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Technology Stocks

Block Inc. Cash App’s performance is relatively strong and is positioning itself to be a longtime leader in the Space

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Business Strategy & Outlook:   

Block’s business model on the merchant side, characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows the company to reach and retain micro merchants that are unviable for other acquirers. In essence, Square’s initial success came largely from expanding the acquiring market, as opposed to stealing material share from existing players. To develop sufficient scale, Square needed to move past its micro merchant base, and recent results suggest it is doing just that. At this point, only about two thirds of its payment volume comes from merchants generating over $125,000 in annual gross payment volume. 

Furthermore, absolute growth in clients above this threshold has accelerated meaningfully over the past couple of years, while absolute growth in merchants below this threshold has largely held steady. The move upstream and cross-selling will allow Square to materially improve margins in the years ahead and show the viability of its business model. But the Square is viewed as a narrow-moat niche operator, not a disrupter, with market share limited by its relatively high pricing and long-term margins constrained by its relative lack of scale. Clover has proven itself a strong competitor and appears to be outperforming Square. The company’s effort to build out a consumer business surrounding its Cash App creates option value, and more uncertainty is faced on this side of the business. Block is competing in a space with winner-take-all dynamics, and its competitors have large consumer customer bases, which justified some initial skepticism. However, Cash App’s performance compared with peers has been relatively strong, suggesting it is positioning itself to be a longtime leader in the space.

Financial Strengths:  

Block is in a solid financial position. Historically, it has avoided carrying a meaningful amount of debt, which seems appropriate given that the company remains unprofitable. However, the company had about $5 billion in debt on the balance sheet at the end of 2021. Absent one-time gains, Block remains unprofitable on a GAAP basis. But stock compensation makes up a significant portion of its expenses. As such, the company did turn free-cash flow-positive in 2017, and improving profitability will increase free cash flow meaningfully in the coming years. The capital-light nature of the business creates significant financial flexibility, and the company should have room to consider cash-based acquisitions to fill in any product holes.

Bulls Say: 

  • The ongoing shift toward electronic payments has created, and will continue to create, room for payments companies to see strong growth without stealing share from each other.
  • Ancillary services are becoming a more critical engine for growth and will help Square fully monetize its merchant client base and improve margins.
  • Electronic payment growth is shifting overseas, and Square’s business model looks portable into international markets, as the company does not rely on a large local salesforce to attract merchants.

Company Description: 

Founded in 2009, Block provides payment acquiring services to merchants, along with related services. The company also launched Cash App, a person-to-person payment network. Block has operations in Canada, Japan, Australia, and the United Kingdom; about 5% of revenue is generated outside the U.S.

(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

Ferguson Reports Excellent Q3 Results; Earnings Pullback Ahead but Stock Attractively Valued

Business Strategy & Outlook:   

Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Between 2008 and 2020, Ferguson’s exposure to the U.S. RMI market (as a percentage of sales) increased from 31% to 60%, while U.S. new construction revenue exposure decreased from 58% to 32%. U.S. R&R spending is forecasted to grow at a 4%-5% compound annual rate this decade (using 2020 as the base year). While R&R spending surged during the pandemic, a dramatic downturn in home improvement projects. 

Instead, the pandemic stepped R&R sales up to a structurally higher base for more normalized growth going forward. In terms of U.S. residential construction, housing starts to decline about 10% to 1.45 million units in 2023. There’s still plenty of pent-up demand for new homes, and less buyer competition and more entry-level construction should usher in price relief. The projected housing starts will average about 1.5 million units annually this decade. Ferguson has built leading positions across most of its end markets through its roll-up acquisition strategy. The company typically acquires local competitors, gaining access to new brands, suppliers, regions, and customers. Ferguson to continue this strategy, which should augment its scale-driven competitive advantage. Ferguson sold its Wolseley U.K. business for approximately $420 million in February 2021. This business struggled to generate shareholder value despite being one of the largest distributors in the United Kingdom. There were very few synergies between geographies and little overlap in suppliers. Ferguson’s strategic shift to the United States will be a tailwind for the firm’s prospects, and Ferguson’s primary listing on the New York Stock Exchange could increase interest from U.S. investors.

Financial Strengths:  

Ferguson set out to clean up its balance sheet following the great financial crisis, and it improved net debt/EBITDA from 3.5 times before the 2008 crisis to 0.8 times as of April 30, 2022. Net debt at the end of the third quarter of fiscal 2022 (April 2022) was $2.4 billion. Ferguson’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy that augments growth with acquisitions but also returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations, given its strong cash balance. Its cash position at the end of the third quarter of fiscal 2022 stood at $1.2 billion. There’s comfort in Ferguson’s ability to tap available lines of credit to meet any short-term needs. The encouragement is by the countercyclical nature of industrial distributors’ free cash flow generation, which results from the ability to drawdown inventory during times of economic malaise. Ferguson generated over $1 billion of free cash flow during the great financial crisis, and current economic weakness to push free cash flow levels materially higher as working capital requirements ease. Ferguson enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say: 

  • Ferguson’s roll-up strategy in the U.S. should lead to market share gains, boosting revenue growth in excess of the market average.
  • Ferguson’s strategic shift to the U.S. away from international markets has strengthened group operating margins.
  • Ferguson generates strong free cash flow throughout the economic cycle despite serving cyclical end markets.

Company Description:  

Ferguson distributes plumbing and HVAC products primarily to repair, maintenance, and improvement, new construction, and civil infrastructure markets. It serves over 1 million customers and sources products from 34,000 suppliers. Ferguson engages customers through approximately 1,600 North American branches, over the phone, online, and in residential showrooms. In fiscal 2021, Ferguson derived 94% of its nearly $23 billion of sales in the U.S. According to Modern Distribution Management, Ferguson is the largest industrial and construction distributor in North America. The firm sold its U.K. business in 2021 and is now solely focused on the North American market.

(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

Nokia’s solutions could appeal to a wider client base as industries integrate “Internet of Things” devices into their networks

Business Strategy and Outlook 

Nokia is a primary provider of telecommunication hardware, software, and services to communication service providers. CSP equipment spending provides robust growth during generational wireless upgrade cycles followed by spending lulls, with 5G being the latest tailwind. 5G’s promise of connecting billions of wireless devices at incredible speed across more spectrum bands, along with more use cases than 4G, may offer Nokia more upside than previous wireless generations. However, Nokia’s core market is not a moat supportive because CSPs typically multisource equipment and possess purchasing power over their vendors. Nokia has a fundamentally strong strategy to remain a leader in its competitive environment after bloated initial 5G costs caused the firm to overhaul its products. Nokia’s core operation should benefit from 5G network infrastructures requiring more hardware to cover the increased quantity of spectrums bands and transmit at the highest speeds. Nokia’s solutions could appeal to a wider client base as industries integrate “Internet of Things” devices into their networks and enterprises build private wireless networks. It is expected, a healthy demand for Nokia’s software and service offerings as software-defined networking becomes commonplace and customers desire solutions to optimize increasingly complex networks.

Nokia’s technology segment creates revenue through licensing critical communication patents and receiving royalty payments through HMD’s Nokia-branded smartphone sales. Nokia has license agreements with leading 5G handset manufacturers, and the company has stated its intention to pursue licensing in industries such as automotive and consumer electronics. Alongside selling more enterprise private wireless networks, 5G networks and Internet of Things device propagation offer Nokia a chance to be less reliant on CSPs’ generational network upgrade spending.

Financial Strength

After taking corrective actions to remove excess costs in its 5G products, Nokia is a financially stable company which can be expected to generate positive free cash flow as 5G networks are built out. While Nokia primarily funnels cash toward organic development, sales, and marketing efforts, the company has made minor acquisitions since its large Alcatel-Lucent purchase in 2015, and Nokia is well positioned to bolt-on smaller software, Internet of Things, or related technology firms as needed. Nokia finished 2021 with EUR 9 billion in cash and equivalents and EUR 5 billion in total debt, with a debt to capital ratio of 21%, and can expect the company to repay its debts on schedule. As 5G networks are rolled out alongside cost-extraction efforts, the revenue growth to outpace operating expenditures as Nokia capitalizes on up-front 5G innovation expenditures while strengthening operational efficiencies. After pausing its dividend to fix bloated product costs in 2019, Nokia announced a plan to restart payments in 2022, alongside a buyback program.

Bulls Say’s

  • 5G should have more uses and a longer build-out cycle than previous wireless generations. Internet of Things device proliferation, from autonomous vehicles to smart factories, should broaden the demand for Nokia solutions. 
  • Nokia’s moving away from an end-to-end networking portfolio could be aligned with purchasing preferences. Its focus on software for 5G networks is wise, as enterprises may require custom data analytics and optimized networks. 
  • 5G may create licensing opportunities outside of handsets, and Nokia royalties could grow via a resurging smartphone brand.

Company Profile 

Nokia is a primary vendor in the telecommunications equipment industry. The company’s network business derives revenue from selling wireless and fixed-line hardware, software, and services. Nokia’s main operating segments are mobile networks, network infrastructure, cloud and network services, and Nokia technologies. The company, headquartered in Espoo, Finland, operates on a global scale, with most of its revenue from communication service providers.

(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
Technology Stocks

HP’s Markets Are Declining Despite Growth Initiatives and It Doesn’t Have a Moat

Business Strategy & Outlook

The HP to remain a leader in the personal computer and printing markets but these markets are facing challenging long-term growth prospects. Industry shifts toward using mobile devices as computer supplements or replacements and fewer printing tasks being performed for economic and environmental reasons may create headwinds for HP. The HP’s growth initiatives will expand its market share within the PC and printing industries as consolidation occurs, but the cost competitiveness among the remaining vendors to limit potential upside. The personal computer purchases will contract as more households primarily use smartphones for computing tasks and as cloud-based software upgrades can delay the impetus to upgrade computer hardware. HP’s personal systems business, containing notebooks, desktops, and workstations, yields a narrow operating margin that one cannot foresee expanding. The company’s growth focus areas of device-as-a-service, or DaaS, and expanding its gaming and premium product offerings should help stem losses from its core expertise of selling basic computer systems. Contractual service offerings like HP’s DaaS are alluring to businesses since IT teams can offload hardware management, receive analytics to proactively mitigate computer issues, and pay monthly instead of facing unpredictable large capital expenditures.

HP’s push toward contractual managed print services, in additional to focusing on graphics, A3, and 3D printers are moves in the correct direction, but the overarching trend of lower printing demand should stymie revenue growth within printing. HP is combating the challenge of lower-cost generic ink and toner alternatives in the marketplace. The company is innovating in a mature market, but the competitors can mimic HP’s successes or cause price disruption. HP’s scale may enable success within the 3D printing market; even though HP is a late entrant, its movement into printing metals could cause customer adoption. The printing market is the overall trend of screen reading replacing printed pages, and one cannot believe HP’s initiatives can offset the macro trend.

Financial Strengths

The HP’s solid balance of cash and equivalents and its ability to generate free cash flow as indicators of a financially secure firm. As of the end of the fiscal 2021, the company had $4.3 billion in cash and equivalents and $7.5 billion in total debt. The HP’s leverage to decrease as retained earnings increase and the company pays off debt on schedule. HP spends about 8%-9% of its revenue on SG&A and about 2%-3% of its revenue on R&D, and the expenditure trends to remain consistent. The company’s yearly dividend has increased year-over-year since fiscal 2016, and a modest dividend increase annually. HP has a solid track record of repurchasing shares, and the company will continue to invest in buybacks. Additionally, as part of thwarting Xerox’s 2020 takeover attempt, HP targeted $16 billion in shareholder returns, with the majority being share repurchases. The company’s strategy regarding its pension plan funding is to commit at least the minimum contribution required by the respective local authorities. At the end of fiscal 2020, the defined benefit plans and post-retirement plan were underfunded by $1.6 billion. One cannot see HP’s benefit payment schedule as a hinderance to operations and posit that HP should be able to properly invest in growth opportunities while supporting its benefit plan obligations.

Bulls Say

  • Expected challenges within the printing and PCs markets may be overstated. Enterprises adopting managed print services and Device-as-a-Service over hardware purchases could expand HP’s margins. 
  • HP’s innovation in notebooks and tablets could moderate concerns about a lengthening computer upgrade cycle. With an invigorated brand, HP is making inroads with premium and gaming PC buyers. 
  • Existing 3D and A3 vendors could be disrupted via HP’s scale. HP’s 3D materials open platform could make HP the preferred choice while offering A3 products opens up a $55 billion market.

Company Description

HP Incorporated is a leading provider of computers, printers, and printer supplies. The company’s mains segments are personal systems and printing. Its personal systems segment contains notebooks, desktops, and workstations. Its printing segment contains supplies, consumer hardware, and commercial hardware. In 2015, Hewlett-Packard was separated into HP Incorporated and Hewlett Packard Enterprise and the Palo Alto, California-based HP Incorporated sells on a global scale.

(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

Campbell Soup Co aims to realize around $1 billion in savings through fiscal 2025

Business Strategy and Outlook

To say CEO Mark Clouse’s three-year tenure heading up Campbell Soup has been fraught with change might be considered an understatement. Since January 2019, Campbell has parted ways with its fresh business and the bulk of its international operations and worked to steady its core meals, beverages, and snacking arms, while navigating a global pandemic. But it doesn’t attribute its recent performance (14% consumption growth on a three-year stack basis) as merely a by-product of heightened consumer stock-ups of essential fare since March 2020. Rather, it’s likely, management’s strategic agenda–anchored in funnelling additional investment across its operations–fuelled by its pursuit of extracting inefficiencies has set Campbell on a sound course. And while much consternation rightly centres on how the business is poised to emerge in a post-COVID-19 world, it is held the steps that had been underway to steady the business and to juice its sales trajectory before the pandemic should serve as a springboard against a more normalized demand environment. 

Campbell is also battling unrelenting raw material inflation (which management now anticipates will prove a double-digit percentage hit in fiscal 2022), though it’s not sitting still. As a means to offset these pressures, Campbell is raising prices across its mix (with its third round of pricing set to hit shelves in August). Further, the firm aims to realize around $1 billion in savings through fiscal 2025 (up from $850 million by the end of fiscal 2022), with a focus on reducing complexity, investing in automation, and optimizing its supply chain and manufacturing network, which strikes us as achievable. But despite these near-term pressures, it’s unsurmised brand spending will contract. Rather, management has suggested its intent to funnel a portion of any savings realized behind its brand mix (in the form of both R&D as well as marketing), supporting the intangible asset that underpins its wide moat. This aligns with foreseeable calling for research, development, and marketing to edge up to 7% of sales over the next 10 years (or about $650 million annually), above the 6% expended the past three years on average ($500 million).

Financial Strength

It is unlikely that a lack of financial flexibility will encumber Campbell’s prospects against the current backdrop, with free cash flow as a percentage of sales amounting to 9% in fiscal 2021. Even though Campbell opted to raise $1 billion in 10- and 30-year bonds in April 2020, the firm has been making good on its commitment to lower its debt balance, with net debt/adjusted EBITDA standing at 2.6 times at the end of fiscal 2021, down from 4.9 times at the end of fiscal 2019 and 3 times when the books closed on fiscal 2020. From analyst’s viewpoint, after hitting its leverage targets, Campbell could be warming to a deal, though it is alleged that its aims are likely anchored in smaller, bolt-on tie-ups (as opposed to larger, transformational deals that could shoulder it with an increased debt load once again). In this context, management’s rhetoric suggests that it isn’t angling for an acquisition that would compromise its ability to reinvest in its business. Further, a mid-single-digit growth in its dividend each year over expert’s forecast, with its dividend pay-out holding around 50% of earnings on average annually (currently yielding around 3%), is expected. It is also foreseen Campbell will repurchase around 2% of shares on average each year, which is likely to be prudent use of cash when shares trade at a discount to analyst’s assessment of intrinsic value.

Bulls Say’s

  • Removing excess costs should afford Campbell the fuel to invest in its brands, nearly one dozen of which generate more than $100 million in sales each year. 
  • Campbell’s innovation focus (leveraging technology, data insights, and artificial intelligence to aid its efforts to bring consumer-valued new products to the shelf in a timely fashion) is attracting new consumers to the aisle and its product mix. 
  • About half of Campbell’s sales result from the faster growing on-trend snack aisle, which stands to offset more muted long-term prospects for the mature soup category.

Company Profile 

With a history that dates back around 150 years, Campbell Soup is now a leading manufacturer and marketer of branded convenience food products, most notably soup. The firm’s product assortment includes well-known brands like Campbell’s, Pace, Prego, Swanson, V8, and Pepperidge Farm. Following the sale of its international snacking operations, which wrapped in calendar 2019, the firm derives nearly all of its sales from its home turf. Campbell has made a handful of acquisitions to reshape its product mix the past few years, including the tie-up with Snyder’s-Lance (completed in March 2018), which enhances its exposure to the faster-growing on-trend snack food aisle, complementing its Pepperidge Farm line-up. 

(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
Technology Stocks

CrowdStrike Remains Attractive Even as We Lower Our Long Term Profitability Assumptions; FVE to $196

Business Strategy & Outlook

CrowdStrike is a leader in endpoint security, a necessity that aids in protecting devices and networks, and its threat hunting and breach remediation services are topnotch. While nefarious threat actors are continually upping their attack methodology to create zero-day attacks and are using the rise in entities using cloud-based resources to their advantage, CrowdStrike developed a methodology to turn any entities’ weak-point into better protection for all of its clients. CrowdStrike’s cloud-delivered endpoint protection platform continuously ingests data from all of its installed agents to enhance its protection solutions while keeping all users up to date against the latest threats. CrowdStrike’s customer base, revenue, and margins will experience profound growth throughout the 2020s as customers update their endpoint and workload security requirements in a hybrid-cloud world. 

CrowdStrike’s endpoint protection platform melded the needs of next-generation antivirus, threat intelligence, endpoint detection and response, and other features like managed threat hunting into a consolidated management plane. The lightweight agents, installed on physical devices like servers and laptops, or in virtual machines and cloud environments, are continually improving through its cloud database algorithms, becoming more capable as more data is received. CrowdStrike’s solutions establish customer switching costs and its network effect makes changing vendors a challenge as clients rely on having the latest threat protection. Alongside a persistent talent shortage in cybersecurity and firms attempting to manage disparate toolsets for various parts of endpoint security, entities are challenged to stay secure in networking environments without distinct security perimeters. CrowdStrike’s experts supplement these overwhelmed or short-staffed teams, and the firm also offers breach remediation and proactive testing services. CrowdStrike is in the early stages of becoming a market mainstay as businesses and governments rapidly adopt cloud-based endpoint protection platforms.

Financial Strengths

CrowdStrike is a financially sound company that will be able to generate solid free cash flow and expand its margin profile throughout the 2020s. CrowdStrike had its initial public offering in June 2019 and has historically operated at a loss on a GAAP basis. CrowdStrike’s capital deployment efforts are true to a land-and-expand strategy, whereby CrowdStrike initially has elevated sales and marketing expenses to gain a customer cohort before expanding its revenue per customer while lowering its operating costs per customer (on a revenue percentage basis). CrowdStrike can benefit from cross-selling and up-selling tangential products to its existing base and new clients, while also converting breach remediation service clients to be product customers. As of the end of fiscal 2022, CrowdStrike had $2.0 billion of cash, cash equivalents, and marketable securities and $740 million of debt. With a strong balance sheet and free cash flow generation, CrowdStrike is anticipated to pay its obligations on time.

Bulls Say

  • CrowdStrike’s innovative endpoint security solutions, delivered as a platform, are quickly attracting customers as clients want to consolidate their myriad legacy security tools. Its threat remediation services are a powerful tool in landing new subscription clients. 
  • After landing a client, CrowdStrike can gain significant margin leverage via the cross-selling and up-selling of additional security modules. 
  • CrowdStrike’s products become more capable as new clients are added, and its threat intelligence and hunting can become a core part of customer’s cybercrime defense.

Company Description

CrowdStrike Holdings provides cybersecurity products and services aimed at protecting organizations from cyberthreats. It offers cloud-delivered protection across endpoints, cloud workloads, identity and data, and threat intelligence, managed security services, IT operations management, threat hunting, identity protection, and log management. CrowdStrike went public in 2019 and serves customers worldwide.

(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

Guidewire Extends Its Streak of Solid Results; FVE Decreased to $120

LONDON, UNITED KINGDOM: Analysts work on the trading floor at Goldman Sachs in London, 22 March 2004. AFP PHOTO / ODD ANDERSEN (Photo credit should read ODD ANDERSEN/AFP via Getty Images)

Business Strategy & Outlook

Guidewire is reaping the benefits of years of groundwork in the form of convincing property and casualty, or P&C, insurers to upgrade their aging core legacy systems to Guidewire’s solutions. The company has used a modern software platform to disrupt a sleepy industry that has been underserved by legacy software vendors, and there is still a long runway for additional growth for Guidewire. Guidewire as executing a classic land-and-expand strategy. The company started with the most critical piece, ClaimCenter, which is customer facing and handles claims processing, and then organically layered in BillingCenter and PolicyCenter within the next several years. Today, Guidewire has a broad software suite that covers all areas of an insurer’s needs and offers a wide variety of add-on solutions. Importantly, the company acquired ISCS to land a lower- and middle-tier SaaS offering.

By any objective measure, Guidewire has become the leading provider of core software to the P&C insurance industry. The company already covers 25% of direct written premiums, or DWPs, and it wins more deals per year than its largest competitors combined. Just as the company nudged the industry to modernize, it will be at the forefront as it now leads a wide array of the largest insurers into the SaaS age with InsuranceSuite Cloud and other cloud-based solutions. Indeed, results were uneven throughout 2019 because of accelerating SaaS adoption, but Guidewire has turned the corner and results are expected to be more predictable in future. Guidewire is anticipated to win more than its share of new clients, especially at the larger end of the market. From there the company is projected to upsell additional lines of insurance business and add on features. Momentum is on the company’s side after capturing many critical Tier 1 insurer mandates, as the industry can no longer wait or afford to maintain legacy systems built in the 1950s in some instances.

Financial Strengths

Guidewire has a standard level of financial strength. Revenue is growing rapidly on an organic basis, and non-GAAP margins are positive and expanding. Continued penetration into Tier 1 and 2 core solutions, with conversions and new bookings of InsuranceSuite Cloud, and the cross-selling of data-driven and digital add-ons will drive consistent midteens annual revenue growth over the next five years. As of July 31, Guidewire had $1.1 billion in cash offset by $344 million in debt, resulting in a net cash position of $776 million. The $344 million in debt represents convertible notes due in 2025, which is not considered as problematic, given the company’s cash balance and expected free cash flow generation leading up to the debt maturity date, and the likelihood it converts into equity rather than is repaid. GAAP Operating margin was negative in fiscal 2021, but is expected to gradually improve over time as a result of easing pressure from accounting treatment for two larger transactions in fiscal 2017 and 2018, and the maturation of the business model transition to subscriptions.

On a non-GAAP basis, margin contraction is modelled in fiscal 2022, followed by several hundred basis points of margin improvement each year over the next five years, driven by scale. Guidewire does not pay a dividend, does not regularly repurchase shares although it did recently begin doing so, and generally makes small acquisitions. The company completed two larger acquisitions in the context of its deal history, with deals of $154 million in fiscal 2017 and $130 million in fiscal 2018. Since its 2012 IPO, Guidewire has completed a handful of acquisitions for approximately $500 million in aggregate. The company is expected to occasionally make small, feature-driven acquisitions.  Management is expected to initiate a dividend in the foreseeable future.

Bulls Say

  • Guidewire is the clear leader seeking to modernize a large and underserved P&C insurance market that is ripe for modernization. 
  • Guidewire is investing in R&D and acquiring companies to add new solutions and features to its existing platform, as there is room to at least quadruple revenue within its existing clients. 
  • Some friction is being removed from the sales process, as insurers are recognizing the need to modernize and the sales conversation is easier with as many live Tier 1 and 2 customers as Guidewire has.

Company Description

Guidewire Software provides software solutions for property and casualty insurers. Flagship product InsuranceSuite is an on-premises system of record and comprises ClaimCenter, a claims management system; PolicyCenter, a policy management system including policy definitions, quotas, issuance, maintenance, and renewal; and BillingCenter, for billing management, payment plans, and agent commissions. The company also offers InsuranceNow, a cloud-based offering, as well as a variety of other add-on applications. 

(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

Alibaba’s Adjusted EBITA Could Bottom Out in December Quarter of Fiscal Year 2023; Shares Attractive

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy & Outlook:   

Alibaba BABA is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and online-to-offline services. Company think a strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba. Alibaba’s internet services had annual active consumers of 953 million as of September 2021, versus the 1.2 billion online population in September 2021 per Questmobile and the 1.4 billion population in China. This provides Alibaba with an unparalleled source of data that it can use to help merchants and consumer brands develop personalized mobile marketing and content strategies to expand their target audiences, increase click-through rates and physical store transactions, and bolster return on investment. Alibaba’s marketplace monetization rates have reduced recently, due to increased compliance of antitrust laws, more competition, and weak consumer sentiment. Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD.

 While the company view the Taobao/Tmall marketplaces as Alibaba’s core cash flow drivers, it also believes AliCloud and globalization offer long-term potential. While AliCloud will remain in investment mode in the medium term, accelerating revenue per user suggests a migration to value-added content delivery and database services that can drive segment margins higher over time. On globalization, third-party merchants are successfully reaching Lazada’s users across Southeast Asia, something that should continue as the company rolls out incremental personalized mobile marketing and content opportunities. While early, company share management’s views about Ele.me offering incremental monetization opportunities from Alibaba’s user base.

Financial Strengths:  

Alibaba is in sound financial health. As of December 2020, the company had CNY 456 billion in cash and unrestricted short-term investments on its balance sheet against CNY 117 billion in short- and long-term bank borrowing and unsecured senior notes. Although Alibaba remains in investment mode, company believes the strong cash flow profile of its e-commerce marketplaces offers it the financial flexibility to continue investing in technology infrastructure and cloud, research, marketing, and user experience initiatives through its current balance sheet and strong cash flow profile. Additionally, it is assumed that the company has the capacity to add leverage to its capital structure, which could allow it to take advantage of low borrowing rates to fund growth initiatives, introduce a cash dividend when it sees limited investment opportunities with good returns on investment, or repurchase shares. It is expected that for the company to pursue acquisitions that could further improve its ecosystem, including online-to-offline, physical retail, and increased logistic capacity or capabilities.

Bulls Say: 

  • Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD. 
  • Core annual active users on Alibaba’s China retail marketplaces had a retention rate of over 90% for the year ended September 2021. 
  • Alibaba’s core commerce (which includes China marketplace-based businesses and other loss-making businesses) adjusted EBITA margin was 26.2%, higher than JD retail’s 2.3% non-GAAP EBIT margin and PDD’s 15.2% non-GAAP EBIT margin for the September quarter of 2021.

Company Description:  

Alibaba is the world’s largest online and mobile commerce company as measured by gross merchandise volume (CNY 7.5 trillion for the fiscal year ended March 2021). It operates China’s online marketplaces, including Taobao (consumer-to-consumer) and Tmall (business-to-consumer). Alibaba’s China commerce retail division accounted for 63% of revenue in the September 2021 quarter. Additional revenue sources include China commerce wholesale (2%), international retail/wholesale marketplaces (5%/2%), cloud computing (10%), digital media and entertainment platforms (4%), Cainiao logistics services (5%), and innovation initiatives/other (1%).

(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

Best Buy’s Long-Term Digital and Services Narrative Remains Intact Despite Near-Term Pressure

Business Strategy & Outlook:   

The company believe Best Buy is taking adequate steps to shore up its competitive position in an intensely competitive consumer electronics space. As the industry emerges from the shadow of COVID-19, it’s become clear that how people shop has permanently changed–with customers demanding seamless omnichannel access to favorite brands, quick fulfillment across channels, and tech solutions to more problems than ever before. As a result, Best Buy’s strategic positioning continues to resonate, with the firm leveraging its physical footprint for fulfillment and post-sale services, emphasizing its differentiated service offering, and experimenting with newer store formats, as the “one size fits all” retail model across trade areas appears antiquated. With more than one third of sales coming through digital channels in calendar 2021 (with management anticipating roughly 35% in perpetuity), the firm’s recent supply chain and e-commerce investments ($2.7 billion over the last five years, some 74% of total capital expenditures) look prescient. Next-day delivery now covers 99% of U.S. zip codes (up from 80% from pre-pandemic), allowing the firm to compete on more level ground against e-commerce competitors, like wide-moat Amazon–as buy-online-pick-up-in-store, or BOPIS) volumes, at 40% of e-commerce sales, remain more challenging for online-only stores to replicate. 

Further, the company takes a positive view of the firm’s Totaltech program, with more than 4.5 million members receiving unlimited home tech support, VIP access to phone and chat teams, free delivery and standard installation, members-only pricing, and free extended warranties on Best Buy purchases. Through the program, Best Buy leverages its network of 20,000 Geek Squad agents, increases touchpoints with customers, and positions itself better to earn the first shot at servicing customer category needs. Finally, Best Buy Health remains intriguing, with lower price elasticity and auspicious tailwinds from an insurer pay model. However, competition in the space remains rife, as a number of moaty firms with extensive healthcare aspirations (Google, Microsoft, Amazon, Apple, Facebook) have invested heavily in the segment.

Financial Strengths:  

The company thinks that Best Buy’s financial strength is sound, with the firm maintaining just $545 million in net debt at the end of the first quarter of fiscal 2023 and an investment-grade credit rating. With leverage well under 1 turn (0.3 debt/EBITDA at fiscal 2022 year-end), strong EBIT interest coverage, and no meaningful maturities until 2028, the company sees very little financial risk for the firm in the near to medium term. Access to a $1.25 billion credit facility adds a further degree of insulation. Consistent with historical patterns, it is expected that Best Buy will prioritize growth capital expenditures, strategic acquisitions, dividends, and share repurchases with its free cash flow (with free cash flow averaging 4.5% of sales through fiscal 2027). The firm also maintains an attractive dividend, with a 35%-45% payout target. The company’s annual share repurchases average a mid-single-digit percentage of shares outstanding through 2032, with our model calling for total shareholder returns of $11.3 billion through fiscal 2027.

Bulls Say: 

  • With digital sales volumes projected to equilibrate at roughly double pre-COVID-19 levels, Best Buy should better compete for online volumes that it historically ceded to online competitors. 
  • Improving route densities should strengthen the margin profile of small parcel e-commerce sales, with 35% of store “hubs” now accounting for 70% of ship from-store volume. 
  • The Best Buy Totaltech program should increase touchpoints with the firm’s best customers, increasing spending and frequency relative to pre-program behavior.

Company Description:  

With $51.8 billion in fiscal 2022 sales, Best Buy is the largest pure-play consumer electronics retailer in the U.S., with roughly 10.6% share of the aggregate market and north of 40% share of offline sales, per our calculations, CTA industry, and Euromonitor data. The firm generates the bulk of its sales in-store, with mobile phones and tablets, computers, and appliances representing its three largest categories. Recent investments in e-commerce fulfillment, accelerated by the COVID-19 pandemic, have seen the U.S. e-commerce channel roughly double from prepandemic levels, with management estimating that it will represent a mid-30% proportion of sales moving forward.

(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

While Inflation Runs Rampant, Pepsi’s Leading Snack and Beverage Mix Should Serve It Well

Business Strategy & Outlook

For many consumers, the Pepsi trademark elicits images of cola containers and ads extolling the brand’s taste superiority versus Coke. While PepsiCo is still a beverage behemoth, its business now extends beyond this industry, with Frito-Lay and Quaker products accounting for over half of sales and over an estimated 65% of profits. A diversified portfolio across snacks and beverages is considered the source of many of the company’s competitive advantages. Though management missteps have stymied performance in the past, the confluence of better execution and benefits inherent to its integrated business model has allowed Pepsi to reaccelerate profitable growth, and there is plenty of room to run.

After years of sluggish sales growth and underinvestment, Pepsi has committed to reinvigorating its top line. To that end, it has made significant investments in manufacturing capacity (for example, production lines to meet demand for reformulated packaging), system capacity (route optimization and sales technology), and productivity (harmonization and automation). These investments are considered prudent and believe they will allow the company to strengthen key trademarks such as Mountain Dew and Gatorade, deepen its presence in growth markets like sub-Saharan Africa, and yield enough cost savings to reinvest and widen profits. Recent strategic pivots in the energy category (such as the Rockstar acquisition and Mountain Dew line extensions) should also underpin growth and margins. 

Pepsi’s growth trajectory is not without risk, as the company faces secular headwinds such as shifts in consumer behavior. Additionally, changing go-to-market dynamics, such as online commerce that encourages real-time price comparisons and obviates the extent of Pepsi’s retail distribution advantage, allow for more nimble and aggressive competition. Still, structural dynamics emanating from Pepsi’s scale, the cachet of its brands, and the breadth of its portfolio, which support its wide moat, should enable the company to maintain and augment its competitive positioning.

Financial Strengths 

Pepsi’s financial health is considered excellent. While leverage has ticked up due to recent acquisitions, the company still has a strong balance sheet with manageable debt levels and robust free cash flow generation. Strong interest coverage ratios also lend credence to the firm’s health in this regard. Pepsi is not forecasted to have any issues meeting its contractual obligations for the foreseeable future, given the reliability of its business and its stalwart positioning across its categories.

Historically, the company has regularly produced around $7 billion in free cash flow (high-single to low-double digits as a percentage of sales). Management has prioritized strategic investments across the business of late, which is considered prudent to aid its competitive standing over the long term. While capacity (particularly in snacking growth areas) and digital capability investments will remain elevated in 2022 and beyond, free cash flow is expected to normalize at or above historical levels, particularly as the company’s revenue management and supply chain digitization initiatives continue to bear fruit. 

Management’s guiding principle as it relates to debt levels is to maintain access to Tier 1 commercial paper. While the prerequisites for this status vary by rating agency, there are no impediments to Pepsi’s ability to continue relying on this short-duration paper, and current leverage levels (around 2.5 times net debt/EBITDA) are considered appropriate for the firm. Moreover, the firm’s commercial paper access is viewed as one of the biggest testaments to its financial strength; this cheap financing should facilitate and perpetuate Pepsi’s financial flexibility. As the pandemic ends, liquidity should be of no concern to Pepsi investors–in addition to roughly $6 billion in cash at the end of fiscal 2021, the firm has undrawn credit facilities in excess of $7 billion.

Bulls Say

  • In still beverages—a category facing fewer secular challenges, particularly in the U.S.–Pepsi is a much more formidable competitor to Coca-Cola. 
  • Pepsi’s global dominance in salty snacks may be underappreciated; with volume share more than 10 times that of the next-largest competitor, the firm benefits from unparalleled unit economics and go-to market optionality. 
  • The firm’s consolidated beverage and snack distribution operations, combined with its direct store delivery capabilities, allow for better execution in merchandising.

Company Description

PepsiCo is one of the largest food and beverage companies globally. It makes, markets, and sells a slew of brands across the beverage and snack categories, including Pepsi, Mountain Dew, Gatorade, Doritos, Lays, and Ruffles. The firm uses a largely integrated go-to-market model, though it does leverage third-party bottlers, contract manufacturers, and distributors in certain markets. In addition to company-owned trademarks, Pepsi manufactures and distributes other brands through partnerships and joint ventures with companies such as Starbucks. The firm segments its operations into five primary geographies, with North America (comprising Frito-Lay North America, Quaker Foods North America, and North America beverages) constituting around 60% of consolidated revenue.

(Source: Morningstar)

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