Tag: Top Stocks

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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.

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

AMD’s semi custom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles

Business Strategy & Outlook

Advanced Micro Devices designs an array of chips for various computing applications. These products include central processing units and graphics processing units tailored to PCs, game consoles, and servers. AMD operates in the x86-based duopoly with Intel that dominates the PC and server CPU markets. AMD benefits from intangible assets related to its x86 instruction set architecture license and chip design expertise, which gives us confidence that the firm will generate excess returns over its cost of capital over the next decade and thus warrants a narrow economic moat rating.AMD outsources its chip designs to third-party foundries such as Taiwan Semiconductor Manufacturing and GlobalFoundries. While AMD has historically been a smaller x86 chip supplier than Intel, it has recently offered materially more competitive products across all of its segments, thanks to a combination of strong execution in new innovative chip designs and Intel’s own manufacturing struggles, which allowed AMD’s chief foundry partner TSMC to leapfrog Intel in process technology.

The firm is well positioned to enjoy data center growth driven by the shift from on-premises to cloud computing. In the mature PC market, AMD will also gain share at Intel’s expense in the coming years. One potent risk for both AMD and Intel is the shift to ARM-based CPUs in PCs and servers, though x86-based chips is to remain dominant for the foreseeable future. AMD has focused on utilizing its CPU and GPU technology in semi custom processor applications, such as game consoles. AMD’s semi custom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles. AMD also competes against Nvidia in the discrete GPU market, though AMD isn’t as competitive in GPUs as it is in CPUs. In February 2022, AMD acquired Xilinx to bolster its product portfolio and better diversify its revenue. Xilinx is the leader in the field-programmable gate array niche of the chip industry. FPGAs can be reconfigured to address the unique needs of users. AMD is to leverage FPGAs in the data center alongside its CPUs.

Financial Strengths

At the end of June 2022, the firm reported $5 billion in cash and cash equivalents against total debt of $2.8 billion. The firm has been doing a nice job of paying down debt in recent years to create a more resilient capital structure. While it has generated solid cash flow in recent years, its longer-term competitiveness remains heavily dependent on its ability to retain healthy market share across the PC, server, and GPU segments.

Bulls Say

  • AMD’s recent CPU and GPU offerings have been more competitive with Intel’s and Nvidia’s products, respectively, and utilize TSMC’s leading-edge process technologies.
  • AMD’s GPUs are highly sought after in cryptocurrency mining. Should blockchain technology take off, AMD could be well positioned to take advantage.
  • AMD has its sights set on Intel’s dominant server CPU market share, and its EPYC server chips have proved to be comparable or even superior to certain Intel chips in many benchmark tests.

Company Description

Advanced Micro Devices designs microprocessors for the computer and consumer electronics industries. The majority of the firm’s sales are in the personal computer and data center markets via CPUs and GPUs. Additionally, the firm supplies the chips found in prominent game consoles such as the Sony PlayStation and Microsoft Xbox. AMD acquired graphics processor and chipset maker ATI in 2006 in an effort to improve its positioning in the PC food chain. In 2009, the firm spun out its manufacturing operations to form the foundry GlobalFoundries. In 2022, the firm acquired FPGA-leader Xilinx to diversify its business and augment its opportunities in key end markets such as the data center.

(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

EDP is well positioned to benefit from the extension of production tax credits planned by the extension of the Inflation Reduction Act

Business Strategy & Outlook

EDP is the European utility with the second-largest weight of renewables (behind Orsted), accounting for two thirds of the group’s EBITDA. They consist of EDP Renovaveis’ wind and solar assets chiefly located in the United States and Iberia and EDP’s hydro assets in Iberia and Brazil. Renewables are the main growth driver as per estimates due to the commissioning of new capacity and capital gains from asset rotations. EDP plans to install 12.5 GW of net capacity by 2025 or 2.5 GW per year, still less than 4 GW-6 GW planned by Enel, Iberdrola, or Engie but almost 3 times as much as 0.9 GW of the previous 2019-22 business plan. As the third-largest renewables player in the U.S. through EDP Renovaveis, EDP is well positioned to benefit from the extension of production tax credits planned by the extension of the Inflation Reduction Act. The second-largest division is formed by EDP’s electricity networks in Iberia and Brazil, contributing around one third of EBITDA. Networks’ profitability will grow thanks to investments in Brazilian networks and indexation to high inflation. The third division is client solutions and energy management, which weighs around 5% of group EBITDA. It is composed of Iberian thermal power plants and supply activities.

The almost zero implicit valuation of EDP’s Iberian operations when stripping out the market value of EDP’s stakes in its subsidiaries EDP Brazil and EDP Renovaveis reflect an excessive holding discount. To eliminate it, EDP’s management is contemplating changing the group’s capital structure. This could lead to a “reverse acquisition” of EDP by EDP Renovaveis. Such a situation where a subsidiary acquires its parent is called a downstream merger. The subsidiary buys back its shares from the parent and then redeems them or issues them to a shareholder in the acquiree. Consequently, the merger may be completed without increasing EDP Renovaveis’ share capital. EPS will grow annually by 9.9% on average through 2026 and a return to dividend growth as of 2023.

Financial Strengths

Net debt to increase from EUR 11.57 billion in 2021 to EUR 16.7 billion in 2026 as organic operating cash flow will be too low to cover hefty investment plan and dividend payments. The net debt/EBITDA to decrease from 3.1 in 2021 to 2.9 in 2026, averaging 2.8 during the period. Net debt/equity will average 0.9 through 2026. EBIT/net interest coverage will strengthen from 4.5 in 2021 to 5.5 in 2026. EDP’s dividend policy is based on a floor of EUR 0.19 per share, equal to the dividend paid since 2012, and a 75%-85% payout ratio. Taking the maximum between EUR 0.19 and an 80%-based dividend, the earnings estimates point to a EUR 0.19 dividend in 2022 and an average annual growth of 11.3% between 2022 and 2026.

Bulls Say

  • Being an early mover, EDP has an attractive portfolio of renewables assets, especially in the U.S.
  • EDP should beat its 2023-25 financial targets due to soaring power prices in Europe.
  • EDP might push EDP Renovaveis to do a downstream merger to eliminate the holding discount.

Company Description

EDP is a vertically integrated utility company and is the largest generator, supplier, and distributor of electricity in Portugal. In addition to Portugal, EDP has sizable operations in Spain, Brazil, and the U.S. EDP owns 82.6% of EDP Renovaveis, the third-largest wind power owner/operator in the world. EDP also owns 51% of Energias do Brasil, an electric utility that serves a population of almost 8 million.

(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

Package Volume Normalization Accelerating for FedEx; Margins Facing Renewed Pressure

Business Strategy & Outlook

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape—FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. FedEx is also the largest U.S. less-than-truckload carrier, which helps forge sticky relationships with retail and industrial shippers on the package side. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment. Leading up to the pandemic, FedEx’s margins grappled with heavy network investment, the gradual mix shift to lower-margin B2C deliveries, and TNT integration outlays. That said, the pandemic-driven e-commerce shift and related surge in residential package deliveries, coupled with an increase in pricing power (tight industry capacity), drove a solid uptick in profitability for ground, express, and freight.

Material labour constraints and wage inflation emerged in fiscal 2022, setting margins back, especially at ground. Additionally, package volumes are facing normalization of business-to-consumer volumes, retailer restocking, and air freight activity. Thus, revenue growth and EBIT margins are easing, and execution uncertainty is high. On the other hand, the profitability can stabilize in the quarters ahead as new management shifts from a growth to an efficiency posture. In general, FedEx’s extensive international shipping network is extraordinarily difficult to duplicate and despite near-term normalization off pandemic highs, domestic/international e-commerce spending should remain a longer-term tailwind (outside a major recession). Although Amazon has been insourcing more of its own U.S. last mile package deliveries over the past several years, FedEx has bolstered its ground and express capabilities and is well positioned to serve the myriad other retail shippers pursuing e-commerce, not to mention its entrenched relationships in B2B delivery. The TNT integration is wrapping up and the efforts to bear fruit in Europe.

Financial Strengths

Total debt approached $20.3 billion as of fiscal year-end 2022 (ended May), down slightly from $20.9 billion in fiscal 2021 and $22 billion in fiscal 2020. Since May 2017, FedEx has borrowed around $7 billion (net) to finance aircraft purchases, sorting facility expansion and automation, pension funding, dividends, and periodic share repurchases. This partly reflects $3 billion of unsecured debt issued in April 2020 to increase financial flexibility as the pandemic hit, and to pay off part of its commercial paper program. FedEx ended fiscal 2022 with roughly $7 billion in cash and equivalents; similar to fiscal 2021. Total debt/adjusted EBITDA came in near 2 times in both fiscal 2021 and fiscal 2022, which represents improvement from 3.3 times in fiscal 2020, as the pricing and demand backdrop surged over the past few years. The metric to hold relatively steady in fiscal 2023. Adjusted EBITDA excludes mark-to-market pension charges and nonrecurring costs.

Bulls Say

  • Outside a prolonged recession, and despite near-term normalization, FedEx’s U.S. ground package delivery operations should enjoy medium-term growth tailwinds rooted in favourable e-commerce trends.
  • FedEx’s massive package sortation footprint, immense air and delivery fleet, and global operations knit together a presence that’s extraordinarily difficult to replicate.
  • During its nearly five-decade history, FedEx has weathered multiple economic cycles. While short-term results may suffer, the firm’s powerful parcel delivery network is firmly established.

Company Description

FedEx pioneered overnight delivery in 1973 and remains the world’s largest express package provider. In its fiscal 2020 (ended May 2020), FedEx derived 51% of revenue from its express division, 33% from ground, and 10% from freight, its asset-based less-than-truckload shipping segment. The remainder comes from other services, including FedEx Office, which provides document production/shipping, and FedEx Logistics, which provides global forwarding. FedEx acquired Dutch parcel delivery firm TNT Express in 2016. TNT was previously the fourth-largest global parcel delivery provider.

(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

Sanofi’s Discontinuation of Cancer Drug Amcenstrant Is Disappointing, but No Major FVE Impact

Business Strategy & Outlook

Sanofi’s discontinuation of cancer drug amcenstrant does not have a major impact on the firm’s fair value estimate as projected peak annual sales for the drug at well below EUR 1 billion annually. However, the string of bad news (including the recent clinical hold on multiple sclerosis drug tolebrutinib) in the late-stage development is concerning. Nevertheless, drug development is risky, and failures are common. These pipeline setbacks aren’t overly concerning, and one continues to believe Sanofi will be able to develop the next generation of drugs to offset eventual patent losses, which is a key factor supporting its wide moat. 

Also, the limited patent losses over the next several years also provide time for Sanofi to refill its late-stage pipeline with several early-stage drugs that look encouraging. On amcenstrant, poor clinical data led to the discontinuation of the drug. A fairly high threshold of efficacy and safety was needed to keep the clinical studies going since there are many very competitive drugs already approved and many more in development for breast cancer. The previous failure of the drug in later-lines of breast cancer treatment did not bode well for the drug. Despite the setbacks, Sanofi’s drug development success improved. One is most bullish on late stage drugs efanesocotocog for hemophilia (strong phase 3 data), multiple sclerosis drug tolebrutinib (despite the clinical hold), and several mid-stage drugs targeting cancer and rare diseases.

Financial Strengths

Sanofi remains on solid financial footing, closing 2021 with a debt/EBITDA ratio of 2 times. Further, the company generates stable cash flows that should enable the firm to meet its dividend payments and still accumulate significant cash reserves. The company redeployed its cash through bolt-on acquisitions in the neighborhood of $2 billion-$5 billion each year to augment its internal research and development. The recent sale of Regeneron stock of close to $12 billion may open up the possibility of a larger acquisition.

Bulls Say

  • Sanofi is launching immunology drug Dupixent, which holds strong pricing power and major blockbuster potential across several indications.
  • Sanofi’s strong entrenchment in rare-disease drugs should translate into steady pricing power as payers tend not to push back on pricing in this area.
  • With a wide product offering in vaccines, consumer health and insulins, Sanofi is well positioned for the fast-growing emerging markets.

Company Description

Sanofi develops and markets drugs with a concentration in oncology, immunology, cardiovascular disease, diabetes, and vaccines. However, the company’s decision in late 2019 to pull back from the cardiometabolic area will likely reduce the firm’s footprint in this large therapeutic area. The company offers a diverse array of drugs with its highest revenue generator, Dupixent, representing just over 10% of total sales, but profits are shared with Regeneron. About 30% of total revenue comes from the United States and 25% from Europe. Emerging markets represent the majority of the remainder of revenue.

(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

Rolls Royce Holdings plc (RR) manufactures aero, marine and industrial gas turbines for civil and military aircraft

Investment Thesis:

  • Very high barriers to entry and Covid-19 are likely to improve industry structure (consolidation)
  • Consumer pent up demand for travel will return with a vaccine. 
  • Liquidity concerns have been addressed with the GBP5bn recapitalization program.  
  • Ongoing focus on R&D and innovation, which will drive further efficiencies.
  • Cost efficiency program to drive savings to support earnings. 

Key Risks:

  • Covid-19 impacts are deeper and more protracted than expected.
  • The Company fails to hit its near-term guidance. 
  • Défense and Power Systems fails to deliver organic growth. 
  • Economic downturn leading to reduced demand from airlines.  
  • Brexit uncertainty. 
  • Adverse currency movements outside hedging strategies. 
  • Regulatory / litigation risks. 

Key Highlights:

  • FY22 outlook remains unchanged. Despite a more uncertain environment, management confirmed FY22 guidance with revenue growth of low-to-mid single-digit driven by improvements in Civil Aerospace driven by higher large engine sales and increases in shop visits, operating profit margin remaining broadly unchanged y/y and FCF being modestly positive. (Refer to Figure 1 for detailed guidance)
  • Managing external inflation/supply chain challenges successfully. Though RR isn’t immune to the impact of global supply chain challenges and cost inflation, management continues to successfully manage these by making innovative changes to manufacturing processes to manage rising costs and supply chain bottlenecks (e.g., repairing and reusing spare parts, de-risking customer deliveries by temporarily increasing inventories) and by partnering with key suppliers to ensure contractual pricing protection in place through long-term contracts.
  • Sale of ITP Aero to close soon. The Company received all the required regulatory approvals for the sale of ITP Aero, with the transaction expected to complete in the coming weeks and proceeds to be used to reduce debt by repaying early the £2bn loan, which is supported by an 80% guarantee from UK Export Finance and remains only drawn debt exposed to interest rate movements.
  • Capital management. Balance sheet remained strong with liquidity of £7.3bn including £2.8bn in cash, equating to netdebt of £5.1bn including £1.9bn leases with no significant debt maturities before 2024. Shareholder returns remain scrapped with no interim dividend for FY22.
  • Cashflow profile – management warns of headwinds in FY23. FCF was an outflow of £68m vs an outflow of £1.2bn in pcp, driven by higher Civil Aerospace EFH receipts and increase in payables, with the company experiencing limited impact from concession payments amid further delays in 787 deliveries and the associated concession payments. However, management warned of a larger headwind in FY23, by continued low receipts from Trent 1000 new engine deliveries as Boeing continues to manage its own inventory.

Company Description:

Rolls Royce Holdings plc (RR) manufactures aero, marine and industrial gas turbines for civil and military aircraft. The Company designs, constructs, and installs power generation, transmission and distribution systems and equipment for the marine propulsion, oil and gas pumping and defence markets. The Company operates three main segments: (1) Civil Aerospace; (2) Defence Aerospace; and (3) Power Systems.

(Source: Banyantree)

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

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

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

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