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Technology Stocks

One-Off Costs dent Wartsila’s Profitability Despite Strong H1 demand; FVE reduced to EUR 10.80

Business Strategy & Outlook

The decarbonization of the marine and energy market has created new business opportunities for Wartsila. The company has invested significantly in anticipation of these trends, ensuring its marine engines are compatible with a wide range of environmentally friendly fuel types, while also emerging as one of the top three players in the energy storage market. A broad range of solutions that help customers reduce their carbon emissions will help grow their installed base and provides a foundation to perform recurring aftermarket services, which is less susceptible to the highly cyclical marine newbuild market and mitigates the shift toward renewable energy, away from Wartsila’s traditional thermal engine business. Both the marine and energy segments have potential to grow the contribution of revenue from services by moving up the service ladder toward performance-based agreements. Wartsila has increased its level of research and development expenditure as well as making significant investments into the Energy Storage business to help offset the declining demand for its thermal energy engines resulting from the shift to renewable energy sources. 

The energy storage business has yet to achieve scale and is loss-making and thus the path toward Wartsila’s 12% operating margin target seems difficult to achieve in the short term, as the shift in product mix toward energy storage has a dilutive impact on margins. A recovery in marine markets has supported strong demand for Wartsila’s equipment and services. Demand is expected to remain robust due to regulatory pressure aimed at reducing the carbon footprint of the marine sector, which will create a wave of shipbuilding and retrofit activity. In addition, Wartsila’s important cruise vessel category market stands to benefit from the reactivation of vessels due to the easing of travel restrictions that will support the service business. Working capital efficiencies have placed Wartsila in a healthy financial position, ensuring the majority of profits are returned to shareholders through dividends, helping to mitigate the potential downside for shareholders if new business opportunities fail to transpire.

Financial Strengths

Wartsila is currently in a stable financial position and only has EUR 4 million of net debt. Net Gearing of 0.0 falls comfortably below the company’s target of 0.5 times. Wartsila’s conservative balance sheet has allowed the company to consistently return the majority of profits to shareholders irrespective of the cyclicality of its end markets and without compromising on investments in growth initiatives. Wartsila’s healthy balance sheet allows the company to continue to invest into the fast growing but loss-making energy storage business to help it achieve scale.

Bulls Say

  • Regulatory requirements are likely to spark a new wave in shipbuilding activity and decarbonization retrofits, which, combined with Wartsila’s investments in fuel agnostic engines, would see an increase in demand. 
  • Approximately half of the group’s sales are from aftermarket activities, which are more predictable, thus reducing the cyclicality of demand from its marine and energy end markets. 
  • The reactivation of cruise vessels driven by the removal of travel restrictions will support demand for Wartsila’s services and spare parts.

Company Description

Wartsila is a global manufacturer of critical equipment and services for the marine and energy markets with operations in over 70 countries. Approximately one half of the group’s sales are derived from the sale of services and spare parts through its network of 258 sales and service network locations. Wartsila is listed on the Nasdaq Helsinki exchange in Finland. Approximately 1 in 3 oceangoing vessels has a Wartsila solution on board, translating into an installed base of over 50,000 vessels and 10,000 customers.

(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.

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ETFs ETFs

Vanguard Australian Shares index ETF: offers potential long-term capital growth along with dividend income and franking credits

Investment Objective

Vanguard Australian Shares Index ETF seeks to track the return of the S&P/ASX 300 Index before taking into account fees, expenses and tax.

Investment Strategy and Investment Return Objective

The Vanguard Australian Shares Index ETF seeks to track the return of the S&P/ASX 300 Index before taking into account fees, expenses, and tax. The S&P/ASX 300 Index was not created by, and is not managed by, a related body corporate of Vanguard. The Fund meets its investment objective by holding all of the securities in the S&P/ASX 300 Index (at most times) allowing for individual security weightings to vary marginally from the Index from time to time. The Fund may invest in securities that have been removed from or are expected to be included in the Index.

Portfolio Performance

About Fund:

The ETF provides low cost, broadly diversified exposure to Australian companies and property trusts listed on the Australian Securities Exchange. It also offers potential long-term capital growth along with dividend income and franking credits.

(Source: Vanguard, investmentcentre)

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

Wipro’s Profitability Bottoms Out in Q1 as Pipeline Stronger Than Ever

Business Strategy & Outlook:    

Wipro is a leading global IT services provider with the typical menu of offerings, from software implementation to digital transformation consulting to servicing entire business operations teams. Wipro merits a narrow economic moat rating, similar to many of its peers, as it benefits from switching costs and intangible assets, although it is benefiting from a cost advantage. While the company will likely struggle amid the COVID-19 pandemic, its stable moat trend will stay secure. Forays into the higher-value realm of industrial engineering will help ensure that Wipro does not miss out on substantial growth trends in the overall IT services industry. In many regards, there’s uncanny resemblance between Wipro and its Indian IT services competitors, Infosys and TCS, such as in its offerings, offshore leverage mix (near 75%), or attrition rates (near 15%). However, Wipro has pockets of solutions where it distinguishes itself. For instance, its robotic process automation services are considered to rank above all other peers according to several sources, including Forrester Research. 

Wipro isn’t unusual for being an IT services provider with switching costs and intangible assets. These are founded on the intense disruption that customers would experience when changing their IT services provider as well as Wipro’s specialized knowledge of the industry verticals it caters to and the distinct knowledge of its customers’ web of IT piping. But besides these two moat sources, Wipro benefits more from a cost advantage (only allotted to Indian IT services companies) based on its labor arbitrage model. While benefits from such a cost advantage will diminish over time as the gap between Indian wage growth and GDP growth in primary markets narrows, Wipro’s moat is secure as the company’s foray into higher-value offerings and increasingly automated solutions offsets this trend.

Financial Strengths:  

Wipro’s financial health is in good shape. Wipro\ had INR 350 billion in cash and cash equivalents as of March 2021 with debt totaling INR 83 billion. Wipro’s cash cushion will remain healthy, as free cash flow is expected to grow to INR 118 billion by fiscal 2026. This should allow for continued share buybacks and acquisitions. Share buybacks, forecasted over the next five years will average INR 50 billion each year. The forecasted acquisitions over the next four years following fiscal 2022 will average INR 9 billion each year. While the forecasted dividend increases over the near term, Wipro will have more than enough of a cash cushion to undergo any dividend raises as desired without needing to take on debt.

Bulls Say: 

  • Wipro could benefit from greater margin expansion than expected as more automated tech solutions decrease the variable costs associated with each incremental sale.
  • Wipro should profit from a wave of demand for more flexible IT infrastructures following the COVID-19 pandemic, as more companies seek to be prepared for similar events. 
  • As European firms become more comfortable with outsourcing their IT workloads offshore, Wipro should expand its market share in the growing geography.

Company Description: 

Wipro is a leading global IT services provider, with 175,000 employees. Based in Bengaluru, this India IT services firm leverages its offshore outsourcing model to derive over half of its revenue (57%) from North America. The company offers traditional IT services offerings: consulting, managed services, and cloud infrastructure services as well as business process outsourcing as a service.

(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

ASML’s immersion lithography tools allowed the company to capture and maintain the leading position in the marketplace

Business Strategy and Outlook

ASML is the leader in photolithography equipment for semiconductor manufacturers. It is to materially benefit from the proliferation of extreme ultraviolet, or EUV, lithography and the uncertainty concerning the long-term extent of EUV insertion has sufficiently diminished to justify a wide moat rating. Photolithography is the process in which a light source is used to expose circuit patterns from a photomask onto a semiconductor wafer. A photomask is a flat, transparent quartz plate containing the microscopic circuit pattern. The latest technological advances in this field allow chipmakers to pursue Moore’s law and continually increase the number of transistors on the same area of silicon. Lithography tools account for a significant portion of chipmakers’ capital expenditures, with EUV platforms exceeding $150 million in price. ASML’s immersion lithography tools allowed the company to capture and maintain the leading position in the marketplace, while competitors like Nikon and Canon do not have the scale or resources to compete at the cutting-edge. Traditional immersion lithography approached its limits years ago, and chip makers adopted non litho workarounds, such as multiple patterning that uses advanced etch and deposition tools from other equipment firms.

To continue pursuing Moore’s law, chipmakers will require EUV lithography tools. EUV uses lower-wavelength light (13.5-nm versus 193-nm for current immersion tools) and simplifies the process flow (3 to 6 times cycle time reduction as a result of fewer steps and 15% to 50% cost reduction compared with multiple patterning schemes). The top three customers of the firm (Intel, Samsung, and Taiwan Semiconductor) committed to help fund a portion of research and development for EUV technologies and acquired an aggregate 23% minority equity stake in ASML in 2012 (though these stakes have come down over time). EUV industrialization in high-volume semiconductor production is now a reality, with the technology having been implemented for a few process steps at certain 7-nanometer process nodes at TSMC and Samsung and more meaningfully in each foundry’s 5-nm process technologies.

Financial Strength

ASML has a strong financial position. At the end of 2021, the company had EUR 7.6 billion in cash, cash equivalents, and short-term investments and EUR 4.1 billion in long-term debt on its balance sheet. This debt position is not an issue given ASML’s typical cash generation. The firm typically holds a significant cash position, which is appropriate given the cyclical nature of the semiconductor equipment industry. During downturns, the cash cushion allows ASML to continue investing heavily in research and development in order to maintain its cutting-edge technology position. This is especially critical in the highly arcane wafer fabrication equipment market, where companies that failed to stay at the technological forefront have seen their competitive positions erode in the past, though ASML’s dominance in lithography is unlikely to be challenged by Nikon or Canon. ASML generally returns excess cash to shareholders via annual dividend payments and share buybacks. At the end of 2021, ASML doubled its annual dividend to EUR 5.50. In July 2021, the firm announced a new share buyback program for 2021 to 2023 of up to EUR 9 billion.

Bulls Say’s

  • ASML is the market leader in photolithography, an integral part of chip manufacturing, and is pioneering EUV lithography for the next wave of Moore’s law. 
  • The extensive technical expertise needed to develop lithography tools, which are highly complex and play a critical role in enabling Moore’s law, serves as a major barrier to entry. 
  • ASML has focused on operational efficiency in recent years to improve profitability throughout the industry cycle.

Company Profile 

Founded in 1984 and based in the Netherlands, ASML is the leader in photolithography systems used in the manufacturing of semiconductors. Photolithography is the process in which a light source is used to expose circuit patterns from a photomask onto a semiconductor wafer. The latest technological advances in this segment allow chipmakers to continually increase the number of transistors on the same area of silicon, with lithography historically representing a meaningful portion of the cost of making cutting-edge chips. Chipmakers require next-generation EUV lithography tools from ASML to continue past the 5-nanometer process node. ASML’s products are used at every major semiconductor manufacturer, including Intel, Samsung, and TSMC.

(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 is 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

Cummins will continue to be the top supplier of truck engines and components, despite increasing emissions regulation

Business Strategy & Outlook

The Cummins will continue to be the top supplier of truck engines and components, despite increasing emissions regulation from government authorities. For over a century, the company has been the pre-eminent manufacturer of diesel engines, which has led to its place as one of the best heavy- and medium-duty engine brands. Cummins’ strong brand is underpinned by its high-performing and extremely durable engines. Customers also value Cummins’ ability to enhance the value of their trucks, leading to product differentiation. The company’s strategy focuses on delivering a comprehensive solution for original equipment manufacturers. The Cummins will continue to gain market share, as it captures a larger share of vehicle content. This is largely due to increasing emissions regulation, which allows Cummins to sell more of its emissions solutions, namely its aftertreatment systems that convert pollutants into harmless emissions. 

Additionally, Cummins stands to benefit from the electrification of powertrains in the industry. The company has made progress in the school and transit bus markets. Long term, the truck market will also increase electrification. The pressure to manufacture more environmentally friendly products is forcing truck OEMs to evaluate whether it’s economically viable to continue producing their own engines and components or to partner with a market leader like Cummins. One has this play out recently, through the increase in partnership announcements for medium-duty engines with truck OEMs. Some OEMs will opt to shift investment away from engine and component development, leaving it to Cummins. Cummins has exposure to end markets that have attractive tailwinds. In trucking, the new truck orders will be strong in the near term, largely due to strong demand for consumer goods. In good times, truck operators replace aging trucks and opt to expand their fleet to meet strong demand. Longer term, Cummins will continue to invest in BEVs and fuel cells to power future truck models. We believe a zero-emission world is inevitable, but the Cummins can use returns from its diesel business to drive investments.

Financial Strengths

Cummins maintains a sound balance sheet. In 2021, total outstanding debt stood at $3.6 billion, but the firm had $2.6 billion of cash on the balance sheet. In 2020, the company issued $2 billion of long-term debt at attractively low rates, some of which was used to pay down its commercial paper obligations. Cummins’ strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. One can find comfort in Cummins’ ability to tap into available lines of credit to meet any short-term needs. Cummins has access to $3.2 billion in credit facilities. Cummins can also generate solid free cash flow throughout the economic cycle. The company can generate over $2 billion in free cash flow in mid cycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, the management is determined to improve its distribution business following its transformation efforts in recent years. The Cummins can improve the profitability of the business through efficiency gains, pushing EBITDA margins higher in the near term. These actions further support its ability to return cash to shareholders. Cummins enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects of 2022.

Bulls Say

  • Strong freight demand in the truck market should lead to more new truck orders, substantially boosting Cummins’ revenue growth. 
  • Cummins will benefit from increasing emission regulation, pushing customers to buy emissions solutions, such as aftertreatment systems that turn engine pollutants into harmless emissions. 
  • Increasing emission standards could push peers to rethink whether it’s economically viable to continue manufacturing engines and components, benefiting Cummins.

Company Description

Cummins is the top manufacturer of diesel engines used in commercial trucks, off-highway equipment, and railroad locomotives, in addition to standby and prime power generators. The company also sells powertrain components, which include filtration products, transmissions, turbochargers, aftertreatment systems, and fuel systems. Cummins is in the unique position of competing with its primary customers, heavy-duty truck manufacturers, who make and aggressively market their own engines. Despite robust competition across all its segments and increasing government regulation of diesel emissions, Cummins has maintained its leadership position in the industry.

(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

Looking beyond the current plan, Ameren has its sight set on nearly $28 billion of additional investment opportunities

Business Strategy and Outlook 

Ameren is a regulated utility that operates in Illinois and Missouri, two historically challenging regulatory jurisdictions that are rapidly improving. With improving rate regulation come significant investment opportunities, supporting the company’s five-year $17.3 billion capital investment plan. Looking beyond the current plan, Ameren has its sights set on nearly $28 billion of additional investment opportunities for the following five years, providing a long runway of growth for the company. Management is to be applauded for attaining constructive utility legislation in Missouri. Its patient yet persistent years-long efforts resulted in increased investment opportunities across the territory, a stark change from the past. Numerous trackers are in place for fuel adjustments, pension, and tax positions. These mechanisms are attributes of a constructive regulatory environment. Recent legislation allows utilities to securitize the remaining liabilities associated with Ameren’s coal plants, potentially allowing earlier-than-planned coal plant retirements and faster renewable energy growth.

With an improved regulatory framework in Missouri, management is keeping its promise to invest in jurisdictions that support investment. Ameren is allocating nearly half of its investment plan to Missouri. Projects will focus on renewable energy, upgrading aging and underperforming assets, and employing smart grids and connected grid services. Regulation in Illinois is set to change. While performance-based ratemaking, in which allowed returns on equity are 580 basis points above the average 30-year U.S. Treasury yield, was constructive, the drop-in interest rates led to some of the lowest allowed returns among its peers. New legislation allows utilities to opt in for a four-year rate plan beginning in 2024. Under the multi year plan, utilities are able to true-up earned returns to their allowed returns and continue sales decoupling. Performance metrics, both incentives and penalties, are given in a range of 20-60 basis points. The new rate structure could produce higher allowed returns in Illinois.

Financial Strength

Ameren will invest $17.3 billion of capital between 2022 and 2026.It is expected the company to issue debt and equity in line with its current capital structure and refinance its debt as it comes due. Ameren increased the dividend 10% in 2021. Future dividend growth to be more in line with earnings growth. Ameren has tended to be at the lower end of its 55%-70% dividend payout target. Ameren’s current financial health is sound. The firm’s 58% debt/capitalization ratio is in line with its utility peers. Interest coverage is healthy at over 6.0 times, and current debt/EBITDA is over 5.0.

Bulls Say’s:

  • Ameren’s regulated utilities provide a stable source of earnings. The company’s large capital expenditure plan should drive above-average rate base and earnings growth for the next several years. 
  • Ameren’s regulatory relationships have improved significantly in Missouri.
  • Ameren’s management team has proved to be best in-class operators, having diligently worked to improve regulatory relationships and execute on substantial growth projects.

Company Profile 

Ameren owns rate-regulated generation, transmission, and distribution networks that deliver electricity and natural gas in Missouri and Illinois. It serves 2.4 million electricity customers and more than 900,000 natural gas customers.

(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 is 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

Cohen & Steers Continues to Be Affected by Equity Market Selloff; FVE Lowered to $80 per Share

Business Strategy & Outlook

While the combination of rising interest rates and an equity market selloff has had an impact on Cohen & Steers’ levels of assets under management, they are cautiously optimistic about the firm over the near to medium term. Cohen & Steers came into 2022 with a record $106.6 billion in managed assets, split among its U.S. real estate (47% of total AUM), global/international real estate (18%), global listed infrastructure (8%), and preferred securities (25%) offerings. But market losses and meager flows during the first half of the year had left the company with $87.9 billion in managed assets at the end of June. So far, market losses are having a bigger impact on AUM than flows, with Cohen & Steers reporting a 12.3% (16.0%) market loss for its managed assets during the second quarter (first half) of 2022. This was better than the Morningstar Global Markets REIT TR Index, which was down 15.6% (20.0%) during the same time frame. Part of this is likely due to the firm garnering just two thirds of its total AUM from real estate investment funds, and some can also be attributed to active management.

While REITs have generally performed well during periods of rising long-term interest rates (based on studies done by NAREIT over the years), the current tightening cycle is a push by the Fed to fight inflation, which has been hitting levels not seen since the early 1980s. Rising rates and inflation can hinder external growth efforts for REITs (as acquisitions become less accretive) and pressure existing tenants, as well as provide investors with a less risky yield alternative in fixed-income securities (leading to outflows). It looks like most of Cohen & Steers’ investors are not running for the exits, though, as flows have been relatively flattish year to date. The firm’s institutional clients tend to be first to reallocate (and generally well in advance of Fed actions), so the fact they’ve not pulled out too aggressively is a positive. The Standard & Poor’s separation of real estate-related companies from the financial services sector has forced many institutional investors to maintain exposure to REITs, adding some stability to Cohen & Steers’ managed assets.

Financial Strengths

Cohen & Steers has not had any debt on its books since 2005. Based on what to be conservative long-term estimates for profitability and cash flows, the company is unlikely to need to tap the credit markets to fund its operations during the five-year projection period. Over the past 10 calendar years, Cohen & Steers has returned more than $1.1 billion to shareholders as dividends (utilizing both regular quarterly dividends and special one-time dividends to pay out capital) and around $130 million to shareholders via share repurchases (net of share issuances). Going forward, the firm will return just over half of its expected annual free cash flow (of around $270 million on average) to shareholders as dividends, with the rest spent on share repurchases or other investments (including seed capital for new products). At the end of March 2022, the firm had $115 million in cash and cash equivalents (including $30 million in U.S. Treasury securities) and $255 million in investments (including $63 million in seed capital) on its books.

Bulls Say

  • Cohen & Steers’ long record of successful REIT investing has allowed it to tap into demand for alternatives that offer diversification away from more traditional stock and bond offerings. 
  • The firm’s funds are entrenched in the broker/dealer market, and the company also garners close to half of its AUM from institutional clients, providing it with a relatively stable base of assets. 
  • At the end of March 2022, Cohen & Steers had $2.33 in cash and equivalents per share on hand, which could be used to fund a special dividend, a strategic acquisition, or to increase share repurchases.

Company Description

Cohen & Steers is a niche asset manager concentrating on real estate securities. The firm invests mainly in the equity shares of real estate investment trusts, with holdings in domestic and international real estate securities accounting for close to two thirds of its $87.9 billion in managed assets at the end of June 2022. Cohen & Steers also manages portfolios dedicated to preferred securities, utilities stocks, and other high-yield offerings. It expects to balance distribution among its closed-end mutual funds, open-end mutual funds, and institutional accounts over time. During the March quarter of 2022, the company garnered 40% (26%) of its managed assets (base management fees) from institutional clients, 47% (55%) from open-end funds, and 13% (19%) from closed-end funds.

(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

Assa Abloy has significant growth potential as it benefits from structural changes

Business Strategy & Outlook

Assa Abloy has significant growth potential as it benefits from structural changes. There are two key drivers of future growth. An industrywide shift toward software-driven products, expanding functionality, and linking locking systems with other building systems. Second, emerging-market demand will move up the quality curve to more sophisticated locking solutions, in which Assa Abloy is a leader. If the spectrum of today’s locks were defined by a basic mechanical lock on one end and a software-controlled locking system on the other end, Assa Abloy’s product portfolio would be heavily weighted toward the latter. Advances in the past decade have expanded the functionality of lock systems to enable ever more precise access parameters, as well as enhanced identification of lock system users. For example, a building administrator would be able to provide a registered visitor with temporary access to a computer for a specified two-hour window on a particular day.

Technological improvements are shortening the upgrade cycle for locks, as customers are eager to implement new security-enhancing features. The shift toward software-driven locks will continue over the long term, with the company’s global technologies division forging the path. The division is experiencing good initial success in selling virtual keys, typically issued on a temporary basis to mobile phones. Asia and other emerging markets lag in locking solutions, with under penetration of electromechanical locks, such as those linked to a keycard reader. Pent-up demand in the region, combined with strategic acquisitions, fueled a fivefold increase in Assa Abloy’s Asia-Pacific revenue over the past decade, with organic revenue growth averaging 5% from 2005 to 2013 (before China’s property bust). For buildings with multiple daily users, there are obvious benefits from upgrading to more sophisticated systems that can track and limit building access. Asia and other emerging markets offer a long runway of demand for Assa Abloy’s products.

Financial Strengths

At the end of March 2022, the company’s net debt/EBITDA ratio was less than 2 times. Looking to the medium term, total debt maturities from 2023 to 2026 are around SEK 13 billion out of around SEK 25 billion in gross debt. Given the forecast for roughly SEK 16 billion in annual free cash flow, which would enable the company to pay down gross debt, in theory, in about two years.

Bulls Say

  • As the global leader in locking solutions, Assa Abloy is best positioned to capture the spoils from a secular shift toward integrated lock and other building systems.
  • The growing contribution of software-driven products should strengthen Assa Abloy’s margins and returns, as well as the stickiness of customer relationships, in the medium term. 
  • Accelerated adoption of electromechanical, digital, or smart locks should ease Assa Abloy’s path toward achieving its target of 5% organic growth over the business cycle.

Company Description

Assa Abloy has the world’s largest installed base of locks, protecting some of the most security-sensitive buildings, including the European Parliament in Brussels. Three fourths of its revenue come from government and commercial customers. The company’s product base is centered on electromechanical locks, which require identification to unlock with a keycard, biometric scan, or PIN. Assa Abloy’s products are sold directly to security systems integrators, locksmiths, hardware stores, and original equipment manufacturers

(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

Atlas Copco is a market leader with a focused product portfolio of mainly compressors and vacuum pumps

Business Strategy & Outlook

Atlas Copco is a market leader with a focused product portfolio of mainly compressors and vacuum pumps. These two product areas contribute around three fourths of revenue and four fifths of profit for the company. Its two smaller divisions, industrial technique and power technique, make up the remaining revenue. The company’s equipment is highly engineered, often with customization and application-specific variations. To that point, equipment sales are done by engineers. End markets for the company’s compressors are diverse, from automotive assembly to food processing. However, for vacuum pumps, semiconductor chip demand is the key driver. The electronics industry contributes two thirds of vacuum pump division revenue and, as a result, nearly one fifth of revenue for Atlas Copco at the group level.

 The economic cycle can cause short-term demand volatility, but the company’s flexible cost structure and large portion of service revenue underpin double-digit margin and returns throughout the cycle. Around 75% of its equipment components are outsourced. Maintenance services and spare parts contribute more than one third of group revenue. The company leverages its large service operations and trains its technicians to service competitors’ equipment as well as its own. The compressor division brings in the largest portion of service revenue at more than 40% of division revenue. The Atlas Copco’s compressor division is around twice as large as its closest competitor, Ingersoll Rand. Atlas Copco uses this near ubiquity to its advantage by acquiring other equipment and tool portfolios that it can sell to its air compressor base. Higher-volume production capabilities and an installed distribution channel allow the company to globalize the products of its acquired businesses at a lower cost than those operations could achieve by themselves.

Financial Strengths

Atlas Copco has a strong balance sheet, with around SEK 29 billion in gross debt and a net debt/EBITDA ratio of less than 1 times at the end of March 2022. Included in its debt is around SEK 11 billion in debt maturities through to 2026. However, one cannot see this as a risk as a forecast roughly SEK 22 billion in annual free cash flow for the medium term, which in theory would enable the company to pay down its total gross debt within three years.

Bulls Say

  • Atlas Copco’s tools are used in automation, including robotic applications, and offer some structural growth to an otherwise cyclical revenue stream. 
  • The expansion into vacuum technologies gives Atlas Copco exposure to long-term semiconductor growth. 
  • The company’s large, experienced service organization should help it to continue to gain share of service revenue across its own products and potentially competitors’ equipment, particularly for compressors.

Company Description

Atlas Copco is a 140-year-old Swedish company and a pioneer in air compression technology. Today, the company is still the world’s leading air compressor manufacturer, with around 25% market share. The company’s product portfolio includes power tools and vacuum pumps. For vacuum pumps, the semiconductor chip cycle is a key demand driver. The company generates revenue from three sources: initial equipment sales, spare parts, and maintenance. Its operations span 180 countries.

(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

Fastenal Reports Solid Sales and Margin Growth in its Second Quarter 2022 Results

Business Strategy & Outlook:   

Since opening its first fasteners store in 1967, Fastenal has built one of the largest industrial distribution businesses in the United States. For many years, Fastenal’s growth story was driven by its branch count, which now stands just under 1,800. While this expansive footprint is still an important component of Fastenal’s business model, other strategies–including expanding its product portfolio, its vending and inventory management services, and, most recently, its on-site program–have become increasingly important growth drivers. The benefits of Fastenal’s vending, inventory management, and on-site services are twofold: Not only do these services drive incremental revenue, they also embed Fastenal in its customers’ procurement processes, which supports higher retention rates and pricing power. Company believes Fastenal has a first-mover advantage in both vending and on-site services, introducing the former in 2008 and the latter in 1992 (although the on-site strategy did not become a focused strategy until the past few years), and sees long growth runways for both offerings. In addition to growth through its vending and on-site initiatives, Fastenal is well positioned to benefit from customer consolidation trends. In recent years, customers have been consolidating their maintenance, repair, and operations, or MRO, spending with large distributors to leverage their purchasing power and increase operational efficiency. With its national scale, broad product portfolio, and inventory management services, the company believes Fastenal can capitalize on this trend and take market share from smaller and less capable distributors. 

Because Fastenal’s sales mix is increasingly skewing more toward large national accounts, on-site programs, and more price-competitive MRO products, the company’s gross margins are likely to come under pressure. However, the combination of higher sales volume and containment of selling, general, and administrative costs provide Fastenal the opportunity to realize strong operating leverage and expand operating margins. It is forecasted that Fastenal’s operating margin will reach 21% by midcycle year.

Financial Strengths:  

Fastenal has an outstanding debt balance of approximately $390 million. It is leveraged at only 0.1 times 2021 EBITDA, which is very conservative relative to the other industrial distributors company covers. Fastenal’s earnings provide substantial headroom to service debt obligations. During fiscal 2021, Fastenal incurred only about $10 million of interest expense and generated about $1.4 billion of EBITDA, which equates to an extremely comfortable interest coverage ratio. Even with its expansive store footprint and cyclical end markets, Fastenal has a proven ability to generate free cash flow (defined as operating cash flow with fewer capital expenditures) throughout the cycle. Indeed, it has generated positive free cash flow every year since 2003. Given its conservative balance sheet and consistent free cash flow generation, the company believes Fastenal’s financial health is satisfactory.

Bulls Say: 

  • Vending and on-site programs should provide a long growth runway for Fastenal.
  • Fastenal can capitalize on its national scale, broad product portfolio, and inventory-management services to take market share from smaller and less capable distributors.
  • Despite serving cyclical end markets, Fastenal’s business model generates strong free cash flow throughout the cycle. Fastenal is likely to continue to use its cash flow to fund a shareholder-friendly capital allocation strategy.

Company Description:  

Fastenal opened its first fastener store in 1967 in Winona, Minnesota. Since then, Fastenal has greatly expanded its footprint as well as its products and services. Today, Fastenal serves its 400,000 active customers through approximately 1,760 branches, over 1,400 on-site locations, and 14 distribution centers. Since 1993, the company has added other product categories, but fasteners remain its largest category at about 30%-35% of sales. Fastenal also offers customers supply-chain solutions, such as vending and vendor-managed inventory. 

(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.