Tag: Top Stocks

Our $21 fair value estimate for no-moat NortonLifeLock after announcing its intention to merge with fellow consume cybersecurity firm Avast. The news follows NortonLifeLock recently acknowledging rumors of Avast combination talks, and we believe this merger is in line with NortonLifeLock’s plan to use mergers as a growth accelerator with a focus on extracting overlapping costs. The deal puts Avast’s enterprise value between $8.6 billion and $9.2 billion, depending on how Avast shareholders elect to receive a majority stock or cash option. We updated our model with the assumption that the merger occurs in the middle of 2022 as expected, helping the company rapidly expand its revenue growth rate and achieve its reiterated adjusted earnings target of $3 per share in the coming years.

NortonLifeLock gains international reach, especially within the important German market, and helps bolster its opportunity with the small business segment through this merger. The combined company will be renamed at a later point and together have about 40 million direct customers and over 500 million total users, as well as about $3.5 billion in combined revenue with a blended adjusted operating margin of 52% (presynergies). 

NortonLifeLock expects to achieve $280 million of annual gross cost synergies, fully realized by the second year post-merger. We believe the merged company will be shareholder centric, with a plan to return 100% of free cash flow through the existing $0.125 quarterly dividend and future share buybacks.

Financial Deals Post – Merger

NortonLifeLock will finance the deal with cash and $5.35 billion of new debt facilities, which the company expects to rapidly pay down post-merger. Avast shareholders are expected to own between 14% and 26% of the combined company, depending on their election, post-merger. In the majority stock option, Avast shareholders receive $2.37 in cash and 0.1937 shares of NortonLifeLock whereas in the majority cash option, Avast shareholders receive $7.61 in cash and 0.0302 shares of NortonLifeLock. In the majority stock option, NortonLifeLock plans to increase its buyback program by $3 billion.

Current NortonLifeLock CEO Vincent Pilette will be the CEO, Avast’s current CEO will become President, and NortonLifeLock’s CFO will retain her role for the combined company. The merged company will have dual headquarters, with Avast in Prague, Czech Republic and NortonLifeLock in Tempe, Arizona. While we appreciate the combined company expanding its geographical footprint, we expect a concerted focus on reducing costs to reel in operating and fixed costs.

Company Profile 

NortonLifeLock sells cybersecurity and identity protection for individual consumers through its Norton antivirus and LifeLock brands. The company divested the Symantec enterprise security business to Broadcom in 2019. The Arizona-based company was founded in 1982, went public in 1989, and sells its solutions worldwide.

(Source: Morningstar)

General Advice Warning

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

The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. 

As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 287 in 2020 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. 

To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019). Grainger continues to expand its endless assortment strategy, but we’re skeptical of the margin expansion opportunity for this business, given strong competition in the space from the likes of Amazon Business and others. 

Financial Strength

As of the second quarter of 2021, Grainger had $2.4 billion of debt outstanding, which net of $547 million of cash represents a leverage ratio of less than 1.1 times our 2021 EBITDA estimate. Grainger’s outstanding debt consists of $500 million of 1.85% senior notes due in 2025, $1 billion of 4.6% senior notes due in 2045, $400 million of 3.75% senior notes due in 2046, and $400 million of 4.2% senior notes due in 2047. Grainger has a proven ability to generate free cash flow throughout the cycle. Indeed, it has generated positive free cash flow every year since 2000, and its free cash flow generation tends to spike during downturns because of reduced working capital requirements. Given the firm’s reasonable use of leverage and consistent free cash flow generation, we believe Grainger’s financial health is satisfactory.

Bull Says

• With a more sensible, transparent pricing model, Grainger should continue to gain share with existing customers and win higher-margin midsize accounts.

• As a large distributor with national scale and inventory management services, Grainger is well positioned to take share from smaller regional and local distributors as customers consolidate their MRO spending.

• Grainger operates a shareholder-friendly capital allocation strategy; it has increased its dividend for 49 consecutive years and has reduced its diluted average share count by over 40% over the last 20 years.

Company Profile

W.W. Grainger (NYSE: GWW) distributes 1.5 million of maintenance, repair, and operating products that are sourced from over 4,500 suppliers. The company serves approximately 5 million customers through its online and electronic purchasing platforms, vending machines, catalog distribution, and network of over 400 global branches. In recent years, Grainger has invested in its e-commerce capabilities and is the 11th-largest e-retailer in North America.

(Source: Morningstar)

General Advice Warning

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

Operating expenses remain elevated compared with the previous year, which reflects Seagen’s investments to support the European launch of Tukysa and continued development of its pipeline. R&D expenses for the second quarter were $235 million and SG&A expenses were $165 million, representing increases of 19% and 31%, respectively.

Adcetris for lymphoma contributed $182 million in sales for the quarter, representing an increase of 9% compared with the prior-year period. Padcev for metastatic bladder cancer contributed $82 million in sales, representing growth of 44% from the second quarter of 2020. The FDA granted regular approval for Padcev in July 2021 and added a new indication for locally advanced or metastatic urothelial cancer. Tukysa for breast cancer reported revenue of $83 million, growing 427% year over year since the drug received FDA approval in April 2020. Seagen could gain regulatory approval later this year for its fourth-approved product, Tisotumab vedotin, or TV, for metastatic cervical cancer.

Company’s Future outlook

We believe Adcetris and Padcev provide ample near-term diversification, which we anticipate will further improve with additional label expansions and approvals of other indications. We expect Tukysa will gain steady market share as the drug recently received approval in the EU. We also anticipate a steady stream of licensing and collaboration revenue from its various partners. Our forecast implies a five-year projected revenue CAGR of about 16%.

Company Profile

Seagen Inc. (formerly known as Seattle Genetics) is a biotech firm that develops and commercializes therapies to treat cancers. Seagen’s therapies are based on antibody-drug conjugate technology that utilizes the targeting ability of monoclonal antibodies to deliver cell-killing agents directly to cancer cells. The company’s lead product, Adcetris, has received approval for six indications to treat Hodgkin lymphoma and T-cell lymphoma. Other approved products include Padcev for bladder cancer and Tukysa for breast cancer. The company has several other oncology programs in pivotal trials. Seagen also licenses its antibody-drug conjugate technology to several leading biotechnology and pharmaceutical companies.

(Source: Morningstar)

General Advice Warning

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

the types of services it historically didn’t provide but has entered via acquisitions in the last several years. We believe the ability to connect enterprises (smaller deployments) to hyper scalers like cloud a provider is what make data centers differentiated and that the ability to do it on a global scale is attractive for customers. Digital’s portfolio seems to be in the sweet spot to provide these abilities, and we think it can close the gap with Equinox as the premier global data center provider for connectivity.

Total revenue grew 10% year over year. Like its peers, Digital’s revenue was boosted by higher reimbursements for power costs. If utility reimbursement had grown at the same pace as rental revenue (10%), total sales growth would’ve been just under 9%. The higher pass-through revenue likely weighed on margins a bit. The adjusted] EBITDA margin was 55%, down more than one percentage point from last year’s second quarter but generally consistent with where the margin has been since the March 2020 Interxion acquisition.

Bookings in the quarter totaled $113 million in annualized revenue, including $13 million in interconnection revenue, a figure that has remained fairly constant each quarter since the Interxion acquisition. Leasing in the Americas accounted for more than half of the total bookings, with Europe and Asia Pacific each making up about a quarter. Two very encouraging results in the quarter were the improvement in pricing, as shown by renewal spreads, and the proportion of bookings made up of smaller deployments.

Company Future Outlook

We are raising our fair value estimate to $130 from $127. We believe the stock is moderately overvalued but more reasonably priced than peers and the first data center firm we’d look to on a pullback. We believe that Digital’s transformation should provide it with pricing power, so we expect to continue seeing better renewal spreads over time. However, we expect these spreads to remain choppy even as they trend up, so we are under no illusions that we’ve seen the last leases having to renew at lower rates.

Company Profile

Digital Realty owns and operates nearly 300 data centers worldwide. It has more than 35 million rentable square feet across five continents. Digital’s offerings range from retail co-location, where an enterprise may rent single cabinet and rely on Digital to provide all the accommodations, to “cold shells,” where hyper scale cloud service providers can simply rent much, or all, of a barren, power-connected building. In recent years, Digital Realty has de-emphasized cold shells and now primarily provides higher-level service to tenants, which outsource their related IT needs to Digital. Digital Realty has also moved more into the co-location business, increasingly serving enterprises and facilitating network connections. Digital Realty operates as a real estate investment trust.

(Source: Morningstar)

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

, but sales fell by nearly 9% versus second-quarter 2019. Gentex shipped about 2 million less units than it expected at the start of the quarter, which caused diluted EPS of $0.36 to miss the Refinitiv consensus of $0.45.

The industry’s supply chains are in turmoil due to the semiconductor shortage impacting chip availability, but other disruptions unrelated to Gentex, such as foam shortages following Texas winter storms, caused automakers to change production at the last minute or refuse shipment of mirrors because other non-Gentex parts never arrived at the automakers’ assembly plants. This supply problem in our view will improve throughout 2021, and the worst of it is occurring in second quarter and early third quarter.

Gentex’s Revenue Growth

The lost production caused management to issue second-half 2021 guidance that implies lower full-year guidance than given in April. Revenue guidance is now $1.88 billion to $1.98 billion, instead of $1.94 billion to $2.02 billion, and we believe that second-half gross margin guidance of 37.5%-38.5% means April’s full-year guidance of gross margin between 39%-40% is not possible. We agree with management’s optimism around 2022 revenue growth being 10%-15%. Gentex’s cash-loaded and debt free balance sheet make times like this easier to get through management seems to be willing to continue share repurchases and spent $115.9 million on that in the second quarter.

Company Profile

Gentex was founded in 1974 to produce smoke-detection equipment. The company sold its first glare-control interior mirror in 1982 and its first model using electrochromic technology in 1987. Automotive revenue is about 98% of total revenue, and the company is constantly developing new applications for the technology to remain on top. Sales from 2020 totaled about $1.7 billion with 38.2 million mirrors shipped. The company is based in Zeeland, Michigan.

(Source: Factset)

General Advice Warning

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