving the Rockies, midcontinent, Southwest, and Pacific Northwest, with a total crude oil throughput capacity of 678,000 barrels per day. It is investing to produce 380 million gallons of renewable diesel annually. It holds a marketing business with over 300 distributors and 1,300 wholesale branded sites across 30 states. It also has a 47% ownership stake in Holly Energy Partners, which owns and operates petroleum product pipelines and terminals principally in the southwestern US.

(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

Hanes has plans to improve Champion’s footwear after recently taking control of the product

Business Strategy & Outlook

Narrow-moat Hanesbrands is the market leader in basic innerwear (60% of its 2021 sales) in multiple countries. Its key innerwear brands like Hanes and Bonds (in Australia) achieve premium pricing. While the firm faces challenges from inflation, the strong U.S. dollar, lower inventory levels at retailers, and COVID-19, Hanes’ share leadership in replenishment apparel categories puts it in better shape than some competitors. In May 2021, the firm unveiled its Full Potential plan to expand global Champion, bring growth back to innerwear, improve connections to consumers (through greater marketing and enhanced ecommerce, for example), and streamline its portfolio.

As part of Full Potential, Hanes intends to build on Champion’s popularity in North America, Asia, and Europe. Although recent results have been rocky, Champion has expansion opportunities as it and other activewear apparel have become more than just athletic apparel and are increasingly worn as lifestyle/fashion brands. Moreover, Hanes has plans to improve Champion’s footwear after recently taking control of the product. Hanes’ management forecasts Champion will reach $3.2 billion in global sales in 2024, up from more than $2 billion last year, but the macroeconomic and industry challenges have probably put this goal out of reach by this time frame. Another key strategy for Hanes is to improve the efficiency of its supply chain. It has already made progress in this area, having achieved a 15% increase in manufacturing output over the past four years. Hanes, unlike many rivals, primarily operates its own manufacturing facilities. More than 70% of the more than 2 billion apparel units sold by the company each year are manufactured in its own plants or those of dedicated contractors.

Financial Strengths

Hanes racked up considerable amounts of debt during its acquisition spree in 2013-18. Its balance sheet was improving prior to the pandemic, but has lately become a concern as its free cash flow has turned negative in 2022. Hanes closed 2022’s third quarter with about $3.9 billion in debt, but it also had $253 million in cash and $560 million available under its revolving credit facility. Despite recent challenges, Hanes will have significant cash available for debt reduction over the next few years, forecasting its total debt to drop to $1.9 billion by the end of 2026. The firm is to meet its goal of bringing debt/EBITDA (3.7 times at the end of 2021) below 3 times by 2026. Although Hanes suspended its share buybacks due to the pandemic, repurchases have resumed in a small way in 2022. The company bought back significant amounts of stock in 2016 and 2017 and repurchased $200 million in shares in early 2020 before the virus spread. It will repurchase about $200 million in shares per year over the next decade. Hanes, unlike many peers, did not suspend its dividend due to the virus. Its annual dividend has been set at $0.60 per share since 2017, but it will be increased in future years as debt is retired. Its annual dividend payout ratio will be around 40% in the long term. Hanes may expand the business through acquisitions, although it has not made a major acquisition since 2018. No acquisitions would be there due to uncertainty about timing, size, and profitability. At this point, internal investments and debt retirement are higher priorities than acquisitions.

Bulls Say

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

Company Description

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

(Source: Morningstar)

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

General Dynamics’ business jet segment primarily produces long-range wide-cabin business jets

Business Strategy & Outlook

About three-fourths of General Dynamics is a defense prime contractor and the other fourth a business jet manufacturer. Defense primes rely on defense spending for revenue, and companies with tangible growth profiles through a steady stream of contract wins, ideally to contracts that are fulfilled over decades are favorable. General Dynamic’s crown jewel of long-cycle contracts, the Columbia-class submarine, exemplifies this with planned procurement through 2042. Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow the defense primes to deliver a lot of cash to shareholders, which is positive because there’s no substantial growth seen in this industry. Defense primes are implicitly a play on the defense budget, which is ultimately a function of both a nation’s wealth and a nation’s perception of danger. As the U.S. budget is looking increasingly bloated with pandemic relief, there’s a near-term slowdown in defense spending to flat or even negative growth, but the contractors will be able to continue growing due to sizable backlogs and think that defense budget growth is likely to return. There is a substantial political uncertainty in the budget, but it will be difficult to materially decrease the defense budget due to structural geopolitical changes that make great-power conflict more salient. It is to be noted that one of the most common budgetary compromises of the previous decade has been more nondefense spending for more defense spending.

General Dynamics’ business jet segment primarily produces long-range wide-cabin business jets. This market is low volume, at roughly 200 global deliveries each year and many repeat customers. New, quality, product drives demand in this segment, so the company must continuously convince customers that it has built a better aircraft. Gulfstream dominates volume in this segment, with roughly 50% market share, which leads to superior margins due to progression along the learning curve. It can be anticipated that the introduction of the G700, G800, and G400 in 2022, 2023, and 2025, respectively will be major sales drivers.

Financial Strengths

General Dynamics historically has one of the best balance sheets among defense primes, and this is a proper business strategy as the company is somewhat more cyclical than peers. General Dynamics issued some debt in 2020 due to pandemic-related uncertainties, and gross debt/EBITDA stood at 2.3 times at the end of 2021. General Dynamics had a sizable debt maturity in 2021, and has a much more manageable maturity schedule over the rest of the forecast period. Over the medium term, the company will bring gross debt/EBITDA to its normal historical levels below a single turn. Hence it makes sense for General Dynamics to generally carry a lower debt burden than peers because they have a highly cyclical business jet segment in addition to the acyclical defense prime contracting business. General Dynamics produces a substantial amount of cash flow to service any debt burden and the company would be able to access the capital markets at minimal cost if necessary.

Bulls Say

  • General Dynamics’ Gulfstream franchise has top-tier volume share and margin in the large-cabin business jet market and has successfully transitioned to the G500 and G600, and G650. Business jets are in a postpandemic cyclical upswing.
  • General Dynamics’ marine segment has decades of revenue visibility, thanks to the long-cycle nature of shipbuilding.
  • Defense prime contractors operate in an acyclical business, which could offer some protection if the U.S. enters a recession

Company Description

General Dynamics is a defense contractor and business jet manufacturer. The firm’s segments include aerospace, combat systems, marine, and technologies. The company’s aerospace segment creates Gulfstream business jets. Combat system produces land-based combat vehicles, such as the M1 Abrams tank. The marine subsegment creates nuclear-powered submarines, among other things. The technologies segment contains two main units, an IT business that primarily serves the government market and a mission systems business that focuses on products that provide command, control, computers, intelligence, surveillance, and reconnaissance capabilities to the military.

(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

Dassault Systemes has the greatest share of the PLM market, and this exposure is responsible for nearly half of the company’s $100 billion addressable market

Business Strategy & Outlook

Dassault Systemes has a hold on the computer-assisted design software market for autos, aerospace and defense, and manufacturing. With 90% of all aircraft and 80% of all autos globally made via Dassault Systemes software, the company will stay well entrenched in engineering teams with help from its significant switching costs and network effect found in its midmarket CAD software, SolidWorks. The wide-moat company has adapted well to new trends in its market exposures, such as electric vehicle design software, which has made us more confident in the longevity of its moat and ability to achieve excess returns on invested capital. Outside of CAD offerings like Catia and SolidWorks, Dassault Systemes has a hefty portfolio of information intelligence, collaboration, content sharing, and simulation software, which all work to serve a part of product production, whether it’s drug research and development, mining planning, or clothing line organization. The most popular of these disparate offerings is Enovia, its product lifecycle management software, which is used in a variety of industries to connect engineers, marketing, and supply chain teams to better orchestrate the lifecycle of a product.

Dassault Systemes has the greatest share of the PLM market, and this exposure is responsible for nearly half of the company’s $100 billion addressable market. While there are new entrants in the PLM and midmarket CAD spaces, Dassault Systemes will be able to work to minimize any additional share that new players would take in its markets by increasing its adoption of its 3DExperience platform. The platform seeks to connect much of Dassault Systemes’ offerings in one place. Over the next two years, Dassault Systemes will be able to significantly increase its platform revenue. With a greater portion of customers on the platform, one should not be surprised to see customer churn come down and switching costs increase as the platform helps to lock in the benefits of using all Dassault Systemes’ software, which used to be more disparate.

Financial Strengths

Dassault Systemes to be financially healthy, given its asset-light model. As of 2021, Dassault Systemes had EUR 3 billion in cash and cash equivalents. The company had EUR 3 billion in long-term debt, much of which is a result of debt financing required to purchase Medidata for $5.7 billion in 2019. The debt/EBITDA will decrease to 1 by 2024, from 2.5 in 2021. Even with significant debt to pay down, Dassault Systemes should be well equipped to generate healthy free cash flow. The firm will continue paying out an annual dividend (with a roughly 30% payout ratio) and continue decent share repurchases.

Bulls Say

  • Dassault Systemes should see strong adoption of its 3DExperience platform, enabling margin expansion due to increasing switching costs.
  • Dassault Systemes’ foray into precision medicine by simulating individuals’ responses to medicine or medical devices should prove profitable over the next 10 years.
  • The integration of Biovia with newly acquired Medidata should provide significant operating leverage and competitive positioning to threaten Veeva’s trial management competitor.

Company Description

Dassault Systemes is a leading provider of computer-assisted design and product lifecycle management software, serving customers like Boeing and Tesla throughout the production process. The company’s top line largely depends on the transportation and mobility, industrial equipment, and aerospace and defense industries.

(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.

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